The Impact of Audit Quality on Financial Statements

31 Mar

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Your client's auditors are under more scrutiny than ever. And when audit quality fails, the financial statements your clients rely on, and that you've helped prepare, are the ones that get questioned.

The IRBA has just released its 2025 Public Inspections Report on Audit Quality, and the numbers are not comfortable reading. Only 28% of audit engagements inspected met the required standards, down from 45% the year before. More concerning is the number of files referred for investigation jumped sharply. IRBA also released its 7th Annual Audit Quality Indicators (AQI) Survey Report alongside the inspections findings, giving the profession a full picture of where South Africa's audit landscape stands right now.

For business accountants in practice, this matters, even if you're not the auditor. Here's why.

What the IRBA Actually Found

IRBA’s inspection approach is deliberately risk-based focusing on public interest entities, complex engagements, and high-risk audit areas. So, when they report widespread failures, it's in exactly the kinds of companies your clients are likely to be investing in, borrowing from, or supplying to.

The top recurring problem areas at engagement level the following issues were noted:

Revenue recognition failures dominated, with inspections repeatedly finding insufficient audit evidence for how and when income was recognised.
Journal entries are always a fraud-risk hotspot - were poorly tested.
Going concern assessments were weak, with auditors not adequately challenging management assumptions.
Financial statement disclosures were incomplete or inaccurate, and
IT-related audit evidence? Broadly inadequate across the board.

On a practice wide level, the IRBA found that some firms have not implemented any meaningful system of quality management at all. Even among those who have, risk assessment processes were poorly designed, engagement quality reviews were ineffective or absent, and independence threats were going unmanaged.

Why This Hits Closer to Home Than You Think

If you're preparing financial statements that are then subject to audit or independent review, the quality of that upstream work directly influences what gets flagged. Weak disclosures, poorly supported estimates, unclear revenue recognition — these are not just audit problems. They start in the accounts.

The IRBA's findings highlight something every accountant in practice should feel: professional scepticism is the skill the profession is failing most consistently. Auditors are making judgements but not documenting how they got there or how contradictory evidence was resolved. This applies to accountants as much as it does to auditors. Your files must demonstrate ‘how’ you got to a conclusion or to an amount disclosed.

The Five Risk Areas You Need to Watch

Revenue recognition
This is the single most recurring deficiency across six consecutive inspection cycles. If your clients recognise income in a way that doesn't clearly match the applicable standard, the auditor's job gets harder (and so does yours when questions arise). Help clients document their revenue recognition policy clearly, with evidence that it's consistently applied.
Going concern
Economic pressure in South Africa is real. More clients than ever are operating close to the edge. But going concern is not just an auditor's problem. If you're preparing management accounts, cash flow forecasts, or financial statements, the going concern disclosure needs to be honest, forward-looking, and supported. Inspectors are finding that auditors accepted management's word too easily. Don't put your client in that position.
IT controls and system-generated information
The IRBA found widespread failures in how auditors tested IT environments, including entities using automated reports without verifying their reliability. This is relevant to you because many clients use cloud-based accounting systems where the integrity of the data is assumed, not confirmed. As the accountant preparing or reviewing figures from those systems, you carry some responsibility for understanding whether the data pipeline is trustworthy.
Financial statement disclosures
Auditors are repeatedly finding disclosures that are incomplete, boilerplate, or not tailored to the client's actual circumstances. If you're preparing financial statements, take disclosures seriously. IFRS and IFRS for SMEs both require specific, entity-appropriate information — not generic text. Weak disclosures create audit risk, and that flows back to you.
Independence and acceptance procedures
The IRBA found independence breaches at multiple firms and identified that some auditors are accepting or continuing with engagements without properly evaluating threats. For accountants doing independent reviews, this applies equally to you. As explored in our practical guide on client acceptance and continuation under ISRE 2400, the acceptance decision is not administrative, it's a professional judgement that can define the entire engagement.

What You Should Do Right Now

Review your revenue recognition documentation.
For every client, make sure their policy is written, consistent, and defensible. If they're in a complex sector (construction, subscriptions, long-term contracts), do this now.
Build going concern into your engagement workflow.
Don't wait for auditors to raise it. If a client is showing strain, shrinking margins, rising creditor days, covenant pressure, document what evidence supports the going concern assumption and what disclosures are needed.
Stop trusting system exports blindly.
Before using a report from your client's accounting system as evidence, understand where the data comes from. One control-check log is worth more than a screenshot.
Tighten your disclosure reviews.
Build a checklist specific to the client's industry, risk profile, and year's events, not generic boilerplate.
Document your professional judgements.
Whether you're doing an independent review or preparing accounts, write down what you considered, what you concluded, and why. Undocumented judgement is not professional judgement.

The Bigger Picture

For business accountants, this is an opportunity. Clients who are under-supported or badly served by their auditors need a trusted, knowledgeable accountant to guide them. IRBA CEO Imre Nagy has been explicit: "Audit quality is a shared responsibility." The accountants preparing the underlying financial information are part of that chain. Staying informed on what auditors are being held to is how you ensure your work holds up when it matters.

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