FRC: Scope to improve quality control practices at audit firms

2 Mar 2017 01:43 PM

The Financial Reporting Council (FRC) is calling on audit firms to improve quality control procedures by building on examples of good practice identified in its latest thematic review. One-third of the audits sampled for the review required more than just limited improvements suggesting that the quality control procedures adopted by the firms had not been effective.

All firms have in place procedures and dedicated resources for ensuring audit quality, some of which go beyond those required by standards. However the number of audits that required more than just limited improvements shows the firms’ audit quality procedures were not sufficiently robust. To achieve faster improvements in, and greater consistency of audit quality, strong leadership and the right culture in audit firms is required.

The FRC’s Audit Quality Thematic Review identified areas of good practice including:

• Half of the firms have a dedicated board or committee that oversees all matters relating to audit quality, bringing all the elements together and ensuring audit quality has specific prominence and focus in the firm’s leadership agenda.
• Two firms have set out their audit quality procedures in a ‘three lines of defence’ model, helping to understand how these audit quality procedures interact together to achieve audit quality and minimise the risk of inconsistency.
• Initiatives to achieve consistent audit quality, identify areas for improvements and monitor the effectiveness of training in specific areas requiring improvement.
• Audits with a higher level of partner and director involvement had a greater likelihood of achieving a high quality outcome prior to issue of the audit report.

The FRC also identified procedures by some audit firms that should be a focus for audit quality improvements.

These include:

• The appropriate involvement of specialists in the audit with sufficient reporting of their work where this was important to achieve audit quality.
• That firms should consider whether there are any insights arising from their root cause analysis where their quality control procedures could be enhanced to further improve audit quality.

Melanie McLaren, FRC’s Executive Director for Audit and Actuarial Regulation, said,

“There is evidence of audit quality being of greater focus at firms’ leadership level. However, it requires more effort on the basic quality control procedures if real sustained improvement is to be achieved.”

The FRC reviewed six of the largest audit firms in its review. 26 audits were selected from FTSE 100, FTSE 250 and other listed companies to look at key aspects of the audit quality control systems used by firms to support their audit teams in delivering quality audits.

Read the full report at: https://frc.org.uk/Our-Work/Audit-and-Actuarial-Regulation/Audit-Quality-Review/Thematic-inspections.aspx 

In 2017/18 the FRC thematic reviews will focus on how firms’ governance and culture supports the delivery of further improvements in audit quality.

Notes to editors:

1. The Financial Reporting Council (FRC) is the UK’s independent regulator responsible for promoting high quality corporate governance and reporting to foster investment. The FRC sets the UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work; monitors and takes action to promote the quality of corporate reporting; and operates independent enforcement arrangements for accountants and actuaries. As the Competent Authority for audit in the UK the FRC sets auditing and ethical standards and monitors and enforces audit quality.
2. All Press enquiries should be directed to:
   Peter Timberlake, Head of Communications, on telephone: 020 7492 2397/ 07768 502332, or email: p.timberlake@frc.org.uk.
   Rita Carolan, Communications Manager, on telephone: 020 7492 2307/ 07428 149096 or email: r.carolan@frc.org.uk.
   Alana Sinnen, Communications Manager, on telephone: 020 7492 2395/ 07949 005526 or email: a.sinnen@frc.org.uk

Related Resources

Audit Quality Thematic Review: Firms' audit quality control procedures and other audit quality initiatives