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].
Report of the Independent Supervisor on Auditors General Pursuant to Section 1229(5A) of the Companies Act 2006 (November 2024)
Financial Reporting Council
This Report of the Independent Supervisor was prepared pursuant to section 1229(5A) of the Companies Act 2006. It is presented to Parliament pursuant to paragraph 10(3) of Schedule 13 of the Companies Act 2006.
The Report of the Independent Supervisor is also presented, pursuant to section 1231 (2), to: - The Secretary of State; - The First Minister in Scotland; - The First Minister and Deputy First Minister in Northern Ireland; and - The First Minister for Wales and laid before the National Assembly for Wales pursuant to section 1231(3A) of the Companies Act 2006.
Ordered by the House of Commons to be printed on 12 November 2024
HC 272
OGL
Financial Reporting Council Limited 2024
This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open-government-licence/version/3.
Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned.
This publication is available at www.gov.uk/official-documents.
Any enquiries related to this publication should be sent to us at: The Financial Reporting Council Limited 8th Floor 125 London Wall London EC2Y 5AS
This document is also available on the FRC website at www.frc.org.uk
Registered number: 02486368
ISBN 978-1-5286-5203-2
E03213047 11/24
Printed on paper containing 40% recycled fibre content minimum
Printed in the UK by HH Associates Ltd. on behalf of the Controller of His Majesty's Stationery Office
Report of the Independent Supervisor on Auditors General
1.1Pursuant to section 1229(5A) of the Companies Act 2006, the Independent Supervisor must, at least once in every calendar year, deliver to the Secretary of State a summary of the results of any inspections conducted for the purposes of monitoring the performance of statutory audits carried out by an Auditor General.
1.2During 2023/24, our Audit Quality Review (AQR) team's inspection of the Comptroller and Auditor General's (C&AG) Companies Act audit work comprised a review of a selection of the National Audit Office's (NAO) policies and procedures supporting audit quality that applied to these audits and reviewed the quality of selected aspects of five of the 60 statutory audits carried out by NAO staff in respect of financial periods ended 31 March 2023.
1.3The population from which the risk-based sample of audits was chosen varied in complexity, size and risk, with 24 of the 60 companies having revenues of between £10 million and £500 million and 7 having revenues in excess of £1 billion. For the sample of audits inspected revenue/net income ranged from £2.0 million to £10.0 billion. One company did not have any income and reported a net loss before tax of £3.8 million.
1.4Our AQR team do not select audits for inspection on a statistical basis, so changes from one year to the next cannot, on their own, be relied upon to provide a complete picture of NAO's performance and are not necessarily indicative of any overall change in audit quality.
1.5Audit quality at the NAO, as reflected in AQR inspection outcomes, has improved, and has returned to similar levels to those achieved in the 2021/22 inspection cycle. Sixty percent of audits inspected were assessed as requiring no more than limited improvements. This compares to a figure of 74% at the Tier 1 audit firms.
Audit quality key findings
1.6The table below summarises our AQR team's quality assessment of the inspections undertaken during 2023/24 covering the C&AG's statutory audits of the 2022/23 financial year and, for comparison, those relating to the five audits our AQR team reviewed in the previous two inspection cycles.
| Assessment¹ | Nos of inspections in 2023/24 | Nos of inspections in 2022/23 | Nos of inspections in 2021/22 |
|---|---|---|---|
| Good or requiring no more than limited improvements | 3 | 1 | 3 |
| Requiring improvements | 1 | 1 | 2 |
| Requiring significant improvements | 1 | 3 | - |
| Total audits reviewed | 5 | 5 | 5 |
1.7The 2023/24 audit inspection results (covering companies with March 2023 year ends) indicate an improvement in audit quality over the previous inspection cycle, with 60% of the audits inspected rated as good or requiring no more than limited improvements. This is the same as the results achieved in 2021/22. Nevertheless, there were two audits which did not meet this quality threshold, one of which had the lowest grade, so there remains room for improvement.
1.8Both of the poorer 2023/24 inspections were due to the audit team not sufficiently challenging management. On the audit assessed as significant improvements required the audit team did not sufficiently challenge or evaluate the assumptions used when recognising a deferred tax liability. On the audit assessed as improvements required, the audit team did not obtain and evaluate an appropriate management assessment of impairment risk and did not undertake an independent assessment of impairment risk. On the same audit, the audit team did not obtain sufficient appropriate evidence to support the amortisation charge and associated useful economic lives of assets which were at risk of impairment.
1.9The 2023/24 AQR inspection cycle has identified some examples of good practice. On one audit the team carried out media searches, identifying an impaired 'harder to value' asset which management had not identified. Experienced audit team members focused their attention on 'harder to value' assets, while staff from the NAO's 'centre of excellence' assisted with the audit of lower risk investments. On this same audit the team prepared a detailed evaluation of judgments made previously on the valuation methodology, their consistency with applicable accounting standards, and the continued appropriateness of these evaluations.
1.10On another audit in addition to using an auditor's expert, the audit team formed its own independent view using data captured from other NAO pension scheme audits to benchmark the assumptions used to value defined benefit pension obligations.
1.11In previous inspection cycles our AQR team identified unacceptable poorer audit quality in audits of financial services companies and audits of financial services-related balances on other entities. This year, our AQR team inspected three companies in the financial services sector or with financial services-related balances. Whilst one of these audits was assessed as requiring significant improvements due to the lack of audit challenge and evaluation of assumptions used when recognising a deferred tax liability, the other two audits were assessed as requiring only limited improvements.
Progress made in the year
1.12It is clear from the FRC's regular meetings with the C&AG that he takes a close personal interest in matters relating to audit quality and in ensuring audit teams have the necessary skills and tools to deliver quality audits. We have seen positive actions where the NAO has taken steps to address the key findings in our 2022/23 inspection report, including ongoing training initiatives, continued investment in centres of expertise, new audit programmes and checklists to assist with the audit of harder to value assets, and root cause analyses to assess the reasons for all lower AQR inspection grades. We were pleased to see that the findings which, in the prior year, had led to the audit of one financial services company being assessed as significant improvements required, had been fully addressed in the audit of a similar company inspected this year. During the year, the C&AG also reallocated internal NAO management responsibilities, which contributed to a more effective and timely completion of this year's inspections. We have observed, though, that completion of root cause analyses is less timely than at Tier 1 audit firms, and have recommended that the NAO assess how this process might be accelerated.
1.13The findings in the 2022/23 inspection cycle were varied, covering the audit of revenue, cash flow statements, accuracy of audit reports, application of aspects of the FRC Ethical Standard, and insufficient audit challenge of key assumptions. Except for the finding on not challenging management's assumptions when calculating a deferred tax liability, there have been no similar findings this year.
System of Quality Management - key findings
1.14This year, our firm-wide work focused on the NAO's implementation of the new International Standard on Quality Management (UK) 1 (ISQM 1) and the NAO's system of quality management (