The regulator’s Audit Quality Thematic Review looked at the quality control processes in six of the largest audit firms. It selected 26 audits (seven FTSE 100, 12 FTSE 250 and seven other listed) which covered year ends from 31 March 2015 to 2 January 2016.

The review found that 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. All the firms had policies where the audit work performed is reviewed by someone more senior.

However, despite such leadership responsibilities and senior review, 31% of the audits reviewed in the sample (one FTSE100, four FTSE 350 and three other listed) were assessed as requiring more than limited improvement. The FRC says this indicates that the firms’ quality control procedures are not yet sufficiently robust.

For the 26 audits the FRC analysed the time recorded by various members of the audit team and, in particular, the proportion of time recorded by the partner and director and compared this to the audit quality review (AQR) categorisation of all 26 audits.

For those audits where the involvement of the partner and director was above the median, 25% required more than limited improvements. However, for audits where the amount of involvement was below the median this increased to 33%.

A second areas of focus for improvement was the use of specialists, with the FRC saying that firms had to be sure they had the appropriate involvement of specialists in the audit with sufficient reporting of their work where this was important to achieve audit quality.

Specialists were involved on all of the 26 audits reviewed, with the most frequently used being taxation, valuations and IT. However, the FRC identified issues in areas involving specialists in three of the eight audits requiring more than limited improvement. It says audit teams should ensure that where a specialist is involved the audit team ensures that the work of the specialists is fully integrated into the audit.

The report also flagged up the increasing use of outsourced service delivery centres (SDCs) for audit work. Overall the percentage of audit work in hours performed by SDC’s has increased by 70% year on year between 2013 and 2016. The FRC says audit firms should consider how audit quality can be maintained or improved as the trend for outsourcing sections of audit work increases.

Good practice

The review identified a number of areas of good practice, which it says firms should consider when looking at how to improve their processes for ensuring audit quality.

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. In addition, at one of these firms, the board or committee meets with one of the firm’s independent non-executives once a year.

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.

One of these firm has also established an audit quality forum, where audit staff discuss audit quality improvements and their suggestions are fed back to the firm’s audit quality board. This staff forum also meets with the firm’s independent non-executives once a year.

Five firms are moving towards involving their central technical support team in a sample of audits on a real time basis. The FRC says this approach helps to identify potential issues, or areas for improvement, and provides an additional layer of challenge to the teams, thereby increasing the likelihood of delivering a good quality audit. It is also intended to act as a coaching tool to help improve audit quality not only for the audits being reviewed but others for which the audit team are involved.

Two firms perform periodic pre issuance compliance reviews in specific audit areas, in addition to the firms’ internal quality monitoring programme, to cover each partner and manager at least once during the year. This helps to monitor, on a more timely basis, whether improvements in audit quality are being achieved across the firm

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 says it will continue to monitor the firms’ progress in improving audit quality and, during routine inspections, will continue to focus on the firms’ leadership, the use of service delivery centres and the use of specialists on audits. In particular, in 2017/18 it will be conducting a thematic review into audit firm governance and culture at the eight firms adopting the audit firm governance code.

The FRC has stated its aim that, by 2019, at least 90% of FTSE 350 audits reviewed by the AQR team will be assessed as requiring no more than limited improvements.

The FRC’s audit quality thematic review is here.