FRC publishes thematic review of auditors' materiality judgements

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16 Dec, 2013

The UK Financial Reporting Council (FRC) has today published the findings from its review of auditors' consideration and application of materiality. The report sets out a number of observations on the application of materiality by the six largest UK audit firms, as well as the reporting of identified errors to audit committees. It also sets out some key messages for audit firms and audit committees to consider.

In 2013, for the first time, the FRC's Audit Quality Review (AQR) team have begun conducting Audit Quality Thematic Reviews. From 2013 onwards, thematic reviews will supplement their annual programme of audit inspections of individual firms. Two reviews have been conducted in 2013:

  • A review of the auditor's consideration and application of materiality; and
  • A review of the auditor’s identification of and response to fraud risks and relevant laws and regulations.

The report on materiality considerations has been published today, with the report on fraud risks, laws and regulations expected in January 2014. The report is based on data from a cross-section of audits conducted by the six largest UK audit firms - BDO LLP, Deloitte LLP, Ernst & Young LLP, Grant Thornton UK LLP, KPMG LLP and KPMG Audit plc and PricewaterhouseCoopers LLP.

The report identifies a number of findings:

  • Several of the firms have recently made changes to their materiality guidance which may lead to higher materiality levels being set.
  • Some firms have significantly higher acceptable percentage ranges than others for determining materiality.
  • Auditors did not always appropriately explain and justify their judgments in completing templates for setting materiality.
  • In the majority of cases materiality levels set were the maximum permitted under the firm’s guidance, irrespective of the risks identified.
  • Auditors did not always appropriately consider revising materiality levels when actual performance was significantly worse than forecast.
  • In a number of instances, not all of those errors that should have been reported to the audit committee were communicated by the auditor.

The report also identifies some key messages for both audit firms and audit committees to address these findings. In particular, firms should ensure that appropriate judgement is exercised in setting materiality and that the judgements made are fully documented. Audit committees should seek to understand the materiality level set by their auditors and why it is considered to be appropriate, including the impact that it will have on the audit procedures.

The FRC's press release can be found on their website here and the report itself can be downloaded here.

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