Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) continued its function of monitoring compliance with Sri Lanka Auditing Standards (SLAuS) by the auditors of Specified Business Enterprises (SBEs) when they conduct audits of financial statements of SBEs. The inspections of the audits of SBEs are carried out with the overall objective of enhancing the audit quality in the country. In doing so, audits are selected for inspection through a risk-based approach as well as a random selection approach.
Amidst the slow and steady recovery of the Sri Lankan economy which encountered significant uncertainties in 2022-2023, SLAASMB as the sole audit regulator in the country, acknowledged the effect of the uncertainties surrounding the businesses and the difficulties they pose in making precise judgments and estimates. These uncertainties increase the risk involved in auditing of accounting estimates and require the auditors to be more skeptical in their approaches and requires a significant amount of professional judgment to be exercised and to be focused on ethical responsibilities when carrying out the audits.
Accordingly, SLAASMB based the selection of audits for inspection during the year on a mixed model where the risk-based approach was combined with a random sampling approach.
SLAASMB conducted audit inspections with special focus on the following areas;
In addition to the aforesaid focus areas of audit inspections, certain audit inspections were carried out to assess the professional judgement and skepticism exercised by the auditors when conducting the audits of financial statements.
During the year, 16 audit engagements carried out by 6 audit firms were inspected, compared with the 33 audits carried out by 9 firms that were inspected during the preceding year. The decline in the number of inspections is attributed to the reduced number of inspection staff at SLAASMB due to resignations during the year. 15 of the audits inspected during the year were carried out by 5 firms that are members of international networks.
Of the inspection findings, 13 audits were compliant with SLAuSs in respect of the areas focused at the inspections. The findings of the balance 3 inspections did not require further action under the statute and the said findings were communicated to the respective auditors by letters of observation.
Based on the severity of the observations made during the inspection of audits, SLAASMB adopts diverse measures in its attempt to make the auditors improve themselves, in achieving SLAASMB’s objective of improving the audit quality environment of Sri Lanka. When non-compliances with SLAuSs are observed during regular audit inspections that do not require further action under the statute, such deficiencies are communicated to the audit firm by a letter of assistance termed “Letters of Observations”. When improvements are required to improve the audit quality, such improvements are communicated as “Suggestions for improvements”.
In addition, when the auditor is observed to have failed to exercise the fundamental ethical principles in the conduct of an audit of an SBE, a “Letter of Warning” is issued to the audit firm with the approval of the Board, requiring the said firm to act diligently and in accordance with the requirements of the applicable auditing standards, when they conduct audits of financial statements in the future. Further, based on the significance of the issues, where necessary, SLAASMB refers the deviations observed from auditing standards to the Attorney General for advice, and where the deficiencies are in the audit quality, such matters are directed to CA Sri Lanka, the licensing authority of the auditors, and to any other regulator governing the entity being audited, as applicable.
During the year, letters of assistance termed “Letters of Observations” were issued to 3 firms in respect of 3 audit engagements, communicating the non-compliance with SLAuSs observed when conducting the audits where such non-compliances did not require further action under the statute. In comparison 9 audits relating to which observations were communicated in respect of deficiencies were conducted by 5 during 2022.
Significant findings communicated to auditors during the year are stated below.
The auditor is required to perform risk assessment procedures to identify and assess the risks of material misstatements through an understanding of the entity, and its environment including the entity’s internal controls, enabling the auditor to provide a basis for designing and implementing responses to the assessed risks of material misstatement.
The deficiencies communicated in relation to performing such risk assessment procedures included the following.
The auditor is required to design and implement appropriate responses to address the assessed risk of material misstatements in order to obtain sufficient appropriate audit evidence.
The deficiencies communicated relating to the auditor’s responses to the assessed risks are as follows.
The auditor is required to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.
The following deficiency communicated in relation to gathering audit evidence.
