ASIC surveillance results - areas of improvement for financial reporting and audit quality

In October 2023, ASIC published its annual surveillance report. The report highlights areas where the quality of financial reporting and audits can be improved.

The surveillance report summarises findings from ASIC’s reviews of both financial reports (180 ASXlisted entities and large unlisted entities) and audit files (15 related audit files at 11 audit firms) for the period 1 July 2022 to 30 June 2023.

Company directors (including audit committees) and auditors are expected to constructively discuss these findings and take action to improve financial reporting and audit quality.

The majority of ASIC’s findings from financial report surveillances related to:

• Insufficient disclosure of material business risks in the operating and financial review (OFR)
• Impairment of assets Revenue recognition, and
  
• Other financial report disclosures.

Insufficient disclosure of material business risks in the OFR

Many entities still need to significantly improve the information they report in the OFR. ASIC noted that:

• Entities that are newly listed might find writing an OFR challenging
• Entities that regularly raise funds cannot rely on other external sources of document such as recent fundraising documents as a
  substitute for the OFR
• Entities with more complex business models ASIC expects that the OFR to provide an adequate explanation of the key features of the business model and industry.

Impairment of assets

During this surveillance period, ASIC contacted 20 entities about their impairment testing, mainly on goodwill and other intangible assets. It noted that directors should question the need for, and adequacy of asset impairment, and the adequacy of
related disclosures.

Revenue recognition

ASIC contacted 14 entities about their revenue recognition including disclosures of accounting policies, with three of these entities making adjustments.

Financial reporting disclosures

ASIC contacted seven entities about their financial report disclosures including:

• Going concern
• Operating segments, and
• Non-audit service fee disclosures.

The key audit areas with audit findings continued to relate to impairment of non-financial assets, asset values, revenue recognition, impairment of receivables, inventory and costs of goods sold, provisions, and investments and financial instruments.

Directors and preparers

In the surveillance report, directors and preparers are asked to support
the audit process by ensuring that:

• The OFR disclosure is not generic and reflect the entity’s specific circumstances and the business environment it operates in
• Management produces quality and timely financial information, supported by robust position papers with appropriate analysis and conclusions referencing
  relevant accounting standards
• The entity applies adequate resources, skills and expertise to promote quality in the reporting process. Position papers should be prepared for directors (including
  audit committees), especially in areas that involve significant estimation uncertainty and judgement, e.g. asset values, revenue recognition and provisions
• There is effective and clear communication channels with the auditor to flag any risks affecting the information in the financial report and that relevant information and
  explanations are provided to the auditor in a timely manner
• There is a robust process for the selection of the auditor, appropriate audit fees are set and there are clear communication channels between the auditor and the audit
  committee to support financial reporting and audit quality.

For any further guidance on the current ASIC expectations, please do not hesitate to contact your local PKF team.