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

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.


  • 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.


  • 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.

FRC publishes a Streamlined Energy & Carbon Reporting (SECR) Taxonomy

19 Dec 2019

The Financial Reporting Council (FRC) has published a taxonomy for Streamlined Energy and Carbon Reporting (SECR). The new requirements come into force on 1 April 2019 and apply to all large companies and LLPs, as well as to all listed companies.

The taxonomy is an addition to the FRC taxonomies suite.

While it is not mandatory to tag SECR data, the government is keen to enable companies that file their annual reports digitally to be able to report their SECR data in the same way, to ensure the same level of transparency is available to external users.
It is expected that both Companies House and HMRC will facilitate submissions using the taxonomy in quarter one 2020.

The taxonomy is available on the FRC website.

FRC makes amendments to FRS 102

19 Dec 2019

The Financial Reporting Council (FRC) has issued 'Amendments to FRS 102 – Interest rate benchmark reform'.

The amendments, which were consulted on within Financial Reporting Exposure Draft (FRED 72) - Draft amendments to FRS 102 - Interest rate benchmark reform, respond to a current financial reporting issue.

Interest rate benchmarks such as the London Interbank Offered Rate (LIBOR) are being reformed, and it is anticipated that LIBOR will not be available after 2021.  There is increasing uncertainty about the long-term viability of some interest rate benchmarks and this gives rise to issues affecting financial reporting in the period before the reform, particularly in relation to hedge accounting.

The amendments to specific hedge accounting requirements in Section 12 of FRS 102 provide relief that will avoid unnecessary discontinuation of hedge accounting as interest rate benchmarks are reformed.   Entities will apply specific hedge accounting requirements assuming that the interest rate benchmark relevant to the hedge accounting is not altered as a result of interest rate benchmark reform.

The amendments are effective for accounting periods beginning on or after 1 January 2020, with early application permitted.

A press release and the amendments are available on the FRC website.  Our related Need to know publication is available here.  Draft amendments to FRS 102 – Interest rate benchmark reformDraft amendments to FRS 102 – Interest rate benchmark reform f, ferfer

FRC publishes revised ethical and auditing standards

19 Dec 2019

The Financial Reporting Council (FRC) has published a major revision to its Ethical Standard and revised Auditing Standards.

The changes, which were consulted on in July 2019, will "help to strengthen auditor independence, prevent conflicts of interest and ensure the UK is seen as a destination to do business, because of stronger investor protection resulting from high quality audit".

The changes incorporate changes to international ethical requirements, which now prohibit auditors from providing recruitment and remuneration services or playing any part in management decision making. Public interest entity auditors will now only be able to provide non-audit services which are closely linked to the audit itself or required by law or regulation. 
The latest revisions are the result of a comprehensive post implementation review, supported by two public consultations and extensive outreach. The FRC will also monitor the outcome of the Brydon review and consider whether further changes to standards and their scope are necessary when the recommendations are implemented. 

The revised Auditing Standards include additional application guidance to make clear how an auditor should respond to requirements.

A press release and the latest standards and guidance for auditors are available on the FRC website.  Our related Governance in brief publication is available here.

FRC proposes amendments to FRS 101

19 Dec 2019

The Financial Report Council (FRC) has issued FRED 73 ‘Draft amendments to FRS 101 Reduced Disclosure Framework 2019/20 cycle’.

FRED 73 arises from the annual review of FRS 101 Reduced Disclosure Framework and proposes two minor amendments to the standard to improve the consistency of the disclosure exemptions in relation to the statement of cash flows and related disclosures.

FRED 73 sets out a proposed amendment to FRS 101 to provide an exemption from the disclosure of cash flows required by paragraph 24(b) of IFRS 6 Exploration for and Evaluation of Mineral Resources. A similar amendment is also proposed to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland for qualifying entities.

