FRC publishes Audit Quality Inspections Annual Report 2012/13

News types: Inspection

Published: 29 May 2013

PN 051

High standards in audit quality maintained

FRC seeks further improvement in scepticism and independence

The Financial Reporting Council today (29 May 2013), publishes the Audit Quality Inspection Annual Report for 2012/13.
 
The key highlights of this year’s report are:

  • An improvement in the overall standard of audit work, especially in the audits of FTSE 350 companies. 59% of audits inspected (46% 2011/12) were categorised as good or acceptable with limited improvements required. 79% of FTSE 350 audits inspected (55% 2011/12) were in these top bands.

  • This improvement is not uniformly spread across all the firms and types of entities: 15% of audits (10% 2011/12) were assessed as requiring significant improvement; of which 87 % (63% 2011/12) were for audits of entities outside the FTSE 350.  

  • The inspections found that, while progress has been made, firms need to maintain and in some cases reinforce their efforts on professional scepticism.


Paul George, Executive Director Conduct said:
“Audit makes a vital contribution to investor confidence in financial statements. We are pleased to see in this year’s results that firms’ efforts to address our concerns on professional scepticism are bearing fruit, particularly in the FTSE 350. It is important that further improvements are more uniformly and consistently achieved across all entities and by all firms.”

Key messages from the report include:

  • Focus on audit quality

    • Firms should ensure that audit efficiencies are not achieved at the expense of audit quality.

  • Improving professional scepticism

    • While recognising the progress that has been made in embedding the exercise of professional scepticism in audit work, further improvements are needed, particularly in smaller audits.

  • Improving audit quality in the financial services sector

    • Firms should strengthen their testing in respect of loan loss provisioning and general IT controls.

  • Group auditors need to ensure they are sufficiently  involved in all stages of the work of component auditors

  • Enhancing auditor independence and ethical issues

    • Firms should reconsider the adequacy of their independence and ethics procedures and the training they provide to staff at all levels. Auditor independence is also important for audit committees to consider and in particular when putting their audit out to tender.

  • Ensuring high quality internal monitoring

    • Firms should reconsider the robustness of their internal monitoring processes and the extent to which they contribute to an improvement in overall audit judgments


Included in this year’s inspection report is a focus on those companies where the substantive operations and general, financial and corporate management are in a different country to that of the auditor. These companies, where the majority of the audit work is often performed by component auditors ⁶, pose risks to the audit. When auditing such companies firms should recognise the risks inherent in such arrangements and ensure they have sufficient involvement in the audit work of component auditors to enable the engagement partner to lead and control the audit as a whole.
 
Notes to editors:

  1. The FRC is responsible for promoting high quality corporate governance and reporting to foster investment.  We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work.  We represent UK interests in international standard-setting.  We also monitor and take action to promote the quality of corporate reporting and auditing.  We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.

  2. In the 2012/13 inspection programme we reviewed the audits of 85 entities (excluding public sector and follow-up reviews), of which 33 were of FTSE 350 companies, and 52 were of entities including other full listed companies, AIM listed companies, unlisted companies, charities, pension funds and mutual building societies.

  3. The UK audit inspection regime is among the most transparent and we believe that this transparency contributes to a continuous and sustained improvement in overall audit quality. 

  4. We grade the quality of the audit work we examine on individual audits on four levels as follows:

    • grade 1 – good

    • grade 2A – acceptable with limited improvements required

    • grade 2B – acceptable with improvements required

    • grade 3 – significant improvements required

  5. The grade of an audit is determined predominantly by the quality of and evidence supporting key audit judgements, not by the auditor ticking the right boxes. By highlighting areas in which there is room for improvement, the FRC helps drive improvements in audit quality, changes in behaviour and encourages confidence among investors.

  6. Definition of group and component auditors: The group auditor is responsible for providing the audit opinion on group financial statements. Components of the group may include: overseas and domestic subsidiaries, associates, joint ventures, divisions and branches. Some components may be audited by the group auditor, but many are audited by other auditors known as the ‘component auditors’.

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