Review and consultationReviews of audit work
Our policies describe the requirements for timely and direct senior professional participation as well as the level of review required for the work performed. Supervisory members of the audit engagement team perform a detailed review of the audit documentation for accuracy and completeness. Senior audit executives and/or engagement partners perform a second-level review to determine adequacy of the audit work as a whole and the related accounting and financial statement presentation. A tax representative reviews the significant tax and other relevant working papers. For listed and certain other companies, an engagement quality reviewer (described below) reviews important areas of accounting, financial reporting and audit execution, as well as the financial statements of the company we audit and our audit report.
The nature, timing and extent of the reviews of audit work depend on many factors, including:
- The risk, materiality, subjectivity and complexity of the subject matter
- The ability and experience of the audit team members preparing the audit documentation
- The level of the reviewer’s direct participation in the audit work
- The extent of consultation employed
Our consultation policies are built upon a culture of collaboration, whereby audit professionals are encouraged to share perspectives on complex accounting, auditing and reporting issues. Consultation requirements and related policies are designed to involve the right resources so that audit teams reach appropriate conclusions.
Consultation is built into the decision-making process; it is not just a process to provide advice.
For complex and sensitive matters, we have a formal process requiring consultation outside of the audit engagement team with other personnel who have more experience or specialized knowledge, primarily Professional Practice and Independence personnel. In the interests of objectivity and professional skepticism, our policies require members of Professional Practice, Independence and certain others to withdraw from a consultation if they currently serve, or have recently served, the client to which the consultation relates.
Our policies also require that we document all consultations, including written concurrence from the person or persons consulted, in order to demonstrate their understanding of the matter and its resolution.
The fiscal year 2015/2016 saw a 10% drop in the number of technical consultations with our PPG. The number of consultations on auditing standards, accounting, fraud and capital markets decreased from 1,206 in fiscal year 2014/2015 to 1,081 in fiscal year 2015/2016. Twenty five per cent of these consultations related to “going concern” issues (2014/2015: 26%); 19% dealt with topics related to modified audit opinions (2014/2015: 23%). These numbers do not include consultations with our RM/Independence Desk or informal consultations and inquiries, nor do they include the consultations to the different panels discussed below.
In fiscal year 2015/2016, audit teams reported 151 instances of potential fraud to the Fraud Panel (compared with 78 in 2014/2015). Based on an initial risk assessment, 101 cases were deemed “clearly inconsequential”. After this assessment, 50 formal consultations to the panel remained. In five cases (eight in 2014/2015), the panel defined the fraud as material. In all cases, our clients acted appropriately, taking the necessary steps to assess and solve the issue. The number of consultations with the Going Concern Panel decreased to 266 in fiscal year 2015/2016 (from 310 in 2014/2015).
The Error Evaluation Panel was consulted in 96 cases (76 in 2014/2015), including 28 errors detected during initial audits (24 in 2014/2015). The panel concluded in eight cases (all non-OOB clients) that a fundamental error had occurred in the audited financial statements of the previous year. In 75 cases (6 OOBs, 69 non-OOBs), the panel concluded that a material error had occurred (58 in 2014/2015). In 13 cases the panel concluded that the error was not material or that no error had occurred.
Engagement quality reviews
Engagement quality reviews are performed by audit partners in compliance with professional standards for audits of all listed companies and those considered higher risk. Engagement quality reviewers are experienced professionals with significant subject matter knowledge. They are independent of the engagement team and able to provide objective evaluations of significant accounting, auditing and reporting matters. In no circumstances may the responsibility of the engagement quality reviewer be delegated to another individual.
The engagement quality review spans the entire engagement cycle, including planning, risk assessment, audit strategy and execution. Policies and procedures for the performance and documentation of engagement quality reviews provide specific guidelines on the nature, timing and extent of the procedures to be performed and the required documentation evidencing their completion. Our PPD approves all engagement quality review assignments for listed companies and those considered higher risk.
