Root Cause Analysis, Regulator’s Inspection Insights – Root Cause Analysis and Remediation: A Call to Action for Quality Improvement
On 31 December 2024, the Hong Kong Accounting and Financial Reporting Council (AFRC) published a report titled “Inspection Insights – Root Cause Analysis and Remediation: A Call to Action for Quality Improvement”. This report aims to enhance Root Cause Analysis (RCA) and the remediation process in the auditing profession to elevate audit quality and ensure compliance with the Hong Kong Standard on Quality Management 1.
This report highlights common issues often overlooked in current RCA and remediation process, including:
- Effective training for RCA Analysts
- Independent oversight for the implementation of remedial actions
- Quality audits through coaching and hot reviews
- Better communication of deficiencies and remedial actions with all audit personnel and the audit committees
The 2023 AFRC Inspection revealed that numerous remediation plans submitted by the firms fell short, pointing out key areas that need improvement, including:
Remediation Work Plan | Lack of policies and procedures for developing structured remediation plans, including the timelines and scope |
Training for RCA | Insufficent training reduces their effectiveness |
RCA Interviews | Interviews limited to partners and managers overlook insights from other engagement team members |
Engagement Metrics Analysis | Failure to analyze key engagement metrics hampers a complete understanding of the root causes, such as total engagement hours, workload distribution, team experience and profitability |
Systemic Deficiency Evaluation | Lack of guidance on the basis of quantitative and qualitative data to determine if the findings represent systemic issues |
Timelines of Remedial Actions | Variability in implementation timelines across firms highlights the need for improved timelines to address deficiencies |
Independent Oversight | Failure to designate an independent team for monitoring the implementation of remedial actions |
Ongoing Monitoring | Lack of coaching or hot reviews results in ineffective execution of remediation plans |
Communication | Insufficient communication of deficiencies and remedial actions to relevant stakeholders |
This Report also outlines the Best Practices adopted by leading CPA firms, including:
| Training |
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Guidance and audit working paper templates |
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| Resources |
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Internal Mointoring and Support |
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The report emphasizes the importance of establishing the right tone at the top in the RCA and remediation process, and firm leadership is critical for upholding audit quality. To enhance the efficacy of the RCA and remediation processes, the Hong Kong AFRC urges firm leaders to dedicate time to evaluating and strengthening these processes, invest in the skills of RCA Analysts and provide comprehensive training and guidance to empower them effectively.
Please click here to access their full report on the Hong Kong AFRC website.