FRC publishes snapshots of current practice in auditor reporting

  • FRC Image

18 Aug, 2022

The Financial Reporting Council (FRC) has published new research into the current state of auditor reporting in the UK.

The research comes following recent audit market reviews which have suggested ways to improve the ‘decision usefulness’ of the financial information companies publish. Additionally, concerns have been expressed that auditor’s reports have become too lengthy and contain too much standardised and boilerplate disclosures. The FRC has committed to considering the quality, relevance, and accessibility of current market practice, whilst ensuring that auditor’s reports are as concise as possible.

The research considered a sample of almost 400 auditor’s reports for companies in the FTSE 350, as well as large Alternative Investment Market (AIM) companies. The findings have been summarised as a series of six thematic ‘snapshots’ with the intention of initiating a conversation with stakeholders on how auditor’s reports can be improved. The 6 areas covered in the snapshots are as follows:

  1. Understandability and useability of auditor reports - The first snapshot looks at the overall useability and understandability of auditor’s reports.  It looks at the variation in length of audit reports between firms, industrial sectors and market segments.  Due to the absence of a common framework for assessing the useability and understandability of individual auditor reports, the research used objective measures such as readability scores and measurement of standardised or generic language within individual reports to give a proxy for understanding how useability and understandability varies across the market.
  2. Communicating judgements on materiality and the scope of group audits -The second snapshot reviews how auditors have used their reports to communicate judgements about materiality and the scope of group audits to users. This includes setting out the basis of judgements for the selection of materiality and performance materiality, as well as decisions on the scoping and coverage achieved by group audits.
  3. Key audit matters (KAMs) - The third snapshot provides an overview on how auditors have approached reporting KAMs. This includes a review of the number of KAMs in auditor’s reports, and a survey of the most common types of risks of material misstatement across the entire sample. In addition, the snapshot reviews how auditors have communicated these risks, and how they communicated their findings from the audit procedures addressing those risks. This snapshot also reviews how KAMs interact with the rest of the company’s annual report.
  4. Key audit matters on climate change, COVID-19, alternative performance measures, and graduated findings - . This snapshot takes a deep dive into how KAMs in auditor’s reports have addressed certain types of risks. These include risks arising from climate change, and the COVID-19 pandemic. The snapshot also examines how KAMs have addressed alternative performance measures used by management to report on a company’s performance, as well as the classification of exceptional items within the financial statements.  This snapshot also explores the use of graduated and binary findings by auditors when reporting on KAMs. 
  5. Going concern - This snapshot explores how auditors have approached the requirement to report on the appropriateness of the use of the going concern assumption.
  6. Fraud and other irregularities - The final snapshot looks at how auditors have responded to the new requirement to explain the extent to which their audit has been designed to detect fraud and other irregularities.

This research represents the first step in meeting the FRC’s undertaking to improve the useability and informativeness of auditor’s reports in its recent Position Paper on Restoring Trust in Audit and Corporate Governance. It forms a foundation for understanding current practice and will be used as a basis for engaging the users of auditor reports and other stakeholders to identify potential areas for improvement.

A press release and links to the 6 snapshots 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.