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FRC publishes its second survey of extended auditor reporting

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28 Jan 2016

The Financial Reporting Council (FRC) has today published the results of its second survey into extended auditor reporting. The survey of 278 FTSE 350 extended auditor’s reports in the UK, which follows an initial survey that was carried out in March 2015, is “intended to highlight new trends, innovations and good practice and to highlight how extended auditor’s reports have continued to develop”. As well as reviewing the extended auditor’s reports, the FRC also engaged directly with investors “in order to identify those areas of best current practice and those where there is scope for further improvement”.

In response to calls from investors to make audits more transparent, the Financial Reporting Council (FRC) issued revisions to ISA 700 (UK and Ireland) The Independent Auditor’s Report on Financial statements in June 2013. The revisions require auditors reporting on companies which comply with the UK Corporate Governance Code to provide significantly increased disclosure around risks, materiality and scope of the audit.  The revisions are designed to complement changes to the UK Corporate Governance Code in October 2012 and are effective for the audits of financial statements for periods commencing on or after 1 October 2012.

The results of the first survey indicated that auditors had met the new requirements and “in many cases had made, sometimes quite radical, further changes to auditor’s reports going beyond the changes required by the FRC”.  The FRC comments that in the second year of extended auditor reporting “the pace of innovation has unsurprisingly slowed”.  However it does indicate that there has been a continued development of good quality auditor reporting with more transparent and accessible reporting of audit findings and disclosure of materiality.

Key findings of the survey include:

Investors welcome the information included in extended auditor’s reports, and particularly for smaller companies where there tends to be less independent information available.

In general, auditors have continued to move away from generic language and descriptions of risk, making their reports more relevant and insightful.

The reports which have earned the greatest praise from investors tend to be well structured, signposting key information and often make innovative use of graphics, diagrams and colour.

The survey suggests that “investors feel that more could still be done to enhance auditor’s reports” in areas such as:

Providing more complete information about the sensitivity ranges used in audit testing.

Giving greater insight into the auditor’s assessment of the quality of an entity’s internal controls informing their significant risk assessment.

Being more explicit about the auditor’s view on the appropriateness of management estimates.

The FRC comments

investors would prefer greater transparency about assumptions made by management and benchmarks used by auditors. However this has to be balanced against the potentially competing demands of clarity and conciseness, as well as preserving the importance of reading an overall true and fair opinion.

The survey also identifies additional areas where auditor’s reports could be further enhanced including:

More frequent inclusion of commentary about what the auditor found as a result of the work done on risks of misstatement.

Explanations of changes to the audit approach, materiality or risk assessment over time.

More auditor’s to include information about ‘performance materiality’ – how it is derived and how it impacts on the audit.

The press release and the full survey, Extended auditor’s reports: A further review of experience, are available on the FRC website.

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