Audit Failure and the Missing Engagement Partner (Ep. 21)

When an audit fails, the issue is not always a bad test or a missed checklist. Sometimes, the real problem is that the engagement partner was missing when it mattered most.

In this episode of Financial Reporting Conversations, Wayne Basford and Judith Leung unpack why the engagement partner must be involved early, not just at final review. They explore how weak planning, poor risk identification, ineffective engagement team discussions, and late file review can all contribute to audit failure.

🎧 In this episode, you’ll learn:

• Why the engagement partner’s role starts before final review
• How poor direction and supervision can undermine audit quality
• Why ETDs should be more than a compliance tick-box
• How late partner review can leave audit teams exposed

Financial Reporting Conversations is brought to you by Basford Consulting helping professionals go beyond compliance and get financial reporting right.

For technical insights, training, and resources that make the unknowns in financial reporting known, visit basfordconsulting.com

🔗 Connect with us:
LinkedIn: Wayne Basford & Judith Leung
YouTube: @BasfordConsulting
Website: basfordconsulting.com

Transcript

SPEAKER_01 0:00

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SPEAKER_00 0:18

Whether you're a preparer, auditor, director, or litigator, our aim is to help you get it right. Hello. When the company collapses shortly after receiving a clean audit opinion, the same question usually appears. Where were the auditors? The order failure rarely have a single cause. They're often the result of decisions, pressures, and behaviours that develop long before the audit opinion is signed. Welcome to Financial Reporting Conversations. In this series, Why Audits Go Wrong, we explore the deeper causes of order failure and the conditions that can undermine ordered quality. In today's episode, we're examining the missing engagement partner. As usual, I'm joined by Wayne Basford. Wayne, you argue that the hidden causes of order failure is the absence of the engagement partner from key audit phases. That sounds surprising because the partner is supposed to be responsible for the entire engagement, isn't it? What do you mean by the missing partner?

SPEAKER_01 1:18

Engagement partner is responsible for the audit opinion. The buck stops with the engagement partner. But when you look at it, they issued the wrong opinion. They gave an unmodified audit opinion on something that was materially misstated. Flick it back. Why did they do that? Why did they jeopardize their career? Why did they jeopardize their auditor registration? They were missing from somewhere in the process. And typically they were missing from earlier on in the process. They were missing being involved in the planning. They didn't properly understand the business. They didn't put their mind to what risks were in that business. They didn't guide their staff. Watch out for this. Have you thought of that? They didn't read the planning information sufficient to spot what's changed. And they're typically far too late in the process. A lot of audit partners, and I could look myself in the mirror and say, yes, Wayne, they have taken the review concept of their responsibility very, very seriously. And the trouble is they've not directed and supervised the planning early enough. The number of audit partners that may have signed off the planning the day they signed off the audit report, they sit there and say, last week in September, I am going to review the file. That file review includes reviewing the planning. And the partner's been absent, and that absence is a real root cause of why that partner signed the wrong audit opinion.

SPEAKER_00 3:11

So you're saying the engagement partner typically gets missing sort of at the beginning and sort of only reappears. I mean, appears, not appears at the end when the review stage. Why is the engagement partner so critical? Why is it so important for the partner to be sort of in the action from the beginning already?

SPEAKER_01 3:30

Ultimately, it is the engagement partner that is the brains behind the audit. And then the continuity we you know we've discussed on previous episodes, the audit process works on a very leveraged model. The audit process works by having lots of inexperienced staff. The audit process works from leverage. We have inexperienced staff, we have graduates who've never seen a business before, we have seniors that are only two, three years into professional career, but you've got a partner who should have 10, 12 plus years experience. The partner is the one that's typically the continuity. So you've got a new senior, a new manager. They don't really know what that client does, they don't necessarily, they're not on top of the industry. Welcome to Western Australia from the guy that's just come from London. We do mining, we do junior explorers. The knowledge rests or should rest with that partner, and that using that knowledge should be transferred to all the members of the engagement team and check they're on the right track. You know, this is direct and supervised. So what have you found? Have you read the minutes? What have they done new? Ah, they've done that there, there's a convertible note. Have you checked that convertible note? That's the years of experience of an audit partner. You know, somebody's got a perfect CV, X Big Four, worked on the major banks, auditing major banks in London. How many peculiar convertible notes have they ever seen auditing Lloyd's bank or Barclays Bank? So it's that experience. That's what we're supposed to be there for.

SPEAKER_00 5:27

The audit partner is meant to know, be the best person that understands the business.

