Audit quality trends: a mixed picture
Nick Reynolds, Head of Audit, ICAEW Quality Assurance Department opened the session with a review of audit quality trends. The proportion of audits rated as “good or generally acceptable” was 67% in 2024. While the Big Four maintained a 90% success rate, medium and larger firms (excluding the Big Four) hovered closer to 80%.
Nick emphasised that achieving 100% “good or generally acceptable” audits in a monitoring visit is a realistic goal for a firm of any size. He encouraged firms to focus on addressing recurring weaknesses to reach this benchmark.
Five key areas for improvement
Neil Lawrinson, Reviewer, ICAEW Quality Assurance Department outlined five recurring areas where audit quality can falter:
1. Complex IT environments
Many firms fail to fully assess the risks associated with complex IT systems, especially in UK subsidiaries of overseas groups. Neil stressed the importance of understanding system interfaces, evaluating general IT controls, and ensuring audit teams have the necessary expertise.
2. Fraud risk considerations
Firms often inadequately address fraud risks, particularly around revenue recognition and management override of controls. Neil highlighted the need for clear documentation of risk considerations including where the presumed revenue recognition fraud risk is being rebutted. He also stressed the need for tailored journal testing and application of professional scepticism, especially when using automated tools.
3. Accounting estimates
Weaknesses persist in planning and executing audit responses to accounting estimates. Issues include vague documentation, over-reliance on management experts, and insufficient challenge of assumptions. Neil urged firms to align planned responses with actual risks and consider sensitivity analysis where appropriate.
4. Service organisations
Some firms overlook the role of service organisations in their audits. Neil advised documenting all relevant service providers, assessing the need for reliance on controls, and critically evaluating control reports, especially distinguishing between Type 1 and Type 2 reports.
5. Use of experts
The use of management and auditor experts remains inconsistent. Neil reminded firms that reliance on management experts without appropriate review and challenge is insufficient. Audit teams must assess the competence and objectivity of experts and evaluate their work thoroughly.
Case study: defined benefit pension schemes
Neil presented a case study focused on a sponsoring employer with a defined benefit pension scheme. The example highlighted failures in identifying accounting estimates, evaluating service organisations, and challenging management experts, ultimately leading to insufficient audit evidence.
Regulatory updates
Nick concluded with key regulatory updates:
- Audit Regulations (June 2025): Firms must now notify ICAEW when accepting certain audits, such as listed entities or those with significantly higher fees than previously undertaken.
- Eligibility changes (October 2024 – April 2025): The “supermajority” requirements affect firms with complex structures. Nick urged firms to review their compliance and seek ICAEW support if needed.
- Crossing the Line: ICAEW’s latest audit training film explores ethical dilemmas and professional pressures. The film is available for free to UK staff at ICAEW-registered audit firms and has been mailed to all ICAEW audit compliance principals in the UK.