The auditor is required to obtain sufficient appropriate audit evidence about whether accounting estimates and related disclosures in the financial statements are reasonable in the context of the applicable financial reporting framework.
Instances of the auditor failing to perform adequate audit procedures relating to accounting estimates are;
The auditor is required to communicate the responsibilities of the auditor in relation to the financial statements and audit, to provide an overview of the planned scope and timing of audits, and to provide timely observations significant and relevant to their responsibility to oversee the financial reporting process and to promote an effective two-way communication between the auditor and TCWG.
The following deficiencies were communicated in relation to the communications the auditor has had with TCWG;
The auditor is required to obtain sufficient appropriate audit evidence regarding the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements, and to conclude, based on the audit evidence obtained, whether a material uncertainty exists about the entity’s ability to continue as a going concern and to determine the implications for the auditor’s report.
The following deficiency was communicated in relation to the evaluation of the appropriateness of management’s use of going concern basis of accounting in the preparation of financial statements;
With the aim of improving the audit quality, suggestions for improvements have been communicated in relation to three (3) audit engagements carried out by three (3) audit firms during the year. The auditor is expected to improve on these suggestions when conducting their audits in the future.
Suggestions for improvements communicated included the following;
Audit quality is a key factor in building public confidence in financial reporting. Accordingly, SLAASMB has taken the following measures to enhance the audit quality of the country.
Audit Committee forms a part of Those Charged with Governance, and are vested with the responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. Accordingly, the Audit Committee plays a significant role in ensuring the quality of the financial reporting process of a company and in maintaining appropriate relationships with the auditor. SLAASMB continues to recognize the contribution of the Audit Committees as Those Charged with Governance towards enhancing the quality of the financial reporting and the audit environment. Accordingly, SLAASMB continued to communicate the outcome of the audit inspections to the Chairs of the Audit Committees of companies listed on the Colombo Stock Exchange to foster effective oversight of financial reporting.
SLAASMB identifies the preparers of financial statements, auditors, peer regulators, government of Sri Lanka and the general public as its stakeholders. By enhancing the knowledge of the stakeholders SLAASMB leads the pathway in achieving its objective of enhancing reliability of the financial reporting in Sri Lanka. Accordingly, SLAASMB with the collaboration of the CA Sri Lanka, the Accounting and Auditing standards setter and the licensing authority of the auditors, conducted a session for its stakeholders to share the common findings SLAASMB has encountered during the audit inspections carried out during the recent years. SLAASMB expects to continue the sharing of findings with its stakeholders to educate the auditors who conducts audits of SBEs as well as members of the Audit Committees who are expected to have effective communication with the auditor.
SLAASMB being a member of the International Forum of Independent Audit Regulators (IFIAR) since its first plenary meeting held in 2007, participated in the meetings of IFIAR that were conducted as virtual meetings during the year, and contributed towards the information gathering activities of the IFIAR and participated in its routine surveys.
SLAASMB is also a member of the Consultative Advisory Groups of the International Auditing and Assurance Standards Board (IAASB) since 2007 and a member of the Consultative Advisory Group of the International Ethics Standards Board for Accountants (IESBA) since 2009. During the year, SLAASMB has been contributing at the meetings held remotely, on deliberations on standards relating to Auditing and Ethics.
IFIAR being committed towards improving audit quality on a global basis, has implemented a 25% reduction target initiative to monitor changes in the rate of audits inspected with findings over four years, considering the findings of the survey in 2019 as the base year, for comparison. Accordingly, the Global Public Policy Committee (GPPC) firms which include BDO, Deloitte, Ernst & Young, Grant Thornton, KPMG and PricewaterhouseCoopers, have agreed to IFIAR measuring results of findings, relating to the listed public interest entity (PIE) engagements, with one or more finding. At the local level, SLAASMB has undertaken to submit to IFIAR, the relevant findings from audit inspections finalized during the survey period relating to the local firms of the said international networks, on an annual basis commencing from 2019.
