Scope and Objectives
The FRC was designated the Competent Authority for audit regulation in the UK on 17 June 2016 by the Statutory Audit and Third Country Auditor Regulations 2016 (2016 Regulations). Our Audit Quality Review (AQR) team monitors the quality of the audit work of statutory auditors and audit firms in the UK that audit Public Interest Entities (PIEs) and certain other entities within the scope retained by the FRC (these are currently large AIM/ Lloyd’s Syndicates). Monitoring of all other statutory audits is delegated by the FRC to Recognised Supervisory Bodies under a series of Delegation Agreements
. The overall objective of our work is to monitor and promote continuous improvements in audit quality in the UK.
All UK audit firms that undertake PIE and large AIM/Lloyd’s Syndicate 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. Those entities included in AQR's inspection scope are as follows:
AQR Scope of Retained Inspection
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 (although we do not do this in our capacity as UK Competent Authority, but rather by private, contractual arrangements with the relevant regulatory authorities in the Crown Dependencies). Our Crown Dependency inspection work includes the audits of a number of major companies which are listed in the UK and are included in the FTSE 100 or FTSE 250 indices. Crown Dependency companies listed on AIM are, however, not included within these inspection arrangements.
Our monitoring activity comprises inspections of a sample of audits and related procedures supporting audit quality (firm-wide procedures) at individual audit firms. In addition, we periodically undertake thematic inspections which focus on particular aspects of audit across a sample of audits and firms.
In selecting individual audits to inspect, we take account of a number of factors including the assessed risk in relation to the entity and particular priority sectors we wish to focus on. In respect of the FTSE 350, the Competition and Markets Authority has recommended that we inspect audit engagements on average every five years, with each individual engagement inspected at least every seven years.
Our reviews of individual audits focus on the appropriateness of key audit judgments made in reaching the audit opinion and the sufficiency and appropriateness of the audit evidence obtained. Our reviews of firm-wide procedures are wide-ranging in nature and include an assessment of how the culture within firms impacts on audit quality.
Our inspections monitor compliance with ‘Relevant Requirements’ as defined in the 2016 Regulations. Relevant Requirements include, for example, the Auditing Standards, Ethical Standards and Quality Control Standards for auditors issued by the FRC and the Audit Regulations issued by the relevant professional bodies.
We identify areas where improvements are required to safeguard or enhance audit quality and/or comply with regulatory requirements. We seek to agree an action plan with each firm inspected to achieve the improvements needed. We assess periodically
the adequacy of the progress made by the firm in addressing our findings.
On occasion matters arising from our inspections may result in a sanction being imposed and enforced against a statutory auditor and/or the audit firm in accordance with the FRC Audit Enforcement Procedure. Such matters are the responsibility of the FRC’s Enforcement Division.
Our reporting arrangements are among the most transparent of any audit regulator in the world and we believe that they contribute to achieving continuous improvements in the quality of UK auditing.
Each year we publish a number of individual firm
inspections reports, which summarise the results of our inspection activities. We also contribute to the FRC’s overall report on audit quality
We also issue confidential reports on individual audits reviewed to the relevant audit firms and Audit Committee Chairs. These reports include our assessment of the quality of the audit work inspected using one of four audit quality categories as follows:
Details of audits subject to AQR inspections are published periodically
- Good (category 1)
- Limited improvements required (category 2A)
- Improvements required (category 2B)
- Significant improvements required (category 3).
Confidentiality, independence and conflicts of interest
All FRC staff are required to observe the FRC’s Guiding Principles on independence, confidentiality and conflicts of interest. These provide, inter alia, that staff must keep confidential all non-public information they acquire through their role at the FRC, unless the disclosure of that information has been properly authorised; and not derive, or seek to derive, any personal benefit, or enable any other person to do so, as a result of such non-public information obtained by them.
The FRC Guiding Principles are supported by further specific requirements for all members of the AQR team. All team members sign both initial declarations (on joining) and annual declarations confirming that they are aware of these detailed requirements and will comply with them at all times. They are also required to acknowledge in writing, on leaving employment, that the confidentiality undertakings given
previously continue to apply.
We will only disclose non-public information obtained from firms for monitoring purposes to a third party external to the FRC where we are satisfied that the disclosure is permitted under Section 1224A of the Companies Act 2006 and not in contravention of any other statutory provision or common law duty. We will not disclose non-public information for the purposes of third party litigation other than pursuant to a court order.
The AQR team is led by Mike Suffield, Director, Audit Quality Review.
General enquiries should be directed, in the first instance, to Amalia Nowak (firstname.lastname@example.org