SPEAKER_01 5:32

The answer is yes. Now you've got this weird issue on rotation, and does rotation and audit rotation add to audit quality or weaken audit quality? But for the most part, the audit partner is the continuity. And when the audit partner has rotated onto a client, the audit partner needs to take the effort to read the file, to have discussions with the previous engagement partner, to read the accounts, to get on top of what this business does, what are the inherent risks associated with this business, and they need to be on top of that as soon as they've won the client, as soon as they've been rotated onto that client, they need to understand it and be aware of the inherent risk factors and how they're going to address those risk factors. And once they've got that factor, they tell the grad, they tell the senior, they tell the manager, it shouldn't be the other way around. You know, I've seen audit partners in my time coming up to Clearance Martin. So, Wayne, what does this client do then? And that's not necessarily the best way for an audit partner to be supervising and directing the audit.

SPEAKER_00 6:53

So, what happens if the audit partner's not there to be directly involved and supervising the engagement?

SPEAKER_01 7:02

Well, remember, this is the context of audit failure, what goes wrong? What happens is they miss a risk, they miss a risk and material misstatement, they don't respond to that risk, they don't get audit evidence either to support that the assertion has been addressed or they just miss it completely, and then they issue the wrong opinion. And I won't go into which matters I've I've looked at. I have actually seen it where the engagement partner has been remarkably well engaged, but the re engagement partner has got too focused on a different area. So this is not an idle engagement partner, this is a very diligent engagement partner, but that has only got so much time in the day. So the engagement partner got focused on a particular area, spent a lot of time on that area, but managed to miss what ultimately ended up the misstatement. So it's not just no the absent engagement partner, which I've seen, the absent engagement partner who's on a conference, who's winning clients, who's on international jollies, who's on another committee, who's on a board, and he's really, really far too busy to do this auditing stuff. I've seen very diligent audit partners just not have enough time to stand back and understand the business as a whole. And always remember, you know, one of the problems, you know, there's a different webinar that we're doing that is what's the commonality on audit failures, the big audit failures. A lot of it is always change. So the entity has gone and bought a new subsidiary, the entity has gone and entered into this new business, has gone and entered into these new contracts, and the audit partner hasn't been aware of it. The audit partner hasn't had the time to put their mind to this change. And how does that change cause audit risk? And you know, the managers are busy, the seniors are busy, they just want that audit partner off their back. And you know, we discussed last week. Are they actually auditing or are they filing? And at some point in the process, those last few weeks of September, unfortunately, most audit managers, seniors, they're filing, they're not auditing.

SPEAKER_00 9:51

You started touching on change, which I understand from all my conversations with you is like an inherent risk factor, which I guess leads us to like, you know, about the engagement partner's role in leading um risk identification. So what happens if the partner is missing and not leading that process?

SPEAKER_01 10:12

Simple. You you know, this is my cascade of audit failure. You don't understand the business, the partner hasn't invested the time in the business, or potentially in your, you know, this is me in the mirror. I understand the business, but I have decided to brief my audit team by the Vulcan mind melt that I just assume my people around me understand the business as well as I do. I assume my manager thinks as I do. You don't understand the business, you don't identify the risks. If you don't identify the risk, you don't get sufficient audit evidence and you you miss it. So, and this is leadership. And again, you know, going back to another course I try and encourage people to sign up for. Where is the audit partner on the ETD? And you know, this is everybody listening, it whether it's the engagement partners themselves saying, maybe I could do it better, or it's all the managers and seniors listening to this uh course or webinar. What do I get from an ETD? Do I get the engagement partner sitting there and telling me, this is what this company does, this is where I'm worried about. I need you, Judith, to go and look at this. Can you please tell me they're not doing this? Or do you see this shambolic agenda? And I've seen it very embarrassingly on a number of times. I just because I've got no idea who that new uh starter is, I will use this as an excuse to learn the new graduate's name, and I will say, Judith, please tell me what this company does, and you can chair the ETD. And I say that embarrassingly because I have sat there as the EQCR thinking this is disastrous. This is not the way you operate an ETD. You're just sitting there as the engagement partner, potentially looking very smug, because the engagement partner actually does know, hopefully, what the entity does, but is just going to pick on that grad and completely wastes everybody's time for an hour doing an ETD that just doesn't address anything.

SPEAKER_00 12:30

If you're finding this discussion useful, please take a moment to click like, subscribe and share. It helps others in the financial reporting community discover financial reporting conversations and keeps you up to date with every new episode. What you've touched, so we've moved on to the ETDs. What is the engagement's partner's role in the ETD?

SPEAKER_01 12:52

To lead it, to lead the ETD, to share knowledge, and to actually share a robust discussion about what could go wrong. So, you know, the timing of these ETDs and this question of whether there should be two ETDs, which there never is, but conceptually, Judith, I am sending you to go and audit XYZ. And I, before I send you out there, will brief you. I will hold an engagement team discussion and I will tell you this is what they do, Judith, this is what I'm worried about. Watch that guy over there, they're weak here, and I send you out on a briefing. In old people's world, when we used to actually go and do audits at the client, there was a wonderful routine that everybody had to be back in the office on a Friday afternoon. And it was a good idea that people came into the office for a Friday afternoon and we went to the pub.

