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Local audit quality inspection results revealed

Author: ICAEW Insights

Published: 28 Oct 2022

Financial Reporting Council rates 70% of local audits as good or only requiring limited improvements, but reiterates concerns about audit timeliness.

The Financial Reporting Council (FRC) has published the results of its annual audit quality reviews of major local audits. Of the 20 financial statement audits reviewed, the FRC rated 14 as good or requiring limited improvements, three as requiring improvements and three requiring significant improvements.

The FRC also reviewed the auditors’ work on value-for-money arrangements and assessed the work of 13 out of the 14 bodies reviewed as good or requiring limited improvements. One inspection was assessed as requiring significant improvements because the file was incomplete and had been edited after its selection for inspection.

A major local audit is an audit of a local government body or NHS body with income or expenditure of at least £500m or a local authority pension scheme with at least 20,000 members or gross assets in excess of £1bn.

ICAEW’s Quality Assurance Department (QAD) is responsible for reviewing local audits conducted under the Local Audit and Accountability Act that are not major local audits. QAD rated 15 of the 17 financial statement audits reviewed as good or requiring limited improvements. One audit required improvements and one required significant improvements. QAD found that all the work it reviewed on value-for- money arrangements was good or requiring limited improvements.

Key findings from the four audits that required significant improvements were material errors in financial statements, insufficient justification for a limitation of scope of opinion, total unaudited misstatements reported by the auditor being material and inadequate work done to assess the classification and valuation of investment property.

The FRC found good practice in areas including fraud risk assessment, internal consultation, challenge of management and the use of an auditor’s expert in the valuation of property. However, the FRC reported that of the 14 local authority audits initially selected for review, seven had to be replaced because neither the 2019/20 nor the 2020/21 audits had been completed.

Commenting on the results, Sarah Rapson, FRC’s Executive Director of Supervision, said: “While it is encouraging that some improvements observed last year have been maintained, the number of audits requiring significant improvement is unacceptable and urgent action is required by the firms to address any shortfalls in audit quality. 

“The persistent timeliness issues with audited accounts remains a significant concern for the FRC as System Leader and concerted action is needed from all parts of the system for local government financial reporting and audit to urgently improve matters.”

91% of 2020/21 local authority audited accounts were not published by the 30 September 2021 deadline, while data from Public Sector Audit Appointments Limited (PSAA) shows that at this date 19% of 2019/20 local authority audits were still outstanding.

In a joint response to the findings of the local audit quality inspection results, Alison Ring, Director for Public Sector and Taxation at ICAEW, and Sarah Sheen, Technical Manager at CIPFA, said: “While recognising there are areas for improvement, we are pleased to see that the number of audits categorised as good or requiring limited improvements has remained consistent.

“We share the FRC’s concerns about the timeliness of local audit and reporting. We agree that this is a system-wide issu, and it’s crucial that everyone in the sector works together to tackle the causes of these delays and ensure the vital local audit system operates effectively.

“We welcome the fact that the AQR process is focusing on matters that are significant to the sector, including expenditure on services, the appropriateness of capital expenditure, investment property valuation and the minimum revenue provision in local government.”

The FRC’s inspection covers the six firms currently conducting major local audits. PSAA recently announced the results of its procurement for the next five-year appointment period from 1 April 2023. Two audit firms, Azets and Bishop Fleming, will be performing local authority audits in England for the first time, while Deloitte and BDO will exit the local authority audit market.

You can read the FRC’s report on its audit quality inspection of major local audits here.

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