29 May 2013

FRC: Audit Quality Inspections Annual Report 2012/13

The key highlights of this year’s report are:

• An improvement in the overall standard of audit work, especially in the audits of FTSE 350 companies. 59 per cent of audits inspected (46 per cent 2011/12) were categorised as good or acceptable with limited improvements required. 79 per cent of FTSE 350 audits inspected (55 per cent 2011/12) were in these top bands.
• This improvement is not uniformly spread across all the firms and types of entities: 15 per cent of audits (10 per cent 2011/12) were assessed as requiring significant improvement; of which 87 per cent (63 per cent 2011/12) were for audits of entities outside the FTSE 350.  
• The inspections found that, while progress has been made, firms need to maintain and in some cases reinforce their efforts on professional scepticism.

 Paul George, Executive Director Conduct said: “Audit makes a vital contribution to investor confidence in financial statements. We are pleased to see in this year’s results that firms’ efforts to address our concerns on professional scepticism are bearing fruit, particularly in the FTSE 350. It is important that further improvements are more uniformly and consistently achieved across all entities and by all firms.”

 Key messages from the report include:

• Focus on audit quality
  • Firms should ensure that audit efficiencies are not achieved at the expense of audit quality.
• Improving professional scepticism
  • While recognising the progress that has been made in embedding the exercise of professional scepticism in audit work, further improvements are needed, particularly in smaller audits.
• Improving audit quality in the financial services sector
  • Firms should strengthen their testing in respect of loan loss provisioning and general IT controls.
• Group auditors need to ensure they are sufficiently  involved in all stages of the work of component auditors
• Enhancing auditor independence and ethical issues
  • Firms should reconsider the adequacy of their independence and ethics procedures and the training they provide to staff at all levels. Auditor independence is also important for audit committees to consider and in particular when putting their audit out to tender.
• Ensuring high quality internal monitoring
  • Firms should reconsider the robustness of their internal monitoring processes and the extent to which they contribute to an improvement in overall audit judgements

Included in this year’s inspection report is a focus on those companies where the substantive operations and general, financial and corporate management are in a different country from that of the auditor. These companies, where the majority of the audit work is often performed by component auditors, pose risks to the audit. When auditing such companies, firms should recognise the risks inherent in such arrangements and ensure they have sufficient involvement in the audit work of component auditors to enable the engagement partner to lead and control the audit as a whole.

Press release

Report

© FRC