Audit Quality Review (overview)
Published: 25 September 2023
4 minute read
Overview
Audit Quality Review (AQR) monitors the quality of the audit work of UK firms that undertake statutory audits of Public Interest Entities (PIEs) and certain other entities. Monitoring of statutory audits outside the scope of AQR inspections is delegated to the Recognised Supervisory Bodies under a series of Delegation Agreements. The overall objective of our work is to monitor and promote improvements in the quality of auditing in the UK.
Scope of AQR inspections
All UK audit firms that undertake PIE and large AIM/Lloyd’s Syndicate/Listed Non-UK entity audits are subject to AQR inspections in respect of this audit work. The frequency of AQR inspections varies, with larger firms inspected annually while other firms are generally inspected once every three years. In certain cases the inspection cycle can be extended to six years.
We also inspect audits of entities incorporated in Jersey, Guernsey or the Isle of Man whose securities are traded on a regulated market in the European Economic Area, under contractual arrangements agreed with the relevant regulatory authorities in the Crown Dependencies. The scope of this work includes the audits of a number of major companies which are listed in the UK, with a particular focus on FTSE 100 and FTSE 250 constituents. Crown Dependency companies listed on a non-regulated market (such as AIM) are not included within these arrangements.
Entities included in AQR's inspection scope (PDF) summarises the scope of our corporate audit inspections.
The FRC is also responsible for monitoring the quality of audits of the largest local public bodies (Major Local Audits) under the Local Audit and Accountability Act 2014 and oversees the audits of certain other public bodies.
The FRC may also reclaim audit inspections delegated to the Recognised Supervisory Bodies.
Monitoring Approach
In selecting individual audits to inspect, we take account of a wide range of factors including periodic coverage of FTSE 350 constituents, the assessed level of risk in relation to individual audited entities and priority sectors for review announced by the FRC.
Our inspections of individual audits focus on the quality of the audit work performed in the areas selected for review, the appropriateness of key audit judgments made and the sufficiency and appropriateness of the audit evidence obtained. We do not assess compliance with all relevant requirements of standards and regulations, either by using checklists or otherwise.
We identify areas where improvements are required to safeguard or enhance audit quality, and/or comply with relevant regulatory requirements, and discuss these with the relevant engagement partner and other senior members of the audit team. We also seek to identify examples of good practice, both to recognise good audit work and to facilitate improvements across the wider audit ecosystem.
The FRC Approach to Audit Supervision (PDF) provides further information on how the work of the AQR team contributes to the FRC’s overall audit supervisory approach.
Reporting
We issue confidential reports on each individual audit reviewed to the relevant audit firms and Audit Committee Chairs. As well as an overall assessment of audit quality, these reports include good practice points, key findings and other findings that merit formal reporting. We also report separately to the audit firm other matters we have identified of less significance.
Our assessment of the overall quality of the audit work inspected, uses one of four audit quality categories:
| Category | Description |
|---|---|
| Good (1) | We identified no areas for improvement of sufficient significance to include in our report. |
| Limited improvements required (2) | We identified one or more areas for improvement of limited significance. |
| Improvements required (3) | We identified one or more key findings requiring more substantive improvements. |
| Significant improvements required (4) | We identified significant concerns in one or more areas regarding the sufficiency or quality of audit evidence, the appropriateness of key audit judgments or another substantive matter such as auditor independence. |
We exercise judgment in assessing the significance of our findings on each inspection, both individually and collectively. One or more key findings will lead to an overall audit quality assessment of “Improvements required (3)” or “Significant improvements required (4)”, depending on their severity. We also report other findings to both the audit firm and the Audit Committee Chair where we consider that the firm should commit to taking specific action in response on future audits. Any such findings will, on their own, result in an overall quality assessment of “Limited improvements required (2)” only (regardless of the number). We ask the audit firm to provide an appropriate action for all findings included in our report.
The table below summarises our assessment of audit quality for the individual inspections undertaken during recent inspection cycles:
| Inspection cycle | Good or limited improvements required | Improvements required | Significant improvements required | Total |
|---|---|---|---|---|
| 2017/18 | 106 | 20 | 13 | 139 |
| 2018/19 | 96 | 33 | 7 | 136 |
| 2019/20 | 81 | 34 | 15 | 130 |
| 2020/21 | 99 | 41 | 7 | 147 |
| 2021/22 | 104 | 30 | 14 | 148 |
Anonymised summaries of our key findings and good practice observations are set out in the following FRC publications:
| Name | Key Findings Reported in 2020/21 Inspection Cycle |
|---|---|
| Publication date | 26 May 2022 |
| Format | PDF, 2.5 MB |
| Name | Good practices reported in 2020/21 inspection cycle |
| Publication date | 26 May 2022 |
| Format | PDF, 1.2 MB |
| Name | What Makes a Good Audit |
| Publication date | 15 November 2021 |
| Type | Report |
| Format | PDF, 3.0 MB |
For audits assessed as requiring improvements (3) or significant improvements (4), the FRC may require the firm to take remedial action and/or assess whether their audit opinion remains appropriate. Assessing an audit as requiring significant improvements does not necessarily mean that an inappropriate audit opinion was issued, the financial statements failed to show a true and fair view or any elements of the financial statements were not properly prepared.
We consider whether enforcement action is appropriate for all audits assessed as requiring improvements or significant improvements. This may result in sanctions being imposed under the FRC’s Audit Enforcement Procedure or other applicable schemes. Such matters are primarily dealt with through the FRC’s Enforcement Division.