The annual report provides an assessment of audit quality and also provides key messages that audit firms should pay attention to if they are to improve their overall level of audit quality. The annual report indicates that “audit quality is improving”.  However the FRC indicates that “there is room for further improvement”.

The AQR team monitors the quality of the audits of listed and other major public interest entities and the policies and procedures supporting audit quality at the major audit firms in the UK. The overall objective of their work is “to monitor and promote improvements in the quality of auditing of listed and other major public interest entities”.  Reviews were performed on a risk-based approach with a specific focus on FTSE 350 companies (as a result of the recommendations of the Competition and Markets Authority (CMA)) and banks and building societies.

Detailed findings from the inspection of individual audits showed that there was a continued improvement in the quality of audit work. 

Specifically the annual report highlights:

• That 67% of all audits inspected in 2014/15 were assessed as either good or only requiring limited improvements, maintaining the improvements in grading of audits seen last year.
• That the quality of FTSE 350 audits is higher than other categories of audits inspected with only 6% assessed as requiring significant improvements (10% for all audits inspected).  The FRC highlights that FTSE 350 work that it inspects is “of a higher standard than that of other audits”.
• Although the level of audit being assessed as either requiring improvements or significant improvements has fallen from 40% in 2013/14 to 33% in 2014/15, the FRC remained “concerned” at these figures.  Listed companies outside of the FTSE 350 continue to account for the largest number of audits assessed as requiring significant improvement.

A number of issues were identified during the audit quality inspections, many of which were common to prior year inspections.  These include:

• Insufficient scepticism in challenging the appropriateness of assumptions in key areas of audit judgment such as impairment testing and property valuations.
• Insufficient or inappropriate procedures being performed. This was common to many audit areas including revenue recognition.
• The failure to adequately identify the threats and related safeguards to auditor independence and to appropriately communicate these to audit committees.

To promote further improvement in audit quality the FRC is undertaking the following initiatives:

• Requesting that firms develop of action plans to address weaknesses identified in individual audit engagements and firm-wide procedures.  This would include detailed root-cause analysis of the factors contributing to the factors leading to the issues identified during the audit quality inspections.  The annual report indicates that these actions plans and the related analyses should be subject to follow-up inspections.
• Requiring firms to undertake remedial action to address certain deficiencies identified during the inspections where these are deemed to be particularly significant or may call into question the appropriateness of the financial statements or the audit opinion.
• Performing thematic inspections such as those of performed in 2014/15 on the audit of loan loss provisioning and related IT controls in banks and building societies and the auditor’s consideration of the quality of financial reporting in smaller listed and AIM companies.  In 2015/16 the FRC propose to undertake thematic inspections of audit sampling, the role of the engagement quality control reviewer (EQCR) and firms’ internal quality monitoring procedures.

In terms of the new extended auditor reporting requirements, the annual report indicates that “firms have responded positively” and the FRC were “generally satisfied that the extended audit reports appropriately reflected auditors’ work and judgements”.  There were only a “small number” of instances where the auditor’s description of the nature or extent of audit work performed was “inaccurate”.  Alongside the annual report, the FRC has also issued a ‘Practice Aid’ for Audit Committees to help them assess audit quality.

In the future, the FRC’s inspection activity will be focused to the audits of businesses in “potentially high audit risk industry sectors including those where complex supplier arrangements are likely to be prevalent and to audits where there has been a recent change in auditor”.  Such businesses will include food, drink and consumer goods manufacturers and retailers – priority sectors set out in the FRC Plan and Budget 2015/16.  The FRC will continue to monitor this area in subsequent inspections.

Alongside the Audit Quality Inspection Annual Report for 2014/15, the FRC has also published individual reports for the 'Big Four' accountancy firms in the UK; Deloitte LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP and a separate report for BDO LLP.

Click for:

• Press release (link to FRC website).
• Audit Quality Inspection Annual Report 2014/15 (link to FRC website)
• Our previous UK Accounting Plus news item on the FRC Audit Quality Inspection Annual Report 2013/14

The aid is divided into several sections, providing audit committee members with:

• an overview of audit quality;
• the sources of evidence that the committee might consider in making its assessment;
• the key professional judgements made by the auditor and how these might be assessed; and
• a discussion of other areas that the committee might consider when evaluating the quality of their auditor.

It identifies four key elements that need to be assessed in an evaluation of audit effectiveness.

1. The auditor's use of professional judgement - this is the key element and is supported by the other three.
2. The mindset and culture of the auditor.
3. The skills, character and knowledge of the auditor.
4. The quality control procedures that the auditor has in place.

The practice aid itself, as well as a summary leaflet, can be downloaded from the FRC's website, as can the FRC's press release on this subject.  Our Governance in brief newsletter providing further information on the Practice Aid is also available.

