What does the FRC’s latest Audit Quality Review mean for audit supervision and enforcement?
The FRC has published its 2022/23 annual review of audit quality for Tier 1 firms. The review demonstrates an overall improvement in audit quality at the largest audit firms but highlights areas of continuing inconsistency across audits.
Some areas of regulatory focus in the coming year
- Inconsistencies in Audit Execution: Despite improvements being noted overall, the review highlights how inconsistencies and recurring findings in the execution of audits are hampering progress. A lack of professional scepticism and challenge continues to be a recurring theme in AQRs (and enforcement investigations) and will continue to be a key focus for the regulator.
- Continuing challenges for the Challenger Firms: whilst the review highlights signs of improvements, the audit quality at the smaller Tier 1 firms continues remains an issue. The FRC has confirmed that it will maintain increased levels of supervision at the smaller Tier 1 firms in the coming year. The FRC will also be undertaking a survey across all Tier 1 firms to gather further evidence and cross-firm benchmarking of elements of audit firm culture that promote high quality audit.
- A word of warning on de-risking audit portfolios: The FRC have reiterated the importance of taking into account the impact on the public interest before resigning or deciding not to tender for the audit of complex, hard to audit entities. This has been an area of focus for the FRC in recent years and may receive further attention following the inclusion of a specific public interest objective in the new Audit Firm Governance Code.
- The role of management and audit committees: The FRC have also reiterated the important role that management of audited entities and their audit committees play in the delivery of high quality audits. The FRC has recently published minimum standards for Audit Committees and audit firms should expect an increased focus on their interactions with audit committees during the audit process.
Further information on the results of the FRC’s annual review, including copies of the firm specific reports, is available here.
