Brydon seeks views on the quality and effectiveness of audit
By Anne Adrain, Head of Sustainability and Assurance
11 April 2019
Sir Donald Brydon has issued a Call for Views and information on the quality and effectiveness of statutory audit in the UK.
As part of his review into the Future of Audit, Sir Donald is seeking views, supported by evidence, on the extent to which the statutory audit meets the current needs of users of financial statements and how it might evolve to better meet the needs of those users, and serve the interests of other stakeholders and the wider public interest.
The Call for Views emphasises the need to consider both the audit process and the audit product as there are distinct issues of quality and effectiveness associated with both of these factors.
In particular, views are being sought on how the statutory audit of Public Interest Entities could be improved to provide greater assurance to shareholders and other stakeholders. At the same time, the review will remain mindful of the impact of any recommendations on smaller and non-listed entities.
It should be noted that the Brydon Review is primarily interested in questions around the purpose, scope and quality of audit, rather than the specific role of the audit regulator, or the market through which audit services are provided. These areas are being addressed, respectively, in the Government’s initial response to Sir John Kingman’s Independent Review of the Financial Reporting Council, and in the Competition and Market Authority’s (CMA) on-going market study into the statutory audit market.
Nonetheless, the Review recognises that these separate areas of reform and enquiry have considerable relevance for the quality and delivery of the audit process and product, and the recommendations of the Review will take their findings into account.
What views are being sought?
The Call for Views has been separated into ten chapters which address the following areas:
- Chapter 1 is focused on definitions of audit and its users, and provides an overview of the statutory audit process. It also considers developments over time which have shaped the UK audit process and product.
- Chapter 2 deals with the ‘expectation gap’ and compares the requirements of audit in law and in international standards with what is currently expected by shareholders, other stakeholders and wider society. This chapter highlights perceived concerns that audit is not meeting existing requirements.
- Chapter 3 looks at the role of audit within the wider context of the assurance that companies are expected to provide to their shareholders regarding management of the business and its key risks.
Views are being sought on whether external auditors should make greater use of the work of internal auditors, and whether there should be a role for the external audit in assessing directors’ disclosures in areas beyond the financial statements.
It also highlights how the possible use of experts from other professions or organisations might lead to more effective assurance. - Chapter 4 looks at the scope and purpose of audit and the belief by some that a significant broadening of the scope and purpose of audit could better serve the public interest as a whole.
Views are invited on what this might mean for the audit in the future. In particular, the various suggested changes to the scope and purpose of audit as a means of helping to address the expectation gap, including whether auditors should have an expanded role in assessing the internal controls of an audited entity. - Chapter 5, on audit product and quality, considers the key enablers of audit quality - by distinguishing process from product - and asks whether they are currently working satisfactorily. The binary nature of audit opinions is also called into question with the possible introduction of graduated findings being considered.
This chapter also asks if the current regulatory assessment of quality drives particular, and possibly sub-optimal, behaviours by auditors. - Chapter 6 is concerned with legal responsibilities and seeks views on the interaction between audit and the legal responsibilities of company directors. These include the duty to maintain “adequate accounting records”, and the obligation under UK company law to ensure that dividends are only paid out of “accumulated, realised profits…less accumulated, realised losses”
- In Chapter 7, the communication of audit findings explores how the auditor’s report is communicated and asks how this might be improved. It also asks whether, and if so, how, greater transparency can be provided about the audit process and the auditor’s perspectives.
- Chapter 8 is concerned with fraud and provides an overview of the extent to which auditors may be reasonably expected under the existing regulatory framework to detect fraud in their audit of a company’s financial statements. The chapter asks whether it is reasonable and feasible to expect auditors to play a greater role in detecting material fraud.
- Chapter 9 looks at the auditor’s liability regime and the extent of recourse for any costs or damages incurred by an audited entity, or by its shareholders or other affected parties, as a result of a negligent audit.
A recurring challenge to significantly expand the purpose and scope of audit, including the introduction of a forward-looking level of assurance, has been the proposition that the auditor liability regime would need to be limited to in order to make this feasible.
This chapter explores whether having differential liability over different aspects of reporting might aid an expansion of assurance. - Chapter 10 is concerned with other issues and looks at a variety of other matters related to the quality and effectiveness of audit, including the role of technology, proportionality, shareholder engagement, culture and the cost of the audit.