Audit Quality Review Grades
Our written report will highlight the grade on each individual cold file reviewed. Our reviews are designed to monitor the quality of audit and promote continuous improvements in audit quality.
Firms should focus on recommended follow-up action to improve audit quality and not just focus on the grade obtained. In order to assess the quality of the audit work inspected we use a four level system from A to D for any cold file reviews performed.
Given the nature of hot file reviews, these are ungraded and the RI should ensure they have appropriately addressed the issues raised before the audit report is signed.
Mercia's four level system
Overall basic for cold file review grades
A - An audit file in which no significant weaknesses were identified.
The audit approach applied is ISA compliant in all material respects, such that the work performed applied the necessary risk-based ISA methodology and addressed the key risk areas identified at the planning stage.
No significant problems found with the accounting treatments or disclosures.
C - A marginal audit file in which there were several weaknesses and deficiencies, such that improvement is required.
These files are characterised by either more frequent weaknesses or specific issues of heightened severity regarding the application of a risk-based, ISA-compliant audit methodology and associated documentation in certain areas.
Significant weaknesses with disclosure or presentation, but where the recognition and measurement requirements have been appropriately applied.
B - An audit file in which the main areas were correctly tested, but some matters need to be addressed.
The overall quality of the audit file is good, with the key ISA matters addressed, although some areas require additional evidence or documentation.
Appropriate selection and application of accounting policies, but some weaknesses with disclosures.
D- An audit file in which there are pervasive or significant weaknesses in the audit approach applied, or there are serious core ISA, ethical, recording, accounts disclosure or other technical failings.
This grade is applied to audit files that exhibit a significant failure to comply with ISA and ethical requirements (either individually or in combination), or that lack sufficient documented audit evidence to support and justify the overall audit opinion.
This would include inappropriate selection and application of accounting policies or a reporting framework, such that the financial statements were considered materially incorrect.
Examples of areas of weakness
Examples of weaknesses that may result in the above grades being awarded are detailed below.
ISA compliance
A - The permanent information is generally up to date and requires only minor updating in certain non-key areas.
B - While some areas are addressed, a lack of all the necessary ISA 315 permanent information concerning the knowledge of the business, laws and regulations, accounting systems notes (including the client’s IT applications) or business appraisal information.
Relatively minor issues concerning the identification and approach to be applied to core ISA requirements.
C - Instances of non-compliance with some specific core planning, risk assessment and core ISA’s.
This would include a generic application of the ISA 700 requirements, with a lack of showing how the explanation to the extent the audit was considered capable of detecting irregularities, including fraud, was tailored to the entity.
D - Serious or pervasive weaknesses in the approach to planning matters such that it cannot be concluded that a risk based, ISA compliant methodology has been applied.
This may include weak or non-existent risk assessment procedures, an absence of properly recorded core ISA considerations and an absence of key meeting notes and effective memoranda
It would also include situations where the audit report has not been drafted in accordance with relevant statutory or ISA requirements.