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Auditors must improve their work on the 'front end' of company reports

Dec 06, 2018
Auditors' work on the information in the front end of company reports outside of the financial statements does not meet the requirements of auditing standards consistently, according to a new report from the Financial Reporting Council (FRC). Inconsistency in the extent and quality of the work in part reflects the non-prescriptive requirements in the audit standards. Firms' own guidance to their auditors also lacks prescription, which has led to varying approaches being taken to this work, even by different audit teams within the same firm.

While the FRC identified instances of good practice in the audits that it reviewed, there were too many instances where insufficient work was performed to support the statements made by auditors in respect of the other information (OI) in their audit reports.

Investors place a great deal of focus on the OI in annual reports, often referred to as the "front end", to guide their decisions, because it is helpful to assessing a company's future prospects. The amount of information included in the front end has grown significantly over time and in most cases is now larger than the financial statements themselves.

OI, if it is materially mis-stated, can undermine the credibility of the audited financial statements or may inappropriately influence the decisions of users of the annual report. The auditor's opinion on the financial statements, though, does not cover the OI. Instead, as part of an audit of the financial statements, the auditor is required to consider whether the OI is materially inconsistent with the audited financial statements or the auditor's knowledge and report on this in the auditor's report.

Mike Suffield, Acting Executive Director for Audit at the FRC, said: "Auditors must improve the extent and quality of the work that they perform on the front end of the annual report. The FRC will review the requirements on auditors in this area in auditing standards, as part of its current project reviewing Auditing Standards, to see what changes are necessary to help improve the work carried out. We will also consider in detail the requirements for assurance over information included in the front end as part of our recently announced project on the future of corporate reporting."

To improve the quality and consistency of their work on OI, the FRC expects auditors to:
 
  • Undertake more targeted procedures, based upon more prescriptive guidance from audit firms;
  • Place greater emphasis on their review of key non-financial information;
  • Increase their scepticism and pay more attention to the completeness of information, particularly in relation to principal risk disclosures and their linkage to viability statements;
  • Require boards to prepare, on a timely basis, appropriate documentation to support key areas of the OI such as the viability statement; and
  • Ensure staff with appropriate experience and knowledge to identify potential material misstatements and inconsistencies are assigned to review the OI.

Source: Financial Reporting Council.