FRC publishes Audit Quality Inspections Annual Report 2012/13

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29 May, 2013

The Financial Reporting Council (FRC) has published the Audit Quality Inspection Report for 2012/13 which provides an overview of the audit quality inspection work carried out by its Audit Quality Review (AQR) team. The report provides an assessment of audit quality and also provides key messages that audit firms should pay attention to if they are to improve their overall level of audit quality. The report indicates that there has been an improvement in the overall standard of audit work subject to inspection. However the report also highlights that there has been an increase in the proportion of audits of entities outside of the FTSE 350 as requiring significant improvements. Findings also indicate that there is a need for firms to increase their focus on professional scepticism and the effectiveness of their independence and ethical policies and procedures.

The AQR team monitors the quality of the audits of listed and other major public interest entities and the policies and procedures supporting audit quality at the major firms in the UK.  Detailed findings from the inspection of individual audits showed:

  • There was a significant increase in audits assessed as good with limited improvements required (59% compared with 46% in 2011/2012).
  • There was a reduction in audits assessed as acceptable overall with improvements required (26% compared with 44% in 2011/12).
  • There was an increase in the number of audits assessed as requiring significant improvements (15% compared with 10% in 2011/12).  This increase was attributable to the audit of entities outside of the FTSE 350.

Alongside these key findings, the annual report also provides key messages that audit firms should pay attention to if they are to improve their overall audit quality.  These key areas, identified as requiring improvement are:

Focus on audit quality

  • The annual report notes that firms should have appropriate controls and procedures in place to ensure that efficiencies in audits, largely a result of fee pressure, are not being made at the expense of audit quality.  The annual report identifies that certain firms have pursued “offshoring” of certain audit procedures and questions whether such procedures allow a sufficient level of audit quality to be maintained. 

The need to maintain professional scepticism

  • Findings indicate that initiatives to reinforce professional scepticism are working but more needs to be done to ensure that this is fully embedded within audit procedures and is used in assessing key audit judgements. 

Audits of financial services entities

  • Findings indicate that firms should strengthen their testing in respect of loan loss provisioning and general IT controls. 

Group Audits

  • Findings indicate that where the work for group audits is performed predominantly by component auditors there is generally a lack of control, supervision and review by the group auditor.  The annual report recommends that group auditors are involved at all stages from the initial risk assessment during planning to the review of the component auditor work. 

Auditor independence and ethical issues

  • Findings indicate that firms continue to adopt a boilerplate approach to independence reporting.  Findings also indicate failures in the correct application of ethical procedures.  The annual report recommends that firms should review the adequacy of their independence and ethical procedures and ensure that the training that they provide to all levels of staff is sufficient. 

Audit quality monitoring

  • Findings indicate that the monitoring of internal audit quality may not be as robust as it could be and may be being performed to a lower set of standards and expectations than would be expected from an external provider.  The annual report recommends that firms reconsider the robustness of their monitoring processes and the extent to which they contribute to an improvement in overall audit quality.

The Financial Reporting Council has subsequently published Audit Quality Inspection reports on their website for the 'Big Four' accountancy firms in the UK; Deloitte LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP. 

Click for:

FRC press release (link to FRC website)

Audit Quality Inspection Annual Report 2012/13 (link to FRC website)

Audit Quality Inspection Annual Report 'Big Four' (link to FRC website)

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