Inspection of Audit Firms and Individual Partners

In 2021, the AOB conducted inspections on 14 Audit Firms covering 45 individual auditors for 54 audit engagements. The AOB adopted a risk-based inspection approach in its planning and engagement selection process and specific key areas in the selected audit engagements. The risk-based approach considers various factors, as highlighted in Figure 1.

The AOB took the opportunity to enhance its data analytics driven approach in its inspection taking into consideration the complexity of the PIE’s structures, industries, situations and operating environments. This continuous enhancement will ensure that the AOB’s inspection programme is sufficiently agile to identify key economic trends and market concerns effectively. In-depth utilisation of data analytics by the AOB allowed for a more targeted inspection approach, thereby enabling the AOB to focus on critical key areas.

In view of continuous uncertainties arising from the pandemic, the AOB explored various options or arrangements with audit firms to perform off-site monitoring reviews and/or virtual inspections to ensure that its inspection programme is not entirely disrupted. As a result, the AOB was able to conduct a total of 11 out of its 14 planned inspections remotely throughout 2021.

To further strengthen its monitoring process, the AOB conducted off-site monitoring reviews by analysing auditors’ reports and disclosures made within Annual Reports and Audited Financial Statements of the respective PIEs, focusing on the financial position of the PIEs and various significant risk indicators.

FIGURE 1: RISK-BASED APPROACH TAKEN BY THE AOB

Risk assessment of audit firms and individual auditors

Market capitalisation of PLC clients audited by audit firms

Specific areas of industry or market concerns

Significant accounting, auditing/other developments

Use of data analytics to identify specific high risk areas

Driven by specific concerns arising from the off-site monitoring review, the AOB was able to identify engagements with potential risk areas for thematic inspections in 2021. Thematic inspection emphasised the audit procedures performed by auditors to address the heightened risks in relation to the critical key areas, as highlighted in Figure 2.

FIGURE 2: SPECIFIC KEY AREAS IDENTIFIED AS HIGH RISK SUBJECTED TO THE AOB’S INSPECTION

Going concern

Valuation of non-financial assets

Revenue recognition

The above approach taken by the AOB in 2021 contributed to a significantly higher number of audit engagements inspected, as presented in Figure 3.

FIGURE 3: INSPECTION AND OFF-SITE THEMATIC REVIEW COVERAGE

Number of audit items

Number of individual auditors

Number of audit engagements

INSPECTIONs

OFF-SITE THEMATIC REVIEW

At the end of every inspection, the AOB assessed the severity of findings arising from each engagement reviewed. For engagements where significant improvements are required, the AOB will take action against the individual auditors involved and consider the need for further measures to be imposed on the firms, if necessary.

The following actions in Figure 4, can be taken by the AOB depending on the results of the assessment performed.

Details on the inspection programme, such as common inspection findings, results of thematic reviews, trends analysis and remediation efforts taken by inspected audit firms were presented in the 2020 AOB Annual Inspection Report (AIR) published during the year. For the 2021 inspection programme, the results will be shared separately in the 2021 AOB AIR at a later date.

FIGURE 4: ACTIONS THAT COULD BE TAKEN BY THE AOB

Imposition of specific remediation measures to incorporate or revise the relevant audit procedures

Referred to other SC line department or sharing of findings with respective PIE

Enforcement action by the AOB

Imposition of additional registration condition and interim measures

ARTICLE 1: ANNUAL TRANSPARENCY REPORTING