FMA spotlights audit quality progress and compliance gaps

The Financial Markets Authority (FMA) – Te Mana Tātai Hokohoko – has released its 2023/24 Audit Quality Monitoring Report, which assesses the performance of audits across Financial Markets Conduct (FMC) reporting entities in New Zealand.

The findings indicated that audit quality remains stable overall, though challenges in execution continue to affect consistency in evidentiary support for audit opinions.

FMA reviews FMC reporting entities

This year, the FMA reviewed nine of the 12 registered audit firms operating in New Zealand and assessed 19 audit files, including 10 from listed entities. This represents a departure from previous practice, where firms were evaluated every two to three years.

By conducting most reviews in a single year, the regulator aims to deliver more prompt feedback and establish a baseline for comparing firms within the same timeframe. This change is also intended to improve the effectiveness of thematic reviews that span industries and audit firms. 

Audit Quality Monitoring Report 2023/24 findings

The report noted five non-compliant audit files, two more than the previous year, with 26 findings overall, compared to 28 in the prior period. The non-compliance rate of 26% remains below the international average of 32%. 

The 2023/24 review emphasised the adoption of two new audit and assurance standards: 

• Professional and Ethical Standard 3, which focuses on quality management systems for firms conducting audits, reviews, and assurance services
• Guidelines for identifying and assessing risks of material misstatement in financial reporting 

See LinkedIn post here.

Jacco Moison, FMA’s head of audit, financial reporting, and climate-related disclosures, noted that the audit firms have successfully transitioned to the new standard and found limited areas that require improvement.

Next year, FMA will focus on whether audit firms have appropriately designed and performance procedures and testing for the effectiveness of their quality management systems.

Priorities for audit firms

In addition to the new standards, the review also focused on key areas with recurring or significant findings, which the FMA highlighted as priorities for audit firms. These included:

• fraud risk assessment and evaluations of entities’ going concern status
• the application of expert analysis in accounting estimates
• revenue recognition practices, including reliance on service organisations

Moison further noted that these areas are essential for maintaining the credibility of financial statements and ensuring the quality and integrity of the audit profession.

“It is important to have these topics front of mind throughout the audit process, as they are fundamental for promoting the integrity of financial statements and the quality, expertise, and integrity of the audit profession,” he said.

The FMA plans to maintain its oversight and provide feedback to promote continued improvement in audit standards across the financial reporting sector.