Navigating the Audit Landscape: Lessons and Insights from 2022 AFRC Inspection Report

Navigating the Audit Landscape: Lessons and Insights from 2022 AFRC Inspection Report

In a world where financial transparency is paramount, the role of auditors is more important than ever. Yet, the 2022 inspection report from the Accounting and Financial Reporting Council (AFRC) provides mixed signs, highlighting the need for concerted efforts in improving audit quality, particularly within smaller audit firms. According to the 2022 inspection report, the AFRC has inspected 55 audits of listed companies, a nearly 50 percent increase compared to 2020. While there has been a slight improvement in the average audit quality of 55 listed companies, the inspection results of smaller auditing firms from categories B and C, which refers to firms auditing fewer than 100 listed companies, were disappointing. The lack of significant improvement in these firms is a concern, as it could potentially hinder investor confidence in the quality of financial reporting of Hong Kong as an international financial centre.

Identifying Deficiencies in Smaller Audit Firms and AFRC’s Specific Concerns

Upon conducting inspections a total of 14 firms in categories B and C, the AFRC has identified deficiencies in various aspects of the systems of quality control and in particular the elements of a) acceptance and continuance of client relationships and specific engagements, b) engagement performance and c) human resources.
In terms of the trend of deficiencies noted during the inspection, AFRC has expressed specific concerns. These include: (i) the need for group auditors to clearly demonstrate their direction, supervision, and timely engagement in significant audit matters, particularly when substantial portions of the audit are not conducted by them; (ii) the assurance of adequate work output by group auditors who operate without appointed component auditors under a remote working arrangement; (iii) the strategies implemented by incoming auditors to manage late auditor changes and complete thorough audits within limited timeframes; and (iv) the assessment protocols for determining the competence, capabilities, and objectivity of an auditor’s expert, along with the reliability of the source data that the expert utilises.

The slow rate of improvement among these firms suggests an urgent need for them to recalibrate their orientation, emphasizing risk management and quality over immediate returns.

The Road Ahead: AFRC’s Future Plans

Looking ahead, the AFRC has outlined several key focus areas for the second inspection cycle from 2023-2025. These include addressing significant deficiencies identified in the 2020-2022 cycle and managing audit risks under revised guidelines, which include a) risk assessment process of the newly implemented systems of quality management; b) AML/CTF compliance; and c) Enhanced procedures for identifying and assessing the risk of material misstatement as required by HKSA 315 (Revised 2019) (2022) Identifying and Assessing the Risks of Material Misstatement. The AFRC also plans to expand inspections to non-listed companies, demonstrating its commitment to improving audit quality across all entities. Furthermore, the bureau intends to strengthen cross-border regulatory cooperation, reflecting the global nature of financial markets.

The findings of the AFRC report is a call to action for all audit professionals, particularly those in smaller firms. Improving audit quality is a collective responsibility. By addressing deficiencies, staying updated with the latest guidelines, and prioritizing quality over returns, auditors can uphold the integrity of financial reporting and foster trust in the market.

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Navigating the Audit Landscape: Lessons and Insights from 2022 AFRC Inspection Report
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