As described in the activity report, one of the two core functions of Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) is to monitor compliance with Sri Lanka Auditing Standards by the auditors of Specified Business Enterprises (SBEs), when they conduct audits of the financial statements of SBEs. SLAASMB approach the monitoring function by inspecting a sample of audits of general purpose financial statements to ascertain compliance with Sri Lanka Auditing Standards in the conduct of the audit.
This audit monitoring activity of SLAASMB is performed with the objective of improving audit quality in the audit market environment. Quality audit in turn contributes towards improved financial reporting activity which helps to build investor confidence and support the capital market development. Focused on the far reaching benefits of enhanced audit quality SLAASMB has taken several initiatives to improve the monitoring mechanism by adopting global best practices in to existing processes.
Audit monitoring is performed by SLAASMB as engagement specific Regular audit inspections and Theme specific audit inspections which focus on a comprehensive review of a predetermined theme throughout the audit. SLAASMB selects audits for inspection considering a risk based approach as well as a random selection approach. However, as a means of continuous improvement, during the year, SLAASMB ventured into developing a new risk-based selection approach to select audits for inspection, which is expected to be adopted from 2021.
The effects of the health and safety measures imposed with the aim of curtailing the spread of the COVID 19 pandemic has had its effects on the audit industry as well. Mobility restrictions and remote work environment caused many auditors to perform the audits from remote locations.
Remote-based conduct of audits requires high dependency on information technology. This is evident in countries with developed IT infrastructure systems which have moved towards conducting the audits remotely. However, in Sri Lanka, the auditors have had to face many challenges when conducting audits based on available IT infrastructure. This situation has given new opportunities to audit firms to move towards investing more on digitalizing audit methodologies. Globally, members of international networks too have been pursuing on the journey of digitalization of their audit methodologies. This move is being witnessed as a current trend at the international level.
The impact was also experienced as time pressure by the auditors when meeting reporting deadlines. However, extensions to reporting timelines of listed entities granted by the Colombo Stock Exchange had no doubt assisted the auditors in this respect.
In general, all auditors have faced challenges in the conduct of the audits in aspects such as remote auditing, time constraints, availability of information, and physical access to management. Difficulties in gathering audit evidence due to limited physical accesses resulted in auditors receiving information in digital form instead of the usual paper form. High dependency of non-physical form of evidence requires use of auditors’ professional judgement in to diverse aspects of the audit and requires the auditor to perform additional procedures to ensure the validity of such audit evidence.
Entities having to perform remote operations deviating from the regular internal control procedures also forced auditors to closely monitor the control measures taken by the entities. In addition, the impact of the pandemic on the operating environment of entities increased the audit risk associated with the valuation of assets (such as impairment of assets, expected credit losses on the financial assets and recoverability of deferred tax assets) and in assessing the completeness of liabilities. Further, auditors have been required to be alert on evidence of events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern due to the impact of COVID 19 pandemic to the businesses. Accordingly, the above challenges have required the auditors to exercise significant amount of professional judgment, remain skeptical and focus on ethical responsibility when carrying out audits during this challenging period.
Based on the severity of the observations made during the inspections, SLAASMB adopts diverse measures in its effort to make the auditors to improve themselves in order to achieve the objective of improving the audit quality environment in Sri Lanka.
When regular audit inspections result in observing non-compliances with Sri Lanka Auditing Standards which are not material as to require further action under the statue, such deficiencies are communicated to the audit firms by letters of assistance termed as “Letters of Observations”. When improvements are required in audits to improve audit quality, such improvements are communicated as suggestions for improvement. In addition, when the auditor is observed to have failed to exercise the fundamental ethical principles of professional competence and due care in the conduct of an audit of a SBE, a letter of warning is issued to the audit firm with approval of the Board, requiring the said firm to act diligently and in accordance with the requirements of applicable auditing standards, when conducting audits of financial statements, in the future. Further, based on the significance of the issues, where necessary, SLAASMB refer the deviations to the Attorney General for advice and where the deficiencies are in the audit quality, such matters are directed to CA Sri Lanka and to any other financial sector regulator as applicable.
