Audit

Early warning systems must be enhanced to improve audit quality, says FRC

Tools for flagging signs of poor quality audits should be used more effectively so timely corrective action can be taken, according to a major review of their use by the Financial Reporting Council (FRC).

The FRC’s study looked at the most useful indicators of both poor and good audit quality within the UK. If used properly, Audit Quality Indicators (AQIs) are a vital tool in helping audit firms detect audits at risk of not meeting necessary standards and for Audit Committees to hold audit firms accountable.

The FRC said it is encouraged that these indicators are being rolled out by audit firms to highlight audits in need of remedy and to promote good practice so that this can be replicated.

However, the FRC found that most monitoring of AQIs across the largest audit firms takes place after audits are completed, rather than prior to or during the process

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A range of indicators are needed to assess the quality of audits, leading to audit firms adopting a broad approach to selecting both qualitative and quantitative indicators.

The FRC examined how audit firms are using AQIs and assessed their benefits. Across the largest six firms, it found:

  • Monitoring of AQIs is an important foundation for initiating actions and interventions to improve audit quality.
  • Firms must focus on forward-looking and granular AQIs to ensure they are identifying early interventions which could prevent deficiencies in audits.

At firms outside the largest six, two had commenced a program of monitoring AQIs. The FRC encourages other firms to follow suit.

The FRC’s executive director of supervision, David Rule, said: “Audit firms need a relentless focus on improving audit quality. Our review found that audit quality indicators, if used correctly, can help firms take decisive and immediate actions to improve audit quality.

“Public reporting of a consistent set of audit quality indicators is required to provide companies and investors another window on audit quality. It is clear that improvements are needed in this area and the FRC will be consulting on proposals in due course.”

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