SPEAKER_00 13:56

Yeah, is that why everyone goes for Friday night drinks?

SPEAKER_01 14:00

Well, no, no, no. We still have the Friday night drinks, but we don't do the briefing. So it used to be okay, everybody tries to, and this is when we carried big audit boxes and audit files. You came into the office on a Friday afternoon, you hopefully put the audit file, the big boxes, stored them in the office. You then had a series of briefings that you would be briefed as to what you were going to be doing on the Monday morning. So this briefing, you need to go and do this, you need to go and watch that, the client's address is this, the best pub is this, you know, you were briefed. And after you'd been briefed, you're very civilized, you'd go for uh catch it with colleagues and friends and go for Friday afternoon drinks. Or there were, and there was another series of briefings. You would be briefed early on a Monday morning in the office, and you'd then go to the client, depending on how close the client was to the office. Those briefings don't ha really happen much because we don't formally go to the client. The audits don't seem to start on Mondays and finish on Fridays. And therefore, but the ETD has been formalised in the auditing standard. So we should have them, but there should be, Judith, go out, go and look at them, update the uh what they do, tell me what the this is me telling what they do, and then there should really be a debrief. This where does the ETD happen? So, Judith, what did you find? You've reviewed all the minutes. Have they done anything different from all of your risk identification, from all the work that you've done, you've read the minutes, you've spoken to the CEO, you've spoken to the project manager, you've spoken to the mine engineer. What did you learn and what should we worry about? Now that's the discussion that should happen in an ETD. And I've attended far too many ETDs. It's confusing when they're actually held. And I think, you know, back to everything I'm putting on on a load of our courses, start with the end in mind. Do you ever say, does the audit partner ever open the ETD with this is the purpose of why we're sit gonna sit here for the next hour?

SPEAKER_00 16:37

So there should be multiple ETDs during the not just the beginning one and the sign-off one.

SPEAKER_01 16:46

Well, just the sign-off one. There's one. Remember, we don't audit, we just tick things. There is supposed to be an ETD. ISA 315 says there should be an ETD, our audit manual says there should be an ETD. We had an ETD. And you ask any you ask the audit partner, you ask the grad, you ask the senior, why did we do the ETD? Because we have to. Because ISA 315 says we do it an ETD. And you know, going back, start with the end in mind. We hold an ETD to share knowledge, to brainstorm what could go wrong, to explain to everybody in the engagement team this is what could go wrong, and this is why how we're going to address what could go wrong. And the work that you're doing over there is to address this assertion. And if anything comes up like this, please tell me. I don't want to find it reviewing a section on the 27th of September because I've sent you out there, these are the key issues. You know, back to this. The part the engagement partners role is direct and supervise and review. This is all part of direct supervise and this feedback mechanism. I've explained to you why I need you to do this. You please explain to me if you've caused seen any problems. And when I sit down at the review period, I can say, Judith, this was the risk. This is what we discussed at the ETD. Why am I relaxed? Why have I got a warm audit glow? Have you addressed the risk that we discussed at the ETD? And again, this is challenging for all the auditors listening to it. I'm not sure that's how it works in practice.

SPEAKER_00 18:47

And, you know, we touch on now you've moved on to another point about addressing the risk and designing procedures to arrest uh to address those risks. Is that something just the audit team does, or should the engagement partner also be involved in that? Or is that engagement partner identifies the risk and go, there you go. Like go ahead.

SPEAKER_01 19:10

Okay, this is an engagement team. There is a team in this, and it's an engagement team that is directed and supervised by the engagement partner. So, right up front, are we all happy that we've addressed the risks? Sorry, are we all happy we've identified the risks? So this is the risk. I, the engagement partner, am happy that these are the risks. Because I am the engagement partner and I need to know what the risks are. So, Judith, you are you happy that these are the risks? Do you understand that these are the risks of material misstatement? And then it's okay. Now I, if I direct, if I'm directing and supervising with my 20, 30 years experience, I'm gonna say, okay, Judith, go and do this, go and do this, go and do this. And that could be as detailed as my wonderful briefings ever be. Or it could be I don't I don't tell you at all what to do. And then you go away in a caseware library and think, I've got I've got no idea what he was talking about. Yes, I've agreed this is revenue recognition is a risk. Yes, we all agree revenue recognition is a risk. Not sure which bit of revenue recognition is a risk, but it's definitely a significant risk of material misstatement. And then you randomly go and select some procedures out of caseware.

SPEAKER_00 20:35

The way checking the invoice and and and make sure the cash is received.