Ms Fraser replaces Harvey Goldschmid, who passed away in February this year, with immediate effect. Ms Fraser is serving her first three-year term as a Trustee ending 31 December 2015. She has been reappointed to serve a second term beginning 1 January 2016 together with three other Trustees who have also been reappointed: Abdulrahman Al-Humaid, Wiseman Nkuhlu and Joji Okada.

Please click for:

• IASB press release (link to IASB website)
• More information on the IFRS Foundation Trustees on IAS Plus

The new members are:

• Peter Baxter, previously Chief Executive Officer & Chief Investment Officer of Old Mutual Asset Managers (UK) Ltd who joins the Conduct Committee;
• Kari Hale, Audit Partner, Deloitte LLP who joins the Audit and Assurance Council; and
• James Coyle, previously Group Financial Controller, Lloyds Banking Group who joins the Monitoring Committee.

At the outreach event, the IASB will present its proposals and participants will have the opportunity to provide their views on the ED.

More information, including how to attend the outreach event can be found on the ICAEW website.

The report forms part of the FRC’s ‘Clear and Concise’ initiative, launched in June 2014 and is the first phase in the Lab’s larger project Corporate reporting in a digital world launched in May 2014. 

It considers the views of investors on a range of digital communication mechanisms currently used by companies to report financial and non-financial information that would be typically found in the investor relations section of a company website.  The report focuses on the annual report as the Lab found that “the annual report remains of paramount importance to investors” and then explores other channels that companies use.

Eight companies, 15 institutional investors and five private retail investors were interviewed for the project.  Additional input was received from an online survey, the slides of which are available from the FRC website below.  The key findings were:

• Most investors prefer PDF for digital annual reports and indicated that PDF provides the best mix of attributes of paper and digital. 
• There were a number of attributes that investors valued in a PDF annual report such as the ‘search’ function that allows investors to quickly pinpoint areas of most interest to them. 
• Investors feel that companies could be making better use of PDFs.  Some suggestions included:
  • Tailoring the PDF annual reports to look better on screen, for example use of landscape orientation or reducing use of columns.
  • Keeping the PDF simple.  The Lab found that interactive PDFs were not favoured by investors especially those private retail investors’.
  • Optimising the PDF for searching by using a single PDF for the annual report and ensuring terminology is consistent across sections of the report.
  • Providing an archive of PDFs over a sufficiently lengthy period with a 5 year period considered fundamental.

In terms of other communication channels that companies use to communicate information alongside the annual report (such as social media and apps) the report found that these other forms of communication are most useful when they provide new or additional information and do not replicate information provided by other channels.  Specifically, social media was not seen as a useful channel for company produced, investor-focused information and apps are not popular with investors.  A number of other investor observations on other forms of communication are provided in the full report.  To assist companies, investors who participated in this project suggest that companies (in relation to other communication channels and tools):

Reduce duplication and focus development towards tools and channels which provide new or additional information.

Acknowledge that investors follow more than one company by making tools and channels more consistent in scope and operation with other companies, making them easy to access and locate.

Make the purpose of each channel or tool clear to investors, and clarify its contents.

The Lab highlights that the report is not intended to form guidance and “companies should consider whether the steps identified by the Lab are suitable to their own circumstances”.  Following this report the Lab will use these findings to inform the next stage of its Corporate reporting in a digital world project - Digital Future.  This project will also consider areas that act as brakes on innovation.

Further findings are included within the full report which can be downloaded below.  Alongside the report, the Lab has also released a survey seeking views on digital reporting from those involved in the production and use of corporate reporting. The survey will be open until the end of June and can be accessed using the links below.

Click for:

• Press release (link to FRC website).
• Full report: Digital present – current use of digital media in corporate reporting (link to FRC website).
• Summary slides of the full report (link to FRS website)
• Survey on digital reporting (link to FRC website).
• Retail investor survey (link to FRC website)
• Our UK Accounting Plus Financial Reporting Lab project page
• Our previous UK Accounting Plus news item on the launch of the Lab’s Corporate reporting in a digital world project.

The insights were gleaned while preparing the ICAEW's response to the European Commission's public consultation on the impact of International Financial Reporting Standards (IFRSs) in the EU, which built on a consultation among ICAEW members and was supplemented by a report reviewing 170 academic research papers (the report has recently been updated).

As the results of the ICAEW's consultation and review exercises indicated among other things that lessons might be learned by jurisdictions outside Europe contemplating or in the early stages of IFRS adoption from the experience of the UK and other EU member states, the lessons have now been published in a succinct and accessible report that places them in a global context.

The lessons are:

The lessons presented in the report a supplementd by three appendices: The future of IFRS – perspectives and progress; IFRS and the global financial crisis; and US GAAP – looking ahead.

Please click to access the report on the ICAEW website - this page offers you access to a short video introducing the report, the full report itself and executive summaries of the lessons.

The ICAEW will be holding a webinar to discuss the key findings of the report on 8 July 2015.  Registration details are available on the ICAEW website.