This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

FRC publishes letter to audit firms setting out areas of focus to achieve high quality audits consistently

  • FRC Image
  • Auditing Image

19 Dec 2019

The Financial Reporting Council (FRC) has published a letter sent to the heads of the largest audit firms in November setting out areas on which audit firms should focus in order to achieve high quality audit consistently, particularly where audits have been identified as high risk.

The areas are largely based upon the FRC’s findings from its AQR inspections and the results of root cause analyses performed by the audit firms on those findings. They also consider some of the key requirements of the recently revised ISA 540 on Auditing Accounting Estimates and Related Disclosures.

The areas of focus are:

Risk assessment

  • Identify and monitor high-risk audits - The firm needs to ensure it monitors high-risk audits and that those audit teams respond appropriately to the identified risks.

Resourcing

  • Adequate resourcing - Audits need to be resourced adequately in order to ensure appropriate audit procedures can be performed.
  • Appropriate competence and capabilities - The audit team members should have appropriate competence and capabilities in auditing in the relevant industry sectors.
  • Involvement of specialist and experts - Specialists and experts are often needed to assist the audit team in complex areas.
  • Audit engagement led by the partner - The audit should be led by the partner, with sufficient personal involvement throughout to ensure the audit approach is effective.
  • Central support, hot reviews and quality control procedures - Providing independent support and real time (“hot”) review of audit work can reduce the risk of insufficient procedures being performed.

Timing of audit work

  • Timely planning and project management - Timely audit planning helps ensure that audit procedures are not carried out too late in the audit process. Effective project management tools can assist with this.
  • Early identification of weaknesses in controls that affect financial information - Identifying weaknesses in controls or inadequate support for key judgements and estimates early will help ensure sufficient time for the audit to respond appropriately.

Audit evidence and the challenge of management

  • Appropriate audit procedures for areas of higher risk - The audit team needs to design audit procedures that are responsive to the identified risks.
  • Challenge management on key assumptions with the right mindset and appropriate scepticism - The audit team should ensure that the judgements and estimates, and related disclosures, made by management are reasonable. This requires the audit firm to have an appropriate culture to encourage the right mindset and professional scepticism.

Reporting

  • Clear communications to Audit Committees - The auditors should communicate matters of concern regarding management’s controls, judgements and estimates, and related disclosures, on a timely basis so that the Audit Committees can act accordingly.
  • Transparent reporting in the auditor’s report - The auditor’s report should be clear in relation to the audit approach for key audit matters.

Continuous improvement

  • Tone at the top and culture - The leadership of the firm needs to ensure that audit quality is paramount. The firm’s culture needs to support the ability to continuously improve audit quality.
  • Audit quality indicators - The quality of audits should be monitored at both a firm and engagement level on a real time basis.
  • Root cause analysis and audit quality plans - The root causes of audit deficiencies should be investigated, and responses developed to ensure appropriate actions to improve audit quality.

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

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.