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Audit quality in question

Author: ICAEW Insights

Published: 14 Feb 2022

Some audit committee chairs are still struggling to distinguish between a good quality audit and a good quality of service from an auditor, new research from the Financial Reporting Council has found.

The worrying findings from the accountancy regulator in its report Audit Committee Chairs’ views on, and approach to, audit quality published in January come at a time of intense scrutiny on the audit profession following a series of corporate collapses including retailer BHS and outsourcing company Carillion, and ongoing criticism of the audit industry by politicians and regulators.

In terms of reporting audit quality, audit committee chairs (ACCs) told the FRC that work on quality was “difficult to articulate in a report as it is often intangible and subjective”. A few ACCs described their approach to reporting on quality as “boilerplate, limited and brief”.

Katharine Bagshaw, Senior Manager, Auditing Standards, Audit and Assurance at ICAEW, said: “The FRC research shows there’s scope for more focus on AQIs among all stakeholders. The use of AQIs is a developing area and high-quality AQIs are as important to the firms themselves as they are to ACC chairs, regulators and investors.”

Audit Quality Indicators (AQIs) – quantitative and qualitative measures of external audit quality – indicate the firm’s historical, present or future ability to perform quality audits, as well as providing insights into audit quality. 

Reiterating the findings of its 2020 research, the FRC report said most ACCs had an awareness of AQIs, but they did not mention using these regularly, compared to other criteria and reports such as transparency reports.

The FRC recommends audit committees make use of AQIs when appointing their auditor, and to assess quality on an ongoing basis. However, the research revealed that Audit Quality Reviews and transparency reports were not used by more than a small proportion of the sample group.

In terms of auditor selection, the FRC findings showed that ACCs were increasingly focused on the added value an audit firm can bring to the business “over and above financial statement assurance”, which could raise further questions about auditor independence.

“Firms that can convey their ability to add value beyond the audit itself are, in many cases, deemed more likely to be appointed than those who solely pitch their auditing credentials,” the report said.

ACCs bemoaned the rise in rules and regulations, saying this has made audits more complex, expensive, and more of a box-ticking exercise than one of judgement. “Overall, the audit process is felt to need a degree of subjectivity, flexibility and judgement,” ACCs told researchers.

Most ACCs said they were “pleasantly surprised by the response from auditors” during the pandemic regarding technological advancements and new processes. But they missed informal interactions because “face-to-face ad hoc conversations often allow for a more transparent and proactive communication style”.

One unnamed FTSE 100 ACC quoted in the FRC report said: “The quality of debate has been impaired significantly. Boards are getting through agendas and having discussions but they’re not having engaged debate, which is incredibly difficult over Zoom.”

Mark Babington, FRC’s Executive Director of Regulatory Standards, said: “It is vital that audits of public interest entities are conducted to a high standard and Audit Committees and their chairs have a key role to play in ensuring this happens.”

Although Babington said the research confirmed that most ACCs understood the importance of high-quality audits, “some ACCs commented that it can be a challenge to differentiate audit quality from the quality of service provided by the auditor”.

The FRC commissioned YouGov to conduct 50 one-to-one interviews with ACCs to further its understanding of ACCs’ views on audit quality and service

The FRC is set to be replaced by independent regulator the Audit, Reporting and Governance Authority (Arga), but it is not likely to be ready until 2023. This would mean that some changes to audit and corporate governance rules would be delayed until 2024.

· Read ICAEW’s thought leadership essay on audit quality. ICAEW is developing a range of resources to provide practical assistance to member firms on audit quality. For more information click here.

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