FRC publishes report of its Audit Quality Thematic Review

  • FRC Image

03 Mar, 2017

The Financial Reporting Council (FRC) has published the results of its thematic review in respect of firms’ audit quality control procedures and other audit quality initiatives. The review highlights areas of good practice and areas where improvements can be made. The FRC believes that the review “will be of assistance to audit firms in developing or enhancing and evolving their quality control review procedures, contributing to their own processes of continuous improvement and to enhance audit quality”.

The FRC’s Audit Quality Review team reviewed the six largest audit firms to consider their audit quality control policies and procedures.  The review focused on three aspects of the firms’ quality control systems to support the audit team in delivering a quality audit - leadership responsibilities for quality within the firm, human resources and engagement performance (e.g. technical reviews of financial statements, internal reviews of audit work, use of specialists on audit).

The FRC indicates that there are a range of audit quality control procedures established at audit firms, both during and after the audit, which need to work together effectively in order to contribute to a quality audit.  Based upon its review, the FRC highlights that, in some cases, “there is opportunity for these procedures to be more effective to achieve further improvements in audit quality”.  Key findings of the thematic review include:

  • All firms have in place audit quality policies and procedures and all have resources at a leadership and management level dedicated to various aspects of audit quality.
  • Whilst all firms have in place policies for review of audit work by someone more senior, 31% of the sample of audits reviewed were assessed by the FRC as “requiring more than limited improvement”. The FRC highlights that this suggests that “firms’ quality control procedures are not yet sufficiently robust”. 
  • All audit firms included specialists within the audit teams for the audits reviewed. The most frequently used were taxation, valuations and IT.  The FRC comments that “where reference was made to specialists’ work in the audit report there were a few cases where their involvement was not accurately described”.
  • All audit teams appropriately used the firms’ consultation procedures with appropriate documentation of the conclusions reached in line with methodology.
  • Of firms using service delivery centres (SDC), the percentage of overall audit work in hours performed by the SDC increased by 70% year on year between 2013 and 2016. The FRC highlights that “audit firms should consider how audit quality can be maintained or improved as the trend for outsourcing sections of audit work increases”.

A number of other findings are included within the full report.  The FRC indicates that “all firms are recommended to consider these findings, in conjunction with any insights arising from their root cause analysis, to consider whether and how their quality control procedures could be enhanced to improve audit quality where appropriate”.

During their review, the FRC’s Audit Quality Review team also identified a number of good practices in firm’s audit quality control procedures that contributed to audit quality which it considered merited sharing more widely and which firms might wish to consider including:

  • Half of the firms have a dedicated board or committee that oversees all matters relating to audit quality, bringing all the elements together and ensuring audit quality has specific prominence and focus in the firm’s leadership agenda.
  • Two firms have set out their audit quality procedures in a ‘three lines of defence’ model, helping to understand how these audit quality procedures interact together to achieve audit quality and minimise the risk of inconsistency.
  • Initiatives to achieve consistent audit quality, identify areas for improvements and monitor the effectiveness of training in specific areas requiring improvement. These include establishing an audit quality forum where audit staff would discuss audit quality improvements and their suggestions would then feed back to the firm’s audit quality board.
  • Audits with a higher level of partner and director involvement had a greater likelihood of achieving a high quality outcome prior to issue of the audit report.

The FRC has indicated that it will continue to monitor the firms’ progress in improving audit quality and will continue to focus on the firms’ leadership, the use of service delivery centres and the use of specialists on audits.  In 2017/18 it will be conducting a thematic review into audit firm governance and culture at eight firms adopting the Audit Firm Governance Code.

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

Related Topics

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.