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FRC publishes a report on developments in audit

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06 Nov 2019

The Financial Reporting Council (FRC) has published a report on developments in audit.

The report sets out the work that the FRC has undertaken in the last year to drive the delivery of consistent, high quality audit by UK firms, and address the risks that stand in the way of that.

The report covers:

  • Audit quality and the FRC’s response. This includes:
    • FRC monitoring results;
    • FRC enforcement;
    • Audit firm monitoring and supervision;
    • Audit monitoring of non-public interest entity audits; and
    • Regulatory supervisory body enforcement.
  • A section on international influence and future developments.
  • A number of appendices including the approach taken to monitor audit quality and the results for the seven biggest firms

Key findings from the report are:

  • Audit quality is not reaching the standards that the FRC expects. Results of the audit quality inspection work carried out by the FRC’s Audit Quality Review (AQR) team for 2018/19 indicated that 75% (73% in 2017/18) of FTSE 350 audits reviewed from the major audit firms were assessed as “good” or “requiring limited improvements”. No firms achieved the FRC’s audit quality target for 90% of FTSE 350 audits to have “no more than limited improvements” by 2018/19.
  • Auditors “struggle” to sufficiently challenge management in areas such as long-term contracts, goodwill impairment and the valuation of financial instruments.
  • “Routine procedures” when auditing revenue are not being performed.
  • With respect to work on internal controls, the FRC’s work indicated that a number of auditors “were not properly identifying relevant controls in areas of significant risk or were not adapting their audit procedures sufficiently when controls were found to be deficient”.
  • “Inconsistent work” on the front half of annual reports which did not “always meet the requirements of Auditing Standards”.
  • Improvements are required in firms’ root-cause analysis and response procedures.

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

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