Audit Firm: Message from Financial Reporting Council to the Big 4

The Financial Reporting Council is the UK’s independent regulator responsible for promoting high quality corporate governance. It recently issued Audit Quality Inspection Report for the year 2014/15.

The review of the firm’s policies and procedures supporting audit quality is undertaken by the Audit Quality Review team of the Financial Reporting Council (“the FRC”) and it covered aspects of the following areas: 

• Tone at the top and internal communications
• Transparency report
• Independence and ethics
• Performance evaluation and other human resource matters
• Audit methodology, training and guidance
• Client risk assessment and acceptance / continuance
• Consultation and review
• Audit quality monitoring
• Other firm-wide matters

 Some of the key messages given by the FRC to the Big 4 audit firms are as follows: 

• Improve the testing of management reports and other system generated information to obtain assurance on its reliability for audit purposes.
• Improve the testing of controls.
• Ensure that audit planning discussions are held with Audit Committees on a more timely basis to enable their input to be reflected appropriately in the audit plan.
• Ensure audit teams pay more attention to the nature and complexity of entities when determining the scope and extent of group and component audit procedures.
• Improve the audit approach in relation to the testing of journals including the selection of journals based on the characteristics of fraud risk
• Ensure that, when using the firm’s valuation and other specialists, audit teams obtain sufficient appropriate audit evidence to corroborate their conclusions.
• Take action to ensure that partners are notified promptly of new audited entities and dispose of any financial interests held in them on a timely basis.
• Ensure that the firm’s audit reports accurately describe the audit procedures performed to address the identified risks.

Additional Thoughts

The key messages given by the FRC to the audit firms can be used as guidelines by the firms to improve the quality of their audits. Firms should develop more stringent internal quality control review mechanisms to improve audit quality and deliver services to the complete satisfaction of all the stakeholders.