The U.K. Financial Reporting Council (FRC) on Tuesday published a blueprint for how it wants audit firms to perform to ensure they deliver high-quality audits.
The 29-page, step-by-step guide, called “What Makes a Good Audit?,” comes at a time when U.K. audit quality (or lack of it) has been severely criticized following accounting scandals at the likes of infrastructure firm Carillion and café chain Patisserie Valerie.
During the 2020/21 inspection period, 29 percent of audits reviewed by the FRC were found to fall short of acceptable standards.
In its report, the FRC defines high-quality audits as those that:
- Provide investors and other stakeholders with a high level of assurance that financial statements give a true and fair view;
- Comply with both the spirit and the letter of auditing regulations and standards;
- Are driven by a robust risk assessment, informed by a thorough understanding of the entity and its environment;
- Are supported by rigorous due process and audit evidence, avoid conflicts of interest, have strong quality management, and involve the robust exercise of professional judgment and professional skepticism;
- Challenge management effectively and obtain sufficient audit evidence for the conclusions reached; and
- Report unambiguously the auditor’s conclusion on the financial statements.
The FRC’s report also highlights the key attributes it believes contribute to the running of high-quality audit practices ahead of wider reform of the sector, such as culture, governance, firm leadership, investment in well-qualified people, training, and processes.
Additionally, the regulator wants audit firms to perform better risk assessment and planning, as well as strive for better communication, performance, and quality monitoring.
In a statement, FRC CEO Sir Jon Thompson said, “It is clear that the unacceptable level of audit quality in recent years has contributed to undermining trust.
“… While some progress has been made … significant improvement is still required, which will take time and an ongoing commitment from the firms to improve standards.”