COMPARACIÓN E INTERPRETACIÓN DE LOS RESULTADOS OBTENIDOS

In accordance with AAA effective from 2010, quality control of auditors is performed by the Board of Auditors every six years (for auditors of PIEs, every three years). The procedure of quality controls is approved by the OB. Quality controls and internal disciplinary proceedings of the professional association are carried out, and the facts of the complaint and investigation are ascertained by the quality control team formed by the

management board of BoA. The team consists of at least two members, but the size and composition of the control team are determined by the management board of BoA on the basis of the risk analysis, objective, schedule and object. The head of a control team shall have completed special training in quality control

2

2004 2005 2006 2007 2008* 2009* 2010* 2011 2012 2013 2014

Pass Fail

organised by the Ministry of Finance. A member of the control team shall have experience in the preparation of reports on the professional activities of a sworn auditor and financial reports or be an expert in accounting, finance or law. The members are elected in a way that conflicts of interests between a member of the control team and the object of the control or proceedings or persons associated therewith would be avoided.

At least one person appointed by the OB participates in the quality control carried out or disciplinary proceedings conducted by the BoA.

OB approves the list of auditors subject to the quality review during the next financial year.

The management board of BoA has the right to increase the nominal frequency of quality control up to the frequency of at least once a year if material violations are ascertained as a result of the work of the control team or disciplinary proceedings which, however, are not sufficient to make a proposal to the Ministry of Finance for the suspension or termination of an activity licence. In other words, where significant shortcomings have been detected during the quality control, the auditor will be subject to quality control on the next year as well.

If significant shortcomings have been detected during the quality controls over two consecutive years, the Ministry of Finance may revoke the activity licence. Any other disciplinary penalties are imposed by the decision of the management board of BoA as a result of disciplinary proceedings; the decision is pre-approved with OB.

As a result of quality reviews, the activity licence of one audit firm has been revoked in 2013/2014, and the activity licences of three audit firms have been revoked in 2014/2015.

The actual performance of disciplinary proceedings by the management board of BoA has been improved year-on-year; as stated in the OB’s yearbook 2014-2015, since the financial year of 2013/2014, the management board’s actual practice has been fully compliant with the requirements of AAA.

Table 23. Frequency and procedure of quality controls in other countries

Country Frequency and procedure of quality controls

Latvia Every 5 years; for PIE auditors every 3 years. Quality control is performed by the Latvian Association of Certified Auditors and supervised by the Ministry of Finance. Authorised representatives of Ministry of Finance participate in the quality control visits of PIE auditors.

Finland Every 6 years, for PIE auditors every 3 years. Quality controls for PIE auditors are performed by the independent full time employees of the Auditing Board of the Central Chamber of Commerce; other quality controls are performed by practitioners who are coordinated, monitored and reviewed by the quality assurance team of the Auditing Board. Inspection results are approved by the Auditing Board of the Central Chamber of Commerce and the Auditing Committee of the regional Chamber of Commerce.

Sweden Every 6 years, for auditors of listed companies: 3 years. Quality reviews of the auditors of listed companies are carried out by the Supervisory Board of Public Accountants (RN). For other auditors, RN relies on inspections carried out by the professional organisation FAR; RN monitors its activities.

(Sources: Composed by the authors; http://tilintarkastuslautakunta.fi)

In the World Bank’s ROSC report from 2004, based on empirical evidence rather than research, high-quality audit delivery could be expected from select audit firms representing approximately 25% of profession. The results from the recent quality controls prove a decent improvement in this area:

During 2014/2015, 41 quality control procedures were held, out of which:

 15 (36.6%) were classified as “green” - the quality of services met the standards; improvement is possible;

 13 (31.7%) as “yellow” – the quality is acceptable, however shortcomings detected and improvement required;

 13 (31.7%) as “red” - significant shortcomings detected, improvement mandatory.

However, there are some critical factors which impact the interpretation of the results. The “yellow” and “red”

results are aggregated to small and medium audit firms only, thus the impact of the “yellow” and “red” auditors to the auditing market is much less significant than the numbers above seem to indicate. Also, within “red”

results, some are repetitive. The impact of the results of the quality controls is analysed below.

2014/2015 was the fifth year of the cumulative first 6-year cycle since the new AAA became effective in 2010.

During that five years, 87.2%of the total audit market (by revenue of audit firms of 2014/2015) has been covered by the quality controls.

Figure 7. Distribution of audit firms' total revenue of 2014/2015 in relation to the quality control coverage during 2010-2015

(Source: Oversight Board yearbook 2014-2015)

Out of the tested audit firms, the results of “green”, “yellow” and “red” are split by revenue (of 2014/2015) as follows:

Figure 8. Distribution of audit firms' total revenue of 2014/2015 according to the quality control results of 2010-2015

(Source: OB yearbook 2014-2015) 13%

87%

Audit firms' total revenue not covered by quality control Audit firms' total revenue covered by quality control

4%

17%

79%

Red Yellow Green

Figure 9. The results of quality controls by segments of the audit firms

Some audit firms have been subject to quality control twice or three times – due to repetitive control as a result of “red”

result in the first year, or due to being an auditor of PIE client.

(Source: OB Yearbook 2014-2015)

In ROSC report, the problem areas surfaced that adversely impact the average quality of auditing practices in 2004 were determined to be lack of documentation, fraud, internal control system, related parties, lack of audit evidence (inventory stock takes, external confirmation letters).

The significant shortcomings detected in the quality reviews of 2010-2015 are in the following areas (OB Yearbook, 2014-2015):

1. Engagement has not been conducted in accordance with appropriate framework.

2. Auditor is not compliant with requirements on ethics, incl independence.

3. Auditor has not performed risk assessment procedures in accordance with a standard; and the extent and nature of planned procedures is not in compliance with the risk assessment.

4. Auditor has not planned and performed the engagement with professional scepticism and has disregarded circumstances that may cause the financial statements to be materially misstated.

5. Documentation of the engagement is inadequate and does not provide the purpose, description and conclusion of a procedure, or the details proving the performance of the procedure.

6. Auditor has not obtained 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 has not concluded, whether a material uncertainty exists about the entity’s ability to continue as a going concern.

7. Appropriately signed management representation letter is missing, or the letter is signed later or significantly earlier than the auditor’s report.

8. In an audit of group financial statements, the auditor has not communicated its requirements to the component auditor, or has breached the requirements of ISA 600 in another way, as a result of which the evidence in relation to components is inadequate.

9. Auditor has issued an auditor’s report of an incorrect type.

The representatives of the management board of BoA expressed a view that the consolidation within the auditors has had a positive impact on the quality of audits. Based on our interviews with users of financial statements, their perception is that the existence of auditor’s report adds credibility to the financial statements.

We acknowledge the improvement in enhancing the quality of auditors in recent years, and we recommend the above described practice be continued in the future to further improve the quality and to aim to achieve that no audit firms will fall under the “red” or even the “yellow” category as a result of the quality reviews.

100%

(the largest 5) Medium audit firms

(the next 25 firms) Small audit firms (remaining firms) Green Yellow Red