Professional Oversight Board

Audit Inspection Unit

Background

The Audit Inspection Unit (AIU), part of the Professional Oversight Board, is responsible for the monitoring of the audits of all listed and other major public interest entities. The AIU was set up following the Government’s post-Enron review of the regulation of the UK accountancy profession which reported in January 2003. The review team’s report recommended enhancing the monitoring of the audits of listed and other major public interest entities through a new independent inspection unit (the AIU) reporting to a professional oversight board (the POB) within an integrated independent regulator (the FRC).

The professional accountancy bodies continue to register firms to conduct audit work with their regulatory activities being overseen by the POB. The audit registration committees of the accountancy bodies receive formal reports from the AIU on our monitoring work, with the POB overseeing the action taken by them in response to our recommendations. The Companies (Audit, Investigations and Community Enterprises) Act 2004 implemented the statutory changes necessary to give effect to these arrangements.

Scope

The scope of the AIU’s inspections is the audit of all entities with listed securities (both equity and non-equity securities) and other entities in whose financial condition there is considered to be a major public interest. The POB is responsible for approving the AIU’s work programme and, in particular, determining which audited entities fall within the “major public interest” category and therefore within the scope of our work. A description of such entities, as approved by the POB for 2008/9, was issued in March 2008 ('Scope of Independent Inspection 2008/9'). The monitoring units of the professional bodies remain responsible for the monitoring of other audits within the scope of audit regulation in the UK (i.e. those which are not within the scope of independent inspection by the AIU).

In addition to the Big 4 Firms, there are a small number of other major firms which audit a significant number of entities within our scope (“Other Larger Firms”). Both the Big 4 Firms and the Other Larger Firms are subject to full scope AIU inspections.

For all other firms which have one or more audits falling within our scope (“Smaller Firms”), our work is limited to the review of one or more of these audits. The firm-wide procedures of the Smaller Firms are reviewed by the monitoring unit of the professional body with which the firm is registered.

The AIU allocates its resources in accordance with our assessment (as approved by the POB) of the relative levels of public interest involved, thereby ensuring that the principal focus of independent inspection is on those audit firms and individual audits where the level of public interest is highest. Accordingly while the Big 4 firms are all inspected annually, following changes made in 2007, certain of the Other Larger Firms are now subject to an extended inspection cycle (every 18 – 24 months). The scope and frequency of inspections of the Smaller Firms is designed to meet the statutory requirements for independent inspection in a proportionate manner, taking account of the inspection work undertaken at these firms by the monitoring units of the professional bodies.

Coverage

The AIU’s inspection visits to audit firms commenced in 2004/05. In the period to 31 March 2005 we focused our work on the Big 4 audit firms and the audits of larger listed companies, those included in the FTSE 100 and 250 indices (collectively referred to as the FTSE 350), undertaken by them. In 2005/06 we carried out second inspections of the Big 4 firms, including coverage of audits outside the FTSE 350, and first year inspections of the Other Larger Firms.

We further extended our coverage of firms in 2006/7 to include a number of the Smaller Firms. This completes the implementation of the new arrangements for independent inspection recommended by the Government’s post-Enron review of the regulation of the UK accountancy profession.

Monitoring Approach

The AIU’s monitoring approach is intended to be challenging for the firms, focusing on audit judgments as well as audit processes. Consequently the AIU has developed and implemented an approach to audit monitoring for the major firms based on the following characteristics:

Focus on the quality of auditing;
Thorough, robust and challenging approach to inspection visits;
Wide-ranging reviews of firm-wide procedures, including an assessment of how the culture within firms impacts on audit quality;
Risk-based selection of individual audits for review;
In-depth reviews of individual audits, addressing identified areas of risk and including critical assessment of the key audit judgments made in reaching the audit opinion; and
An assessment of of the quality of communications with the Audit Committee.

Reporting

We prepare reports on each individual audit engagement we review which are copied to senior management within the firm’s audit practice. The key issues arising across our reviews of individual audit engagements, and those arising from our review of firm-wide procedures, are set out in our formal private report to the audit registration committee of the professional body with which the firm is registered (the ICAEW in the case of the Big 4 audit firms; the ICAEW or the ICAS for the Other Larger Firms).

We have issued public reports on the principal themes and issues arising from our inspections in each of the three years from 2004/5 to 2006/7. Our third public report, '2006/07 Audit Quality Inspections', was published in June 2007. A printed copy may be obtained, free of charge, by sending an e-mail to m.batchelor@frc-pob.org.uk.

The POB published details of new reporting arrangements for the AIU, to be implemented during the 2007/08 inspection cycle, in December 2007 ('Reporting on Audit Quality Monitoring - implementing a new approach: Results of Consultation and Policy Conclusions'). The new reporting arrangements, which reflect the outcome of extensive consultation with stakeholders, are designed to meet increased expectations regarding the transparency of inspection findings in a cost-effective manner.

Confidentiality

The Companies Act 2006 and the Audit Regulations and Guidance 2008, issued by the three Institutes of Chartered Accountants in the UK and Ireland (ICAEW, ICAS and ICAI), govern the disclosure of information obtained from audit firms by the AIU for monitoring purposes. Our operating procedures for maintaining the confidentiality of informaiton obtained from audit firms for the purposes of our inspections were updated in April 2008. ('Operating Procedures for Maintaining Confidentiality').

AIU Team

The AIU Team is headed by the Director, Andrew Jones. He is supported by a Technical and Quality Control Manager, the Inspection Team (comprising 16 members as at 1 January 2008) and a Team Secretary. General enquiries should be directed to m.batchelor@frc-pob.org.uk.