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FRC publishes a Thematic Briefing on the audit of cash flow statements

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24 May 2021

The Financial Reporting Council (FRC) has published a Thematic Briefing on the audit of cash flow statements. The briefing document highlights the results of the FRC's Constructive Engagement key findings and the steps taken by audit firms to strengthen the audit of cash flow statements.

Cash flow statement errors remain a recurring issue in Constructive Engagement cases.  The FRC indicates that cash flow statement cases made up 9% of the cases that it resolved through constructive engagement during 2019/20 and this rose to 17% in 2020/21.  The FRC highlights that whilst audit firms have taken appropriate steps where errors have been identified, this increase in cases suggests that further action is needed to prevent the need for restatements and errors occuring.

As indicated in the FRC's Annual Review of Corporate Reporting and latest cash flow thematic review, the FRC have frequently identified what it calls as 'basic' errors in cash flow statements.  Many of these relate to misclassification errors between operating, investing and financing activities. 

The Thematic Briefing indicates that a common root cause of these errors is that the internal consistency checks being performed by audit teams across the financial statements are not picking up the basic cash flow statement errors.  Other root causes identified include:

  • The audit team may not have always adequately challenged management on the accounting policies applied and disclosures made affecting the cash flow statement.
  • Guidance available to the audit team to deal with technical and complex judgements is not always sufficient or embedded through staff awareness methods and training.
  • The review process does not always identify and adequately respond to matters identified in the audit.
  • The use of spreadsheets and the manual nature of cash flow workings by companies increases the complexity of auditing the consolidated cash flow statement.

The Thematic Briefing contains case examples and enhancement actions taken by audit firms arising in cash flow statement cases.  The Thematic Briefing also includes a summary of how audit firms have enhanced the audit of cash flow statements.

A press release and the Thematic Briefing document are available on the FRC website.

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