Financial Reporting Council body issues its annual review of the quality of the statutory audits of large companies
The Audit Inspection Unit (AIU) of the Professional Oversight Board – which is part of the Financial Reporting Council – today published its annual report (the Report) for the year to 31 March 2011. The Report can be read here and the accompanying press release can be read here.
The Companies Act 2006 requires that auditors who perform the statutory audits of listed companies, and other companies in whose financial condition there is considered to be major public interest, be independently inspected. These inspections are carried out by the AIU.
Key issues and concerns from the AIU inspections
The Report sets out “key issues and concerns” arising from the AIU’s inspection activities in the 2010-11 year that the AIU believes should be addressed by audit firms to improve audit quality. These include:
Professional scepticism:
“The AIU’s findings continue to identify the need for firms to ensure that both partners and staff exercise appropriate professional scepticism, particularly in respect of key areas of audit judgment such as the valuation of assets and the impairment of goodwill and other intangible assets.”
We discuss recent regulatory initiatives on auditor scepticism in this post.
Focus on audit quality:
“Given the current economic climate which has led to a decline in fee income, when seeking to grow their businesses and obtain further efficiencies in the conduct of audits, firms must ensure that this is not at the expense of audit quality. The importance of audit quality should be reinforced, and its achievement appropriately rewarded at all levels within audit firms.”
Auditor independence:
“The proper identification and assessment of threats and safeguards is crucial to the effectiveness of the Ethical Standards in maintaining auditor independence. Firms must recognise that this is particularly important at a time when the need for more specific prohibitions is being debated.
Partners and staff must be in no doubt that auditor independence must not be compromised by an inappropriate focus on selling non-audit services to audited entities. This continues to be an area of concern.”
The Ethical Standards for Auditors referred to above are here.
Group audits:
“Firms, and in particular smaller firms, should carefully consider whether they have the appropriate resources, expertise and involvement to undertake audits of multi-national groups to the required standard.
When performing the audit of a UK subsidiary of a large overseas group where the audit approach is designed for the group as a whole, firms must ensure that they obtain sufficient audit evidence to support their statutory audit opinion on the UK subsidiary. This issue is particularly relevant to the audits of UK components of international financial institutions.”
Audit committee reporting:
“Audit committee reporting should include a clear and unequivocal statement of the auditor’s views on key areas of audit judgment.”
And audit of disclosures:
“Greater attention should be given to the audit of the disclosures in financial statements, especially those in respect of key areas of judgment, to ensure that sufficient appropriate disclosures to meet the needs of users have been made.”
For more on the regulation of the UK audit market, see our “Reporting and Accounts” category.
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