Common Audit Findings and How to Address Them
In New Zealand, audits play a crucial role in ensuring the accuracy and integrity of financial reporting, compliance with regulations, and the overall health of organisations. However, even the most diligent businesses can encounter common audit findings that require attention and remediation. This article explores some of the most frequent audit findings in New Zealand, drawing on insights from the Financial Markets Authority (FMA) and the Office of the Auditor-General (OAG), and offers practical strategies for addressing these issues.
Common Audit Findings
1. Inadequate Documentation and Audit Evidence
One of the most prevalent findings highlighted by the FMA’s Audit Quality Monitoring Report 2022/23 is the lack of sufficient and appropriate audit evidence. This issue often arises from inadequate documentation of financial transactions and internal controls.
Solution:
- Implement Robust Documentation Practices: Ensure all financial transactions are thoroughly documented and easily accessible. This includes maintaining detailed records of invoices, receipts, contracts, and correspondence.
- Use Technology: Leverage accounting software and document management systems to automate and streamline documentation processes. Cloud-based solutions can provide real-time access and secure storage.
- Regular Training: Provide ongoing training for staff on the importance of documentation and how to maintain accurate records.
2. Going Concern Assumptions
The FMA has also noted concerns regarding the evidence obtained to support the going concern assumption. This assumption is critical as it underpins the preparation of financial statements on the basis that the entity will continue to operate in the foreseeable future.
Solution:
- Conduct Regular Assessments: Regularly evaluate the company’s financial health, including cash flow projections, debt obligations, and market conditions.
- Document Assumptions: Clearly document the assumptions and rationale behind the going concern assessment. This should include detailed analyses of financial forecasts and potential risks.
- Engage Experts: Consider involving financial advisors or auditors early in the process to provide an independent assessment of the going concern status.
3. Ethical Compliance and Independence
Ethical lapses and concerns about auditor independence have been flagged by both the FMA and OAG. Maintaining high ethical standards and ensuring auditor independence are fundamental to audit quality and trust in the profession.
Solution:
- Establish a Strong Ethical Framework: Develop and enforce a comprehensive code of ethics that outlines expected behaviours and practices. Ensure all employees are aware of and adhere to these standards.
- Promote a Speak-Up Culture: Encourage employees to report unethical behaviour without fear of retaliation. Implement whistleblower policies and provide multiple reporting channels.
- Regular Reviews: Conduct regular reviews of auditor relationships and engagements to ensure independence is maintained. Rotate audit partners periodically to mitigate familiarity threats.
4. Accounting Estimates and Judgements
The accuracy of accounting estimates and judgements is another area of concern. These estimates, such as asset impairments and provisions, require significant judgement and can be prone to error or bias.
Solution:
- Strengthen Internal Controls: Implement robust internal controls around the estimation process. This includes having clear policies and procedures for making and reviewing estimates.
- Use Historical Data: Base estimates on historical data and relevant market information to enhance accuracy.
- Independent Review: Have estimates and judgements reviewed by an independent party, such as an internal audit team or external consultant, to provide an objective assessment.
5. Compliance with Regulations
Non-compliance with regulatory requirements is a common audit finding that can have serious repercussions, including fines and reputational damage. This includes compliance with financial reporting standards, tax laws, and industry-specific regulations.
Solution:
- Stay Informed: Keep up-to-date with changes in regulations and standards that affect your business. Subscribe to updates from regulatory bodies such as the FMA and Inland Revenue.
- Regular Audits: Conduct regular internal audits to identify and address compliance gaps before external audits.
- Training and Education: Provide regular training for staff on regulatory requirements and compliance best practices. Ensure that compliance is a key component of your company’s culture.
Case Studies from New Zealand
Case Study 1: Ministry of Foreign Affairs and Trade (MFAT)
The Office of the Auditor-General’s case studies highlight how MFAT’s Audit and Risk Committee addresses audit findings. The committee splits meeting agendas into regular reporting and strategic matters, ensuring comprehensive oversight.
Approach:
- Diverse Expertise: MFAT brings in members with specialist skills on short-term contracts to address specific priorities.
- Focused Agendas: Meetings are structured to cover both compliance and strategic issues, allowing for thorough discussion and resolution of audit findings.
Case Study 2: Land Information New Zealand (LINZ)
LINZ treats its Audit and Risk Committee as a “portfolio” of advisors, bringing in experts as needed to address specific audit findings and risks.
Approach:
- Flexible Membership: The committee includes standing members and specialists brought in for specific issues, ensuring a broad range of expertise.
- Proactive Engagement: By engaging experts proactively, LINZ can address audit findings efficiently and effectively.
Conclusion
Addressing common audit findings requires a proactive and systematic approach. By implementing robust documentation practices, conducting regular assessments, maintaining high ethical standards, and ensuring compliance with regulations, New Zealand businesses can enhance their audit quality and build trust with stakeholders.
Drawing on insights from the FMA and OAG, as well as practical examples from local organisations, businesses can develop effective strategies to address audit findings and improve their overall financial management. By fostering a culture of transparency, accountability, and continuous improvement, businesses can navigate the complexities of audits and achieve long-term success.