Stock, long-term contracts and group audits and consolidated financial statements are areas where audit firms may find opportunities to improve audit quality, according to data collected during the 2022 calendar year by ICAEW’s Quality Assurance Department (QAD). Recent analysis of key drivers behind audits that required improvement or significant improvement identified the following three areas as common and recurring aspects.

Simple UK groups

Firms involved in the audit of simple UK groups should not presume that issues relating to group audits are restricted to multinational audits conducted by the largest audit firms, although the direction, control and review of the work of third-country component auditors can still require improvement in some cases. More often, QAD concerns relate to relatively simple, UK-based groups where the same audit firm audits the whole group and there are errors in consolidation, overlooked risks of impairment in parent company investments, or whole elements of the consolidated financial statements are missing, such as parent company balance sheets.

There’s a resource hub to assist those auditing groups of companies.

Effective audit strategies

Long-term contracts can be more challenging to audit, whatever the firm. An effective audit strategy requires experienced audit staff, taking a holistic and ‘contract-orientated’ approach rather than tackling revenue, cost of sales and balance sheet captions separately. Assessment of the outcome of long-term contracts involves significant judgement and challenge of management, including in the estimation of accruals and costs to complete. There is a lot of scope for these audits to go wrong – and too frequently they do.

Weaknesses in the audit of stock may reflect broader long-term changes in the UK business sector, as these often relate to manufacturing entities with more complex accounting policies, including work-in-progress, manufactured finished goods, standard costing and overhead absorption. Even some of the larger audit firms acknowledge that their audit teams do not regularly come across these businesses and opportunities to hone their skills in auditing these areas. 

Other weaknesses relate to arguably more routine audit work, with lack of evidence from stocktake attendance or a flawed approach to reliance on operating effectiveness of controls at companies with perpetual inventory stock counting systems.

Auditing accounting estimates offers resources and support tools.

Approaches to audit

Many aspects of remote auditing developed during the pandemic are here to stay – welcomed by firms, their clients and audit staff. However, some firms express concerns that certain audit clients now have a clear preference for a remote audit, whereas the firm would prefer to be at the clients’ offices; also remote auditing can mean that it takes longer to train and develop the skills of their junior auditors.

Guidance created for audit firms during the pandemic remains relevant and includes:

Remote auditing – obtaining evidence

Remote auditing – remote team working

Remote auditing – work on internal controls

It is important that all audit firms take time to assess the effectiveness of their approach to audits post-pandemic and the appropriate blend of work done remotely and conducted face to face. Statutory audit is not just about numbers and checklists, but a depth of understanding of how audit clients, and those who own, manage and are employed by them, work.