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 statutory backing for these arrangements is set out in the Companies Act 2006.
Scope and Coverage
The audits of all UK incorporated companies 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 are within the scope of the AIU's work. 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 2011/12, was issued in March 2011 ('Scope of Independent Inspection 2011/12'). 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 outside the scope of independent inspection by the AIU).
In addition to the Big 4 Firms, there are currently five other firms undertaking a significant number of audits (more than ten) within our scope (“Other Major Firms”). Both the Big 4 Firms and the Other Major Firms are subject to full scope AIU inspections including a review of their firm-wide procedures.
For all other firms which have one or more audits falling within our scope (“Smaller Firms”), our work focuses on the review of one or more of these audits. The firm-wide procedures of 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 on an annual cycle, the Other Major Firms are now subject to an extended inspection cycle involving the phasing of work over a period of approximately two years. The scope and frequency of inspections of 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.
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 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, utilising a risk model covering listed and AIM listed entities;
- In-depth reviews of individual audits, addressing identified areas of risk and including critical assessment of key audit judgments made in reaching the audit opinion; and
- An assessment of the quality of communications with the Audit Committee.
Reporting
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 Major Firms). These reports are discussed with the firms at a senior level before they are finalised.
The POB published details of revised reporting arrangements for the AIU in December 2007 ('Reporting on Audit Quality Monitoring'). These reporting arrangements reflect the outcome of extensive consultation with stakeholders and are designed to meet expectations regarding the transparency of inspection findings in a cost-effective manner.
Our Annual Report for 2010/11, published in July 2011, provides an overview of our inspection and other activities in the year to 31 March 2011 and the principal findings arising from our work. Individual reports on our inspections of Major Firms and an overall report on our inspections of Smaller Firms have also been published: http://www.frc.org.uk/pob/audit/firmreports1011.cfm
We also issue confidential reports on individual audits reviewed by the AIU to the relevant audit firms. The firms are expected to provide copies of these reports to the directors of the audit clients concerned.
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 information 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 and a Team Secretary. General enquiries should be directed to m.batchelor@frc-pob.org.uk.
