29 September 2020: The majority of non-PIE audits undertaken by ICAEW-registered audit firms are delivered to a good standard but around a quarter required improvement, according to the IRB annual audit monitoring report published today.

The ICAEW Regulatory Board’s (IRB) annual audit monitoring report outlined that the majority (74%) of 2019 audits reviewed by ICAEW’s Quality Assurance department achieved the standards expected. Good practice was seen in many areas and these visits were concluded without the need for any follow-up action. 

However, 18% of audits required improvements, with 8% needing significant improvement. According to the report, this did not necessarily mean that the audit opinion was incorrect or financial statements were misstated. Audits typically needed to improve because they lacked sufficient evidence, reached inappropriate decisions in key areas, failed to challenge management and/or lacked adequate documentation. 

In all cases where quality needed to improve, robust action plans were agreed with firms, and progress was monitored.

Overall, the 2019 results found a slight reduction in the most serious cases referred to the independent Audit Registration Committee (ARC) for it to consider taking action. The ARC can impose various sanctions such as restricting a firm from taking on any new audits, imposing a financial penalty or removing a firm’s audit registration.

The IRB is responsible for ICAEW’s regulatory and disciplinary functions and reports annually on the findings of ICAEW’s quality assurance inspections carried out by the ICAEW Quality Assurance Department (QAD). 

In 2019, the QAD reviewed 960 audit files across a wide range of firms, from the Big Four to sole practitioners. As a different population of audit firms are reviewed each year, the report states that year-on-year quality comparisons are difficult, but results indicate a broadly similar position to previous years.

Trust in the profession has ‘never been more important’

One of ICAEW’s principal objectives is to see a reduction in the percentage of audits falling below the standard expected over the coming years, and as such regular external “cold file” reviews and the effective use of root cause analysis were identified as key tools for driving improvement. The report also highlighted the range of educational resources available to firms, such as ICAEW training films. 

Commenting on the report Michael Caplan QC, Chair of ICAEW’s Regulatory Board, said the report shows good practice among most audit firms, but it is “concerning” that around a quarter of audit files reviewed did not meet the high standards ICAEW expects, as the largest audit supervisory body in the country.

“Trust in the quality of audit underpins confidence in UK business,” commented Caplan. “In the current economic climate, this has never been more important.”

ICAEW is the largest Recognised Supervisory Body (RSB) in the UK, regulating around 2,600 firms for audit. As a condition of the Delegation Agreement entered into by the FRC and ICAEW in 2016, when the FRC became the Competent Authority for audit, ICAEW agreed to maintain a high-quality monitoring regime which would be subject to regular inspection. The quality of ICAEW’s monitoring work is inspected annually by the FRC Oversight team, including ‘live shadowing’ of some visits. 

This year for the first time, ICAEW quality assurance findings were included in an appendix to the Financial Reporting Council Audit Quality Review. 

The full audit monitoring report can be viewed here.