The content on this page has been converted from PDF to HTML format using an artificial intelligence (AI) tool as part of our ongoing efforts to improve accessibility and usability of our publications. Note:
- No human verification has been conducted of the converted content.
- While we strive for accuracy errors or omissions may exist.
- This content is provided for informational purposes only and should not be relied upon as a definitive or authoritative source.
- For the official and verified version of the publication, refer to the original PDF document.
If you identify any inaccuracies or have concerns about the content, please contact us at [email protected].
GT - FRC Audit Quality Inspection and Supervision report - 23 July 2021
The FRC does not accept any liability to any party for any loss, damage or costs however arising, whether directly or indirectly, whether in contract, tort or otherwise from action or decision taken (or not taken) as a result of any person relying on or otherwise using this document or arising from any omission from it.
The Financial Reporting Council Limited 2021 The Financial Reporting Council Limited is a company limited by guarantee. Registered in England number 2486368. Registered Office: 8th Floor, 125 London Wall, London EC2Y 5AS
This report sets out the FRC's findings on key matters relevant to audit quality at Grant Thornton UK LLP (GT or the firm). It is based on inspection and supervision work undertaken in our 2020/21 cycle, primarily our review of a sample of individual audits and our assessment of elements of the firm's systems of quality control.
The FRC's focus is on the audit of public interest entities (PIEs[^1]). Our selection of individual audits and the areas within those audits for inspection continues to be risk-based focusing, for example, on entities which: are in a high-risk sector; are experiencing financial difficulties; have material account balances with high estimation uncertainty; or, where the auditor has identified governance or internal control weaknesses. The majority of individual audits that we inspect are of PIEs but we also inspect a small number of non-PIE audits on a risk-based basis.
Higher-risk audits are inherently more challenging as they will require audit teams to assess and conclude on complex and often judgemental issues, for example in relation to future cash flows underpinning assessments of impairment and going concern. Rigorous challenge of management and the application of professional scepticism are especially important in such audits.
Our increasing focus on higher risk audits means that our inspection findings may not be representative of audit quality across a firm's entire portfolio of audits or on a year-by-year basis. Our inspection findings cannot therefore be taken as a balanced scorecard of the overall quality of the firm's audit work. However, our forward looking supervision work now provides us with a holistic picture of the firm's approach to audit quality and the future development of its audit quality improvement initiatives.
As well as risk-based selections, we aim to review all FTSE 350 audits periodically.
To provide a more holistic assessment of audit quality, the report also includes reference to other measures of quality at the firm. The Quality Assurance Department (QAD) of the Institute of Chartered Accountants in England and Wales (ICAEW) inspects a sample of the firm's non-PIE audits, the results of which are summarised on page 8.
The firm also conducts internal quality reviews. A summary of the firm's internal quality review results is included at Appendix 1, together with the actions that the firm is taking in response.
At Appendix 2 are further details of our objectives and approach to audit supervision.
1. Overview
Commentary on our inspection work at the largest audit firms
We completed more audit inspections at the largest seven firms in 2020/21 (103) than in 2019/20 (88). Our overall inspection findings are similar to last year, with 71% of audits (73 out of 103 inspections) requiring no more than limited improvements compared to 67% last year (59 out of 88 inspections).
The number of audits that we have assessed as requiring improvements remains unacceptably high. This year the results varied more between firms and we found inconsistencies, with good practice in some audits but deficiencies in the same areas in other audits at the same firm.
The most common key findings in our public reports are in relation to revenue, impairment of assets and group audit oversight. These are recurring issues but we also identified good practice in these areas in some audits.
We also identified good practice during our 2020/21 thematic review of the audit of going concern, where we found that firms had responded positively to the increased risk arising from Covid-19, by enhancing their procedures in this area[^2].
Four of the largest firms (Deloitte, EY, Grant Thornton and PwC) had a year-on-year improvement in their overall inspection results, with around 80% or more of audits requiring no more than limited improvements. While this is encouraging, these improved results still fall short of our expectations.
