Auditing high-risk areas : an analysis of current practices

Abstract

Purpose: This research attempts to establish whether audit deficiencies apply to the global audit quality by comparing local weakness in the audit practice to those identified by the PCAOB and the CAQ in the U.S. The deficiencies identified by the QAU in Malta will further be considered. Subsequently the challenges in obtaining sufficient and appropriate audit evidence will be discussed and ultimately the study will focus on the cost, challenges and the benefits of disclosing these high-risk areas in the audit report for small and medium-sized entities rather than disclosing them only for public listed entities.

Design: Eight interviews were held with auditors from both big-4 companies and auditors from SMEs. An interview was further held with a representative from the QAU and with two directors of small and medium-sized companies.

Findings: Findings indicate that weaknesses identified in Malta and in the U.S have their similarities. The deficiencies that came out in this study include the familiarity threat and the self-review threat due to the small operating network in Malta. Tests of detail proved to prevail in local practice over tests of control. Another problem that came to light was the lack of documentation included in the audit file to support the work that was performed during the audit engagement when it comes to both impairment of loans receivables and the calculation of materiality threshold. The current format of the audit report was further highlighted as a weakness in this research. Two challenges in obtaining sufficient and appropriate audit evidence arose in this study, mainly lack of trust in the audit professional and the problem of timing and efficiency as clients tend to not prioritise the audit. The disclosure of highrisk areas for SMEs in the audit report was not favoured by the majority of the interviewed auditors and it was concluded that the possibility of such a disclosure should only be possible for companies above a certain threshold.

Conclusions: This study concludes that there needs to be increased training with regards to documentation for tests of impairment of intercompany loans. Furthermore, there requires to be a shift in focus from the tests of detail that are prioritised during audit engagements to tests of controls. Another concluding finding was that the audit report should be kept direct and concise so that a clear message is delivered to the users. Promotion of the audit profession would better the image of the auditor thus combatting the image of intrusion that audit clients have of the auditor. The last conclusion of this research is that high-risk areas should not be disclosed for SMEs but rather companies above an established threshold, would have the possibility to disclose areas which seem significant to the auditor in the audit report.

Implications: The results of this research bwill be useful for both researchers and regulators to better understand current practices and challenges being encountered in Malta when conducting audits.