SPEAKER_01 20:42

I have so I will do my three-step testing, I will check to purchase order, I will check to dispatch note, I will check to the invoice, and I will check to cash receipts. The perfect audit procedure to address the five-step approach in IFS 15. And if anybody's listened to that, please note that is British sarcasm. That is not the way you address the risk of the five-step approach in 15. But what point does the partner direct and supervise this is the risk? You go away, you're my manager, you're my supervisor, go away and let's have a look at how we're going to address that risk. At what point is the engagement partner supposed to say, yeah, Judith, that's great. Or you know this procedure about order, dispatch, invoice, cash collection? I don't think that actually addresses identifying performance obligations. I don't think that addresses allocating uh consideration based on the standalone selling price. At what point should The engagement partner communicate that back to the engagement team. I would suggest that the planning phase not on the 27th of September. But this is a radical audit approach.

SPEAKER_00 22:14

Lastly, you know, we're always reviewing before sign off. I presume that's something every order partner does, and that should be relatively okay. They're more quite diligent in that aspect.

SPEAKER_02 22:28

I love your naivety or or or hope and positiveness.

SPEAKER_00 22:34

When we talk about that, they show up at the review stage, right?

SPEAKER_01 22:38

When I often talked last week about auditors, perhaps in that last week in September, that last two weeks in September are filing rather than auditing. I do think with technology, with stamp dating, with metadata, with the threat of regulatory reviews, the threat of peer reviews, I would be confident that a lot of engagement files have got sign off before the audit partner issues the engagement report. So issues the audit opinion. And I do question, but I am cynical and my glasses definitely half empty or broken or leaking. Did they actually review anything they have just uh signed off? And when do you review it? You know, I am reviewing this diligently on the 28th of September. It's too now, even if they did review it, the point of what they're reviewing is going to be too late. Oh my god, you've not done anything on uh the five-step approach. Why didn't you do it? And you know, the poor audit manager or the poor senior will have some pathetic excuse about you didn't tell them to do it and they're not psychic and way and you didn't explain yourself, which may have been a you may sympathize with the your lack of psychic ability to understand what's going on in my mind. But if I'm reviewing it and finding a terrible, terrible problem on the 28th of September, I would suggest that is far too late. And you get the problem, you know, this review. I I definitely see more and more. We've got our priority clients, we've got our priority clients, and they they're good, they want to get their uh 4E, they want to get their accounts out by August 31. And then we've got these really, they're never ready, they're never work. But I haven't actually got the staff to do all of these audits in in August. So I will deliberately have my B grade clients, my C grade clients, I don't even start looking at them until September. How busy were you in September? How burnt out were your engagement teams in September? How burnt out is the engagement partner in September? And you know when you you're looking at that file when you're reviewing that file? You know, rhetorical question for a lot of audit partners. Were they reviewing it or were they desperately signing things off? You know, is there a mechanism? I'm not sure whether there is on some to you know, sign off multiple signs, tick, tick, tick, tick, sign, sign, sign, tick, tick, tick, tick. That's not reviewing. But I'm I'm a cynic.

SPEAKER_00 25:45

So from this conversation, it sounds like that the missing engagement partner sounds like a fundamental more leadership and maybe culture issue within the firm.

SPEAKER_01 25:56

You know, everybody listening to this, and from the engagement partners that are hopefully thinking, yeah, I know that person over there, does it nobody, none of the engagement partners listen to this? Well, think they're the problem with the process. But a lot of the managers, a lot of the seniors, do they feel exposed? Do they feel supported? Do they and I've I've listened to managers. Well, I did my best. I tried hard. You can't believe how hard. But I don't know what I was doing. I'd I'd never audited something like that before. I got no direction, and the engagement partner, all he did was shout at me and was grumpy uh when he wasn't happy with it uh when he re finally reviewed the file. If he told me that before I'd spent two weeks auditing it, it might have been better. Now, if that you know, I'm talking 30 plus years of being in this business, and I might be looking at myself, and there might be a lot of people that have previously been my managers and been my seniors that said, yes, Wayne, you didn't necessarily brief me as well as you should have done. I put my hands up to that, but hopefully, sharing this uh video will help people improve audit quality and will put their mind to the engagement partner needs to be involved throughout the process. So that's meant to be on a positive note.

SPEAKER_00 27:25

Thanks, Wayne. So audit failure is rarely the result of a single mistake. It often reflects deeper issues in leadership, judgment, and the systems that supports the audit process. Understanding those factors is essential if we want to understand why audits go wrong. Thank you for joining us for this episode of Financial Reporting Conversations, and we hope you'll join us next time as we continue examining the pressures and decisions that shape audit quality.

SPEAKER_01 27:52

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SPEAKER_00 28:03

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