FRED 73 also sets out a proposed amendment to the exemption from paragraph 33(c) of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, removing the condition that this exemption is only available when equivalent disclosures are made in the relevant consolidated financial statements of the group in which the entity is consolidated. This is for consistency with the exemption from the presentation of a statement of cash flows.

No other amendments are proposed in the FRED.

The comment period for FRED 73 closes on 16 March 2020.

A press release and FRED 73 are available on the FRC website.

New CMAC members

19 Dec 2019

The IASB's Capital Markets Advisory Committee (CMAC) announces that five new members have been appointed.

Florian Esterer, Koei Otaki, Anthony Scilipoti, Sunil Singhania and Joao Toniato will join the CMAC for a three-year term beginning 1 January 2020, renewable once for an additional three-year term.

Additional information, including information on the backgrounds of the new members, is available on the IASB website.

Latest IFRS updates integrated into the ESEF taxonomy

19 Dec 2019

The second version of the European Commission’s delegated Regulation (EU) 2019/2100 on regulatory technical standards for the specification of a single electronic reporting format (ESEF) was published in the Official Journal of the European Union on 16 December 2019.

Until now, the core taxonomy included in ESEF was the 2017 IFRS Taxonomy. The amendment replaces that version with the most recent one published by the IFRS Foundation in March 2019.

The ESEF will be amended on a yearly basis to reflect updates to the IFRS Taxonomy published by the IFRS Foundation.

Please click to access the updated regulation in the Official Journal.

Sir Donald Brydon issues his report on the quality and effectiveness of audit

19 Dec 2019

Sir Donald Brydon has published his final report setting out his personal views on the quality and effectiveness of audit to the Secretary of State.

In undertaking the review, Sir Donald received 120 submissions, totalling 2,500 pages, and held more than 150 meetings with regulators, auditors, investors, companies and professional services firms.

It is a long report with detailed and innovative proposals in a range of areas and it highlights the changing public-interest responsibilities of business and recognises that society expects corporate reporting to be broader and more relevant than at present. As part of that, Sir Donald is challenging auditors to play their part in making audit more informative to a broader group of stakeholders. Recognising the complexity of this part of the governance eco-system, the review also includes recommendations about the behaviour of directors, audit committees, shareholders and regulators and about actions that can be taken by all four to create an environment which will permit better and more effective audit.

A high level summary of the recommendations is set out below.

A redefinition of audit and its purpose

“The purpose of an audit is to help establish and maintain deserved confidence in a company, in its directors and in the information for which they have responsibility to report, including the financial statements.”

In addition, Sir Donald suggests that there should be clarity and reinforcement of the need for auditors to provide decision useful information to the users of audit reports. Significantly that information should, on occasion, include original information (i.e. information not produced by the audited company for disclosure) that is likely to have a material impact on users’ decisions.

New Principles of Corporate Auditing (see below) include a statement that auditors act in the public interest and have regard to the interests of the users of their report beyond solely those of shareholders.

The creation of a corporate auditing profession governed by principles

At present auditing is an extension of the accounting profession. Sir Donald believes that it should be an independent profession in its own right, with its own governing principles, qualifications and standards. To achieve this, he recommends that:

“ARGA should facilitate the establishment of a corporate auditing profession based on a core set of principles. ARGA should be the statutory regulator of that profession. In doing so, I recommend that ARGA develops a coherent framework for corporate audit that includes but is not limited to the statutory audit of financial statements.”

A set of principles, ‘The Principles of Corporate Auditing’, has been put forward in the report which it is proposed should apply to all “corporate auditors” which would include the statutory auditors of the financial statements and auditors of other corporate information. The intention is that ARGA should assess how auditors have followed the audit principles as part of their annual Audit Quality Reviews.

The introduction of suspicion into the qualities of auditing

The Report introduces, in addition to the existing concept of professional scepticism, the need for professional suspicion. It is recommended that ARGA should revisit the existing definition of professional judgment with a view to strengthening, and demonstrating better, the use of judgment in audit.