The Engagement Quality Review (EQR, onafhankelijke opdrachtgerichte kwaliteitsbeoordeling) is an important part of our quality control system. We continued to use the “deep dive” approach, going one step further and deeper in our reviews. We gave detailed instructions for executing EQRs and we communicated the importance of timely involvement and the expected number of hours for an EQR. All executives and reviewers were informed and trained.
With respect to the staffing of the EQR teams, we have opted for a model that involves two kinds of reviewers: those who spend a substantial part of their time on EQRs and those who only perform a few EQRs. The principle underlying the learning organization is that the EQR not only serves as an extra pair of eyes to ensure that formal rules are complied with, it also plays the role, as far as possible, of a colleague with widespread practical experience in conducting and documenting audit assignments of a similar nature to the assignment it is assessing. The intention is that the team being assessed learns from the reviewer’s knowledge and experience gained in other reviews. We believe that learning from each other contributes to the desired quality culture.
In the Netherlands, EQRs are mandatory for Public Interest Entities or PIEs (Organisaties van Openbaar Belang or OOBs). EY’s global definition of a PIE is similar to, but not exactly the same as the Dutch definition of an OOB. Of the EQRs performed in 2015/2016, 46% (2014/2015: 49%) concerned OOBs or PIEs according to EY’s global definition of a PIE. Fifty-six per cent (2014/2015: 51%) of the EQRs were held at specific groups of non-OOB clients, including non-OOB high risk clients, our ten largest non-OOB clients, large municipalities, large pension funds and various state-owned entities. During fiscal year 2015/2016, we performed 423 engagements (2014/2015: 425). One client may have multiple EQR references, for example due to the review of interim financial statements and/or prudential reports.
Engagement auditors are not allowed to issue the auditor’s opinion until the Engagement Quality Reviewer has informed the Compliance Officer that he agrees with the engagement auditor’s conclusions.
Inflight Review & Coaching
In 2015 we launched a new project to improve our audit quality, known as the Inflight Review and Coaching initiative, which enables us to learn more about the status of engagements in progress and possible issues. Those insights help the teams answer complex audit questions and allow us to improve documentation by means of coaching. We also obtained insights into good practice’s, which we shared with all audit professionals. Participants in this project included professionals from the Professional Practice Group and managers and senior managers from practice.
Over the past year we have performed a general review in connection with the application of Significant Risks and SCOTS (all external auditors were selected) and topic reviews in connection with ISA 600 (group audits), Initial Audits, Corruption, Estimates and EQR. We have reported the lessons learned to the individual engagements teams (in general terms) and to all Assurance executives. Further, we shared good practices and developed additional guidance and enablers for Initial Audits and Group audits.
The overall feedback from the selected engagements on both review and coaching is that it has helped the teams to further improve the quality of the audit engagements. The Audit practice as a whole also indicates that they appreciate the further guidance received.
Audit engagement team resolution process for differences of professional opinion
EY has a collaborative culture that encourages and expects people to speak up, without fear of reprisal, if a difference of professional opinion arises or if they are uncomfortable about a matter relating to a client engagement. Policies and procedures are designed to empower members of an audit engagement team by requiring them to raise any disagreements relating to significant accounting, auditing or reporting matters.
These policies are made clear to people as they join EY, and we continue to promote a culture that reinforces a person’s responsibility and authority to make their own views heard and canvas the views of others.
Differences of professional opinion that arise during an audit are generally resolved at the audit engagement team level. However, if any person involved in the discussion of an issue is not satisfied with the decision, he or she has both the right and the obligation to see that the issue is referred to the next level of authority until agreement is reached or a final decision is made. Until such time, the parties to the discussion do not withdraw, step aside or otherwise extract themselves from the process.
Furthermore, if the engagement quality reviewer makes recommendations that the engagement partner does not accept or the matter is not resolved to the reviewer’s satisfaction, the audit report is not issued until the matter is resolved by following consultation processes for resolving differences of professional opinion. Our documentation requirements for disagreements and their resolution are the same as for other consultations. Anyone involved in the process may separately document his or her personal position in an attachment to the documentation of the final decision.