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FRC publishes report of its Audit Quality Thematic Review

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06 Jan 2016

The Financial Reporting Council (FRC) has published the results of its thematic review in respect of firms’ audit quality monitoring. The report includes good practice observations, an overview of findings and key messages for both auditors and Audit Committees. The FRC comment that the report is intended to “promote a better understanding of the firms’ quality control monitoring programmes and how these can improve justifiable confidence in audit”.

The review “considers the monitoring performed by nine audit firms over their quality control systems for audits of financial statements as required by International Standard on Quality Control (UK and Ireland) 1 and the UK Audit Regulations, including the monitoring performed for 50 audits”.

The review follows other thematic reviews conducted in January 2014 and December 2013.  Thematic reviews analyse further aspects of auditing which are not considered in detail during the FRC’s routine audit inspections of individual firms.  Thematic reviews seek to identify both good practice and areas of common weakness among audit firms.

Overall the FRC indicate that “overall firms allocate substantial resources to their monitoring of the quality of audits”.  However, it does highlight that “given the importance of the firms’ quality controls in supporting the consistency of the quality of audit work performed across the firm, firms do not devote a similar level of resources to their monitoring of the firms’ quality controls”.

A number of good practice observations are provided in the report.  The FRC indicates that “all audit firms are recommended to consider our good practice observations and implement such procedures, where appropriate”. 

Monitoring the firms’ quality control systems

Although the FRC found that all firms undertake annual monitoring of their quality control systems; the frequency, scope of review, resources dedicated to it and follow up of issues “varied significantly”.  The FRC observed the following good practices:

Communicating failures in the application of the firm’s quality control procedures to the individuals concerned and reflecting these in their performance appraisal and remuneration decisions.

Undertaking root cause analysis on issues identified from monitoring the firm’s quality controls as well as reviews of individual audits.  

Monitoring completed audits

The FRC highlight that all firms monitoring activity includes an annual review of a sample of completed audits to cover all individuals signing audit reports at least once every three years.  The FRC observed the following good practices:

Moving away from completing procedural type checklists towards a risk focused review; leading to a more challenging review of the audit.

Undertaking a review of a group audit including reviewing the audit of a significant UK component.

Ensuring that relevant findings are discussed with both the training and the ethics and independence teams.

Undertaking in depth thematic reviews of specific aspects of audits where there are recurring issues as part of the firms’ quality monitoring is a positive step for improving audit quality.

A number of key messages are also provided in the report.  The FRC indicates that the key messages should be considered by all audit firms in seeking to improve their audit quality monitoring procedures.

Key messages in relation to monitoring the firms’ quality control systems

Firms should consider whether:

 - The extent and frequency of their monitoring is appropriate to meet regulatory requirements.

 - The sample sizes for testing the firm’s quality controls are sufficient to obtain reasonable assurance that they are operating effectively

Audit firms should allocate sufficient and appropriate staff to undertake their monitoring and provide them with adequate training and guidance to ensure consistency between reviewers.

Key messages in relation to monitoring completed audits

Firms should require reviewers to provide a clear summary and justification that supports the outcome of a review.

Firms should assess whether individuals involved in the firm’s quality control processes, in addition to the audit partner3, ought to have identified the issues arising and required them to be addressed prior to completion of the audit.

Firms should review the last completed audit for each entity covered by their monitoring.

The report recognises that Audit Committees “play an essential role in reviewing and monitoring the effectiveness of the audit process”.  To enhance their oversight of the effectiveness of an audit and their evaluation of audit quality, the report indicates that audit committees may wish to consider:

enquiring annually for the latest results of the firm’s monitoring and whether their audit was reviewed, discussing the findings and the remedial action taken or planned to address them; and

asking whether the scope of the review included any UK components and whether the audit team have received any feedback from the monitoring performed by network firms responsible for audit work on overseas components.

The FRC “will expect to see improvements ” in future inspections of individual firms.

The press release and full report are available on the FRC website.

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