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Rule's guide to high-quality audits

The head of supervision at the Financial Reporting Council has told auditors in no uncertain terms that they need to buck their ideas up when it comes to performing high-risk audits

David Rule says that recent audit quality review inspections have shown that high-risk audits are “significantly more likely” to be of lower audit quality. “Some 47% of the audits that we identified as higher risk, on selection, in our 2018/19 inspections were assessed as requiring improvement, compared with 13% of audits not identified as higher risk.

“The typical issues we identified on high-risk audits also differed from those on other audits. On high-risk audits, we often found insufficient challenge of management judgments and estimates, especially where estimation uncertainty was high. For other audits, the issues more often related to deficiencies in routine audit procedures.”

Rule has published a letter he wrote to the heads of audit at the larger audit firms in early November before the General Election was announced and government departments went into purdah. In it he sets out those areas that the firms should focus on in order to achieve consistently high-quality audits.

At the moment, the consistency is more often found in the problems the AQR inspectors unearth than in high quality audits. In 2018/19, 25% of audits reviewed required improvement – with insufficient audit evidence and lack of challenge on management over judgement areas such as valuations, impairment assessments and provisions – heading the list.

This is nothing new, Rule pointed out in the letter. The AQR inspectors have identified these problem areas time and time again over the past few years, “with a factor being inadequate application of professional judgment and scepticism”.

They also regularly come across inadequate planning, late timing of audit work and insufficient resourcing which in turn lead to increased pressure on acquiring sufficient audit evidence, “especially in the face of tight reporting deadlines”.

Yet, audit firms can and do perform high-risk audits to a high standard, Rule said. Common features include: significant involvement of partner and other senior team members; good use of specialists; consultation on complex areas; challenge of management resulting in changes where assumptions are too optimistic; robust quality control procedures; and clear and timely communication to audit committees.

“We would encourage audit firms to consider the resources needed and how they plan and perform audits of different types of entities, including those audits identified as high risk, in a way that delivers high quality,” he added.

Clearly, the cost of a high-risk audit is going to be higher because of the additional work involved, but this is something the firms will have to embrace if they are going to raise the overall quality of the audits they carry out.

Originally published in Economia on 18 December 2019.