The quality of audits of FTSE 350 companies in the UK is improving, according to the latest audit reviews undertaken by the Financial Reporting Council (FRC).
81% of FTSE 350 audits reviewed in 2016/17 were categorised as requiring no more than limited improvements, compared to 77% in 2015/16 and 70% in 2014/15. The FRC has set a target that at least 90% of FTSE 350 audits reviewed should require no more than limited improvements by 2018/19.
A higher proportion of audits reviewed outside the FTSE 350, however, required more than limited improvements. As a result, the FRC reports no overall change this year in audit quality across all the audits it reviewed.
The FRC has issued reports on the largest six audit firms – BDO, Deloitte, EY, Grant Thornton, KPMG and PwC. They set out identified areas of good practice, key areas requiring improvement and the actions each firm, having carried out root cause analysis, proposes to take.
Some of the improvements underpinning audit quality that the FRC has seen are:
- Firms’ leadership implementing or further developing significant firm or network-wide audit quality improvement programmes;
- Adoption of better guidance and training on the use of specialists;
- Actions to embed the use of data analytics in the audit;
- Better evidence of the involvement of the Engagement Quality Control Review partner and audit technical reviewer; and
- Strengthened internal monitoring arrangements.
Key areas identified by the FRC where further improvement is required and the firms’ plan actions include:
- Challenge of management in key areas involving judgement such as impairment reviews, asset valuations and provisions;
- The design and execution of audit procedures relating to revenue recognition; and
- Systems and arrangements for ensuring compliance with ethical and independence requirements.
According to Melanie McLaren, FRC’s Executive Director for Audit and Actuarial Regulation, high quality audit underpins public trust and confidence in business. “Audit firm leaderships’ focus on audit quality is a key driver of good audits and is vital to promoting a culture of continuous improvement. While the progress made by individual firms differs, all firms are investing in audit quality and have set out further action to improve.”