Its analysis suggests there is evidence of continuous improvement, particularly for larger audits. However, the FRC says a higher proportion of audits it reviewed outside the FTSE 350 main market required more than limited improvements.

As a result, the FRC reports no overall change in audit quality across all the audits reviewed in 2016/17, which also marked its first year as the designated competent authority for audit, which has increased its responsibilities and enhanced its powers.

The FRC says that across all audits, outcomes are inconsistent between the firms, with areas of identified good practice such as enhanced quality control procedures also often those areas where there is most room for improvement.

The regulator points out that the picture is not consistent across all firms, market sectors and audit procedures.  High profile accounting failures, as well as the results of audit monitoring, continue to highlight cases where auditors have not met expectations. Whilst there is evidence of greater professional scepticism, this is also the area where the FRC finds the greatest number of issues.

The report states: ‘Failures by auditors to be sufficiently sceptical, and therefore independent and objective in the way they approach their work, continues to be a theme running through poorer quality audits identified in our inspections and in our enforcement cases. This is a particularly important area given the increasingly complex nature of accounting estimates, and recent and upcoming changes to IFRS.’

Melanie McLaren, FRC’s executive director for audit and actuarial regulation, said: ‘In our monitoring of audit quality we have yet to see overwhelming evidence of improvement in all sections of the market or the consistency of performance we want between different firms.  Firms are though investing in improvement measures, and those audit committees surveyed report that they are seeing evidence of good quality audit.

‘Firms are focused on areas including their leadership, governance and culture, better use of technology and quality management systems.

‘This year we will focus on how we can enhance the speed and effectiveness of our enforcement role underpinning justifiable confidence in audit.’ 

The FRC issued more than £14.2m of sanctions on auditors and audit firms in 2016/17, and says it is working to reduce the time taken on investigations, with the aim of providing faster feedback when it identifies practices which need addressing.

On the question of audit rotation, the FRC says its evidence indicates that whilst the Big Four audit firms continue to dominate the FTSE 350 audit market, there has been greater competition based on quality between the firms within that market. It says there is no evidence to suggest that competition has led to a simple downwards pressure on audit fees. However, it says firms report that the costs and challenges connected with tendering, as well as those related to taking on new clients with complex businesses are high.

In total 213 (61%) of the FTSE 350 have announced they have completed a tendering exercise in the past six years, and three quarters (74%) of tenders have resulted in the appointment of a new audit firm.

Overall, the Big Four firms have increased their total share of FTSE 350 audit market from 95% to 97% (based on number of audit clients).  The FRC says 2015 and 2016 are likely to represent peak years in the short term for the number of audit tenders as the initial impact of the policy changes works through – with approximately 50 tenders in the FTSE 350 in 2015 and 70 in 2016.

Looking ahead, the FRC says a thematic review of how the audit firms are promoting, measuring and assessing their own culture will be carried out in 2017/18, with a particular focus on the implications for audit quality.

The regulator says it has ‘an emerging concern’ about differential quality with improvements in large PIE audit quality potentially being at the cost of quality elsewhere. It will focus on the how the firms lead on quality – including the ongoing revisions to ISQC1 (the international quality control standard) which will embed a quality risk management approach – and will also be looking at their use of technology and data to facilitate real-time audit quality monitoring.

FRC report Developments in Audit 2016/17 is here.