Root cause analysis (RCA) is a requirement of the new ISQM 1 which comes into effect in less than 10 days. It is one of the eight main components of that standard.
Audit firms will be expected to carry out RCA from 15 December 2022 and have the results and implementation action plan available for inspection by audit monitoring teams in 2023.
RCAs main objective is to examine the more serious audit deficiencies that have occurred during either hot or cold file reviews and involves asking ‘why’ questions, typically five times. The ultimate aim being to prevent them from happening again.
Known as the ‘5 Whys’ technique – it is allegedly attributed to the famously successful Toyota vehicle manufacture process.
In the audit world you might find that the source of a problem is lack of adequate staff training or staff performing audit work with an out of date disclosure checklist – the root problem occurs there.
But what is the root cause of the problem? The answer lies in going deeper by asking why the problem occurred. Asking “Why?” five times requires taking the answer to the first why and then asking why that occurs.
Typically, the process of asking “Why?” leads upstream in the process. It may be a defect that occurs in planning, but the root cause may be in the poor quality of client records, or perhaps a lack of sufficiently critical sceptical thinking on the part of the audit team.
Some typical root cause that we have come across include:
- risk assessment at the planning stage of the audit;
- the extent of audit evidence obtained and the level of documentation; and
- the degree of disclosure within the financial statements.
A common reason for these types of issue is a lack of understanding of the ISAs (Ireland) or accounting standards. Some firms insist on staff reading the ISAs as a basic starting point. What a good idea?
The 2022 book of the ISAs (Ireland) is available from the CAI store here. (We promise we don’t get a commission!). These standards are essential reading for all audit teams, especially with so many modifications to the standards coming into play for accounting periods ending 31 December 2022.
Other reasons that can be root causes include:
- flaws in the design of audit tests and
- inadequate review by senior audit team personnel (i.e. the audit manager or the audit engagement partner) as well as;
- Client familiarity which can play a part in leading to poorer quality audit documentation.
For more assistance please see our new ISQM TOOLKIT or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please call or e-mail John McCarthy FCA or e-mail him at john@jmcc.ie
Publications and AML webinar
- The ISQM TOOLKIT 2022 is available to purchase here.
- See our latest Anti-Money Laundering Policies Controls & Procedures Manual (March 2022) – View the Table of Contents click here.
- Also we have an updated AML webinar (March 2022) available here, which accompanies the AML Manual. It explains the current legal AML reporting position for accountancy firms and includes a quiz. Upon completion, you receive a CPD Certificate of attendance in your inbox.
To ensure your letters of engagement and similar templates are up to date visit our site here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items if bought together.