The extension of the concept of auditing to areas beyond financial statements

The audit report should also include a new section in which the auditor states whether the director’s section 172 statement is based on observed reality, on the basis of the auditor’s knowledge of the company and its processes.

Mechanisms to encourage greater engagement of shareholders with audit and auditors

There are a number of recommendations aimed at enabling and encouraging a company’s shareholders to influence the scope of the audit, and to hold the Audit Committee and auditor to account. Sir Donald recommends a process be established in which the company’s shareholders are given a formal opportunity to propose any matters they wish to be covered in the audit. It is also proposed that there should be a standing item on audit at the company’s general meeting, to permit questioning of the Audit Committee Chair and the auditor.

Sir Donald proposes that the Audit Quality Forum should be replaced with a new body, the Audit Users Review Board, to be co-ordinated by the Investment Association and bringing together a range of users of audit, including the Audit Committee Chairs Independent Forum, The 100 Group, institutional and retail shareholder representatives, and other users.

A change to the language of the opinion given by auditors

The Report highlights the growing challenge in using ‘true and fair’ as a descriptor of financial reporting given that corporate accounting increasingly involves the use of estimates and judgments. Sir Donald recommends that ‘true and fair’ be replaced in UK company law with the term ‘present fairly, in all material respects’. This should sit with a legal obligation on directors to state that the financial accounts they present each year have been fairly presented in all material respects.

The report further recommends the following enhancements to the audit report:

  • Create continuity between successive audit reports
  • Provide greater transparency over differing estimations, perhaps disclosing graduated findings
  • Call out inconsistencies in information made public
  • Reference external negative signals and how they have informed the audit

New reporting by directors - the introduction of a corporate Audit and Assurance Policy, a Resilience Statement and a Public Interest Statement

To help frame the role of the auditor(s) and to make clearer the extent of all assurance in regard to the information they communicate, it is recommended that directors present a three-year rolling Audit and Assurance Policy to the shareholders. This should indicate their approach to the appointment of auditors, the scope and materiality of all auditing (including that of the financial statements), the assurance budget and the relationship of any audit to identified risks. Shareholders would be invited to express their views on this policy in an advisory vote.

In addition, directors should publish their statement of principal risks and uncertainties before determining the scope of each year’s audit and actively seek shareholder and other views on the appropriate emphases. Plus it is recommended that a ‘Resilience Statement’ should replace the existing going concern and viability statements. The ‘Resilience Statement’ would incorporate a going concern opinion for the short term, a statement of resilience in the medium term and a consideration of the risks to resilience in the long term.

The ‘Public Interest Statement’ would require the directors to explain the company’s view of its obligations to the public interest, whether arising from statutory, self-determined or other obligations, and how the company has acted to meet this public interest over the previous year.

Sir Donald sets out recommendations for the role auditors would be obliged to play in providing assurance in relation to these statements.

Suggestions to inform the work of BEIS on internal controls and improve clarity on capital maintenance

In support of the recommendation made by Sir John Kingman for consideration of an enhanced framework for internal controls, Sir Donald has recommended that:

“The CEO and CFO provide an annual attestation to the board of directors as to the effectiveness of the company’s internal controls over financial reporting and that this attestation be guided by new principles on internal controls reporting to be developed by the Audit Committee Chairs Independent Forum and endorsed by ARGA.”

It is proposed that companies be required to disclose when any material failure of their internal controls has taken place and that a disclosed failure would lead to the new CEO/CFO attestation being subject to audit for the following three reporting years.

With regard to the Capital Maintenance Regime, Sir Donald recommends that the directors, in proposing a dividend, need to make a statement that the payment in no way threatens the existence of the company in the ensuing two years and that this dividend is within known distributable reserves.

For a company where it is likely that distributable reserves are deemed “similar” in size to a proposed dividend, Sir Donald believes that the dividend should only be recommended by the directors if the level of the distributable reserves is established and payment of that dividend is consistent with obligations of the directors under the Companies Act and consistent with the new Resilience Statement. These distributable reserves should be subject to audit.

