In a review of the quality of cash flow auditing, the Financial Reporting Council (FRC) has identified recurring errors in cash flow statements relating to misclassification between operating, investing, and financing activities
As part of the regulator’s annual enforcement work it conducts a number of constructive engagement investigations which do not go to the final enquiry stage although the number is on the rise. The latest FRC figures for the 2019-20 constructive engagement work show that three (9%) of the cases over the period related to issues with cash flow statements, which were resolved through constructive engagement. The number of cases reviewed in 2020-21 increased to 17% with eight instances flagged for review.
FRC said that ‘whilst our constructive engagement work has shown that audit firms have taken appropriate steps where errors have been identified, the increase in cases during 2020-21 suggests that further action is needed by firms to improve the overall quality of the audit of cash flow statements to prevent the need for restatements and errors occurring’.
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