Overall inspection results at KPMG did not improve and it is unacceptable that, for the third year running, we found that improvements were required to KPMG's audits of banks and similar entities. In addition, our firm-wide work on KPMG's IFRS 9 procedures and guidance identified that further improvements are required to provide a stronger basis for KPMG's banking audit teams to deliver high quality audits in this area. KPMG has already invested significantly in its banking audit practice and considers that, based on steps it has already taken, it will be able to demonstrate improvements in 2020 year-end audits. In response to our findings this year, the firm's senior leadership has committed to make the further changes necessary to improve audit quality in time for 2021 year-end audits. We will monitor these closely to assess on a timely basis the extent to which they address our findings.
This year, we increased the sample of audits we selected for review at BDO and Mazars, given their growth, with a focus on complex audits. Five of the nine audits that we reviewed at BDO and three of the seven audits that we reviewed at Mazars needed more than limited improvements. These firms have grown the size of their PIE audit practices and have plans to grow further, which will increase competition and choice in the market. Our engagement indicates that these firms are genuinely committed to improving audit quality but they must put in place the necessary building blocks for the consistent execution of high quality audits as they grow.
71%
Overall, the number of inspections requiring no more than limited improvements fell short of our expectations.
This year, results varied more between firms and we found inconsistencies, with good practice in some audits but deficiencies in the same areas in other audits at the same firm.
Central to achieving consistent audit quality is a healthy culture within the audit practice that encourages challenge and professional scepticism, as we set out in our letter to Heads of Audit in December 2020. We have a major project underway to examine audit culture, including an international conference held in June this year on the subject. Operational separation of audit practices from the rest of the firm should help the largest firms to focus on developing an appropriate audit culture.
Our supervision teams are increasing the range of pro-active and forward-looking work.
Our supervision teams[^3] are increasing the range of pro-active and forward-looking work they are carrying out with the largest seven firms in areas such as audit quality plans, root cause analysis, quality control procedures and audit quality indicators with a focus on how firms are responding to recurring findings. We report privately to firms on our findings in these areas, in order to share good practice. In 2021/22 we will continue to focus our inspections on KPMG banking audits and we will increase audit inspections at BDO and Mazars. Our 2021/22 inspections will also focus on and take into account the impact of Covid-19 on audits.
All reviews
Bar chart showing 'All reviews' performance across years
This chart displays the percentage of audits falling into categories: 'Good or limited improvements required', 'Improvements required', and 'Significant improvements required' for the years 2016/17 to 2020/21.
| Year | Good or limited improvements required | Improvements required | Significant improvements required |
|---|---|---|---|
| 2020/21 | 73% | 27% | 0% |
| 2019/20 | 59% | 22% | 7% |
| 2018/19 | 91% | 21% | 7% |
| 2017/18 | 84% | 26% | 4% |
| 2016/17 | 82% | 16% | 8% |
FTSE 350
Bar chart showing 'FTSE 350' performance across years
This chart displays the percentage of FTSE 350 audits falling into categories: 'Good or limited improvements required', 'Improvements required', and 'Significant improvements required' for the years 2016/17 to 2020/21. The "Good or limited improvements required" category includes two sub-categories of reported percentages.
| Year | Good or limited improvements required (Sub-category 1) | Good or limited improvements required (Sub-category 2) | Improvements required | Significant improvements required |
|---|---|---|---|---|
| 2020/21 | 36% | 33% | 11% | 0% |
| 2019/20 | 32% | 36% | 11% | 2% |
| 2018/19 | 48% | 24% | 12% | 5% |
| 2017/18 | 49% | 15% | 15% | 3% |
| 2016/17 | 56% | 23% | 19% | 3% |
In 2021/22 we will continue to focus our inspections on KPMG banking audits and we will increase audit inspections at BDO and Mazars.
Grant Thornton overall assessment
We reviewed seven individual audits this year and assessed six (86%) of them as requiring no more than limited improvements.
The number of audits reviewed was reduced from previous years to reflect the fall in the number of audits within the scope of the FRC. There has been a significant improvement in the number of audits requiring no more than limited improvements compared to the number of such audits identified in both our 2019/20 and 2018/19 public reports. While it is too soon to identify this improvement as a trend, it is nonetheless an encouraging signal. The finding that contributed most to this year's inspection results on individual audits related to the challenge and corroboration of key judgements and estimates.
Grant Thornton initiated its three-year audit quality plan, the Audit Investment Plan (AIP or the plan) in Spring 2019 to improve audit quality. The AIP