During 2020, one audit inspection has been referred to Attorney General of which the proceedings are in-progress.
During the year, regular audit inspections were conducted on 27 audit engagements carried out by 7 audit firms compared with 33 audit engagements conducted by 7 firms during 2019. The total number of audits inspected were lower than in 2019 mainly due to the lower number of inspection staff being available during 2020. Further, due to the requirements of social distancing and access restrictions on having direct contact when performing thematic audit inspections, the plan to perform thematic audit inspections were re-evaluated. There by with the requirement to dedicate additional time to review the appropriateness of audit procedures performed by auditors when addressing the effect of COVID 19 on the operations of the entities audited, the inspections were limited to Regular audit inspections.
Further, during the year, SLAASMB finalized the findings of the thematic audit inspection conducted in 2018 and published the Report.
As referred in Enforcement actions, when findings on non-compliances with standards are not material as to require further action under the statue, such deficiencies are communicated to the audit firms by letters of assistance termed as “Letters of Observations”. Such deficiencies were identified in 4 audit engagements conducted by 4 firms.
Significant deficiencies communicated include:
Failure by the auditor to express an appropriate audit opinion was observed in the following instance;
Failure by the auditor to obtain sufficient appropriate audit evidence were observed as follows:
Failure by the auditor to obtain sufficient appropriate audit evidence on fair value estimates was observed in the following instance;
When improvements are required in audits to improve audit quality, such improvements are communicated as suggestions for improvements.
During the year, suggestions for improvements relating to 10 audit engagements were communicated to 6 firms. The auditors of such firms are expected to improve on the areas identified in their future audits.
Suggestions for improvements communicated during the year include;
The Thematic audit inspections commenced in 2017 by SLAASMB continued to focus on firms’ policies and procedures in respect of a specific area or aspect of the audit, by inspecting selected audit engagements of such firm. With the findings of all inspections being reported together, the report includes a comparison of findings and highlights good practices and areas of common weaknesses relating to the selected theme or specific area.
During 2020, SLAASMB issued the report of the thematic audit inspections conducted among 19 audits of 5 firms during 2018 on the theme, Auditor’s communication with Those Charged with Governance (TCWG) in the audit of financial statements of listed entities. The said theme was identified to be appropriate considering the effective two-way communication between the auditor and TCWG and its contribution towards enhancing the capital market development in the country. In the inspection process, SLAASMB obtained feedback of the Audit Committee chairs of the auditee entities, to gain insights to the timeliness and effectiveness of the said two-way communication.
The findings of the thematic audit inspection conducted during 2018 are included in the detailed report of the thematic audit inspections issued during 2020 and published in the website www.slaasmb.gov.lk
SLAASMB, being the regulator monitoring compliance with accounting standards and auditing standards, advocates good communication between the three parties, namely the auditor, regulator and TCWG. Considering the improvements envisaged by adopting the good practices identified during the inspections, SLAASMB has shared copies of the Thematic Audit Inspection Report issued during 2020, with all the audit firms, Chairpersons of listed entities and the Chairpersons of Audit Committees of listed entities.
The salient features identified from the Thematic Audit Inspection Report issued during 2020 relating to auditors’ effective communication with TCWG are as follows.
Auditor’s professional judgement in determining the appropriate persons to be considered as TCWG, and consistency in such determination is a key to good two-way communication.
Establishing the communication process at the planning stage helps in enhancing the effectiveness of two-way communication
The entity’s governance structure affects the method of communication and matters to be communicated. Accordingly, the method of communication and matters to be communicated are essentially not determined based on firm’s policies and procedures.
Engagement letter is used as the main tool to communicate auditor’s responsibilities towards the financial statement audit. Separate engagement letters are used for non-audit services.
Meetings, presentations and letters are common methods of communication during different stages of the audit.
Active involvement of TCWG at such meetings and presentations are useful for effective two-way communication and contributes towards effective decision making of both parties.
Meeting minutes maintained by the auditor or extracts of the minutes maintained by the entity is a key to provide evidence of the two-way communication had during the audit.