Greater clarity around the role of the audit committee

Audit committees agree an annual assurance budget, within which they have primary responsibility for negotiating and agreeing the audit fees, and which sets a framework for company spending on any other assurance work.

A package of measures around fraud detection and prevention for both directors and auditors

The Report includes a package of recommendations aimed at raising the prominence and transparency of fraud prevention and detection by both directors and auditors. It is recommended that there should be a new reporting duty on directors to set out the actions they have taken each year to prevent and detect material fraud. Plus there should be a corresponding new duty on the auditor to state in their report how they have assured the directors’ statement on material fraud, and what additional steps they have taken to assess the effectiveness of the relevant controls and to detect any such fraud.

Improved auditor communication and transparency

Sir Donald recommends that audit firms ensure a clear separation between the team which negotiates the audit fees, and the team which carries out the audit(s). In addition, audit firms should be required to publish the profitability of their work from audit, and also the remuneration of their Senior Statutory Auditors and the attendant performance measures around that remuneration. Auditors should also disclose, within the audit report, the hours spent on each audit by each grade within the audit team. Clear reasons should be given for any resignation, dismissal or decision not to participate in a retender; auditors and companies should answer relevant questions in a general meeting.

Obligations to acknowledge external signals of concern

Acknowledging that employees are often well placed to provide insights or highlight concerns that should usefully be considered as part of the audit planning process, or during the audit itself, it is recommended that directors actively seek the views of employees regarding the scope of any audit activity and report back to them how their views have been taken into account.

Further, it is recommended that existing voluntary and statutory company disclosures on supplier payment performance should be brought into the annual report, and be subject to a level of audit as described in the company’s Audit and Assurance Policy.

Extension of audit to new areas including Alternative Performance Measures

Any Alternative Performance Measures reported by a company, and any use of Key Performance Indicators to underpin executive remuneration, should be subject to audit.

The increased use of technology

BEIS and ARGA should work with auditors to create the necessary protections and policies for audit to be able to use data from the companies they audit in order to promote better quality audits. Auditors should explain in the audit report any use of sampling techniques.

The full report is available to download on the BEIS website.

IASB issues podcast on latest Board developments (December 2019)

18 Dec 2019

The IASB has released a podcast, featuring IASB Chair Hans Hoogervorst and Vice-Chair Sue Lloyd, to discuss the deliberations at the December 2019 IASB meeting, the recently-issued general presentation and disclosures ED, and other developments.

The 15-minute podcast features discussions related to financial instruments on the following topics:

  • Proposals outlined in the newly-published ED on general presentation and disclosures.
  • Progress related to amendments to IFRS 17 Insurance Contracts as well as developments in the IBOR reform project and financial instruments with characteristics of equity.
  • Business combinations under common control and what work will be done on this project in 2020.
  • More details on the review of the IFRS for SMEs Standard.
  • Difference between the IFRS for SMEs Standard and a separate research project that deals with subsidiaries that are SMEs.
  • Proposed amendments to IAS 8.
  • Highlights from 2019.

The podcast can be accessed through the press release on the IASB website. More information on the topics discussed is available through our comprehensive notes taken by Deloitte observers at the December IASB meeting.

IFRS Foundation publishes first stakeholder engagement register

18 Dec 2019

The IFRS Foundation has published its first quarterly stakeholder engagement register, which provides a public record of IASB members’ engagement with stakeholders.

The register was created to increase transparency and "continue demonstrating the Board’s independence and accountability and is also in line with stakeholder feedback." The register includes speaking engagements and face-to-face, web-based or phone meetings of more than 30 minutes duration. The register is sorted monthly by IASB member and details for each engagement: the stakeholder name, category of engagement, and location.

For more information, see the press release and stakeholder engagement register on the IASB’s website.

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