Latest audit inspection reports released by the FRC

Business women discussing
By Anne Adrain, Head of Sustainability and Assurance

12 July 2019

The FRC has issued its 2018/19 inspection reports on the quality of FTSE 350 audits.

Summary

The UK Financial Reporting Council (FRC) has issued its latest round of audit inspection reports. At a time when audit is under an incredible amount of scrutiny, the overall assessment is that, in total, only 75% of FTSE 350 audits were either good or required limited improvements, below the FRC’s target of 90%. In summary, there has been no improvement on last year’s overall results. Furthermore, 25% of the audits assessed were judged to be below an acceptable standard

The FRC has stressed the importance of audit which plays a vital role in establishing investor confidence in UK companies and is concerned that poor quality audit work remains unacceptably common.

In the latest audit inspection reports for 2018/19, which relate principally to audits of companies’ December 2017 year-ends, the figure of 75% shows little change when compared to the 73% achieved in 2017/18. None of the individual firms achieved the FRC’s audit quality target for 90% of FTSE 350 audits.

Each of the seven firms inspected, which includes the Big Four Firms as well as BDO, Grant Thornton and Mazars, has committed to specific actions to enhance audit quality including, for the worst performers, detailed audit quality improvement plans. The FRC will continue to assess the success of these initiatives and secure further action if necessary.

The FRC found cases in all seven firms where auditors had failed to challenge management sufficiently on judgemental issues. This has been a recurring theme over a number of years and it may be a result of a number of factors including the absence of professional scepticism in evaluating evidence presented by company management, tight reporting deadlines and the complexity of the judgements involved. Familiarity is also a factor arising from long-standing audit relationships, particularly if the auditor considers that the company is “the client”, as opposed to the shareholder or investor.

Positive developments

The inspection reports have highlighted positive actions and examples of good practice compared to previous years. These include the use of audit data analytics in the audit process and the involvement of specialists in the audit have also been praised.

Summary of key findings in reports

  • The absence of professional scepticism in the audit of potential prior year adjustments and related disclosures in the annual report and accounts.
  • A lack of challenge over key estimates and assumptions in key areas of judgement, including asset valuations, impairment testing and intangible assets.
  • Inconsistent quality in the audit of revenue.
  • Inconsistent quality in the audit of provisions and liabilities, including sufficiently challenging management’s assumptions.
  • A lack of challenge and evidence in the audit of long-term contracts.
  • More rigorous procedures are needed in the audit of revenue and inventories for some retailers.
  • Tougher systems and procedures when evaluating whether to undertake non-audit services.
  • A lack of consistency in the group audit team’s oversight of component audit teams.
  • A need for improvement in the quality of the audit of the valuation of financial instruments in financial services entities and a stronger approach to the audit of loan loss provisions in these entities.
  • Improvements are needed in the audit of going concern.
  • The audit of the completeness and evaluation of prior year adjustments should be improved.
  • A need for improved testing of controls including IT general controls.

Topics

  • Audit and Assurance

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