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Audit Quality Review

Scope and Objectives

The Audit Quality Review (AQR) team monitors the quality of the audit work of those UK audit firms that audit Public Interest and certain other entities within Scope (large AIM). The overall objective of our work is to monitor and promote continuous improvements in audit quality in the UK.

All UK audit firms that undertake Public Interest and large AIM audits are subject to AQR inspections in respect of this audit work. The professional bodies have the responsibility for monitoring all other audit work. The frequency of AQR inspections varies with larger firms inspected annually while other firms are generally inspected once every three years. In certain cases the inspection cycle can be extended to six years. Those entities included in AQR's inspection Scope are as follows:

 AQR Scope of Independent Inspection 2016/17

Audits of entities incorporated in Jersey, Guernsey or the Isle of Man whose securities are traded on a regulated market in the European Economic Area are also within the scope of our work under separate arrangements agreed with the regulatory bodies in the Crown Dependencies. This includes the audits of a number of major companies which are listed in the UK and included in the FTSE 100 or FTSE 250 indices. Crown Dependency companies listed on AIM are however not included within this inspection scope.

Monitoring Approach

Our monitoring activity comprises inspections of a sample of audits and related procedures supporting audit quality (firm-wide procedures) at individual audit firms. In addition we periodically undertake thematic inspections which focus on particular aspects of audit across a sample of audits and firms.
 
In selecting individual audits to inspect we take account of a number of factors including the assessed risk in relation to the entity and particular priority sectors we wish to focus on. In respect of the FTSE 350 the Competition and Markets Authority has recommended that we inspect audit engagements on average every five years, with each individual engagement inspected at least every seven years.
 
Our reviews of individual audits place emphasis on the appropriateness of key audit judgments made in reaching the audit opinion and the sufficiency and appropriateness of the audit evidence obtained. Our reviews of firm-wide procedures are wide-ranging in nature and include an assessment of how the culture within firms impacts on audit quality.

Our inspections cover, but are not restricted to, compliance with the requirements of relevant standards and other aspects of the regulatory framework for auditing. This includes the Auditing Standards, Ethical Standards and Quality Control Standards for auditors issued by the FRC and the Audit Regulations issued by the relevant professional bodies.

We identify areas where improvements are required to safeguard or enhance audit quality and/or comply with regulatory requirements. We seek to agree an action plan with each firm inspected designed to achieve the improvements needed. We assess the adequacy of the progress made by the firm in addressing our findings periodically.

On occasion matters arising from our inspections may result in a sanction being determined against the audit firm or disciplinary action being taken. Such matters are the responsibility of the FRC’s Enforcement Division.

Reporting

Our reporting arrangements are among the most transparent of any audit regulator in the world and we believe that they contribute to achieving continuous improvements in the quality of UK auditing.

Each year we publish a number of Individual firm reports and thematic inspections reports, which summarise the results of our inspection activities. We also contribute to the FRC’s overall report on audit quality. This latter report replaces the AQR Annual Report which was last issued in May 2015.

We also issue confidential reports on individual audits reviewed to the relevant audit firms and Audit Committee Chairs. These reports include our assessment of the quality of the audit work we inspected using one of four audit quality categories as follows:
  • Good (category 1)
  • Limited improvements required (category 2A)
  • Improvements required (category 2B)
  • Significant improvements required (category 3). 
A list of audits subject to AQR inspections will be published periodically.

Confidentiality, independence and conflicts of interest

All FRC staff are required to observe Guiding Principles on independence, confidentiality and conflicts of interest. These provide, inter alia, that staff must keep confidential all non-public information they acquire through their role at the FRC, unless the disclosure of that information has been properly authorised; and not derive, or seek to derive, any personal benefit, or enable any other person to do so, as a result of such non-public information obtained by them.

The FRC Guiding Principles are supported by further specific requirements for all members of the AQR team. All team members sign both initial declarations (on joining) and annual declarations confirming that they are aware of these detailed requirements and will comply with them at all times. They are also required to acknowledge in writing, on leaving employment, that the confidentiality undertakings previously given by them continue to apply.

We will only disclose non-public information obtained from firms for monitoring purposes to a third party external to the FRC where we are satisfied that the disclosure is permitted under Section 1224A of the Companies Act 2006 and not in contravention of any other statutory provision. We will not disclose non-public information for the purposes of third party litigation other than pursuant to a court order.

Enquiries

The AQR team is led by the Director of Audit Quality.

General enquiries should be directed, in the first instance, to Amalia Nowak (a.nowak@frc.org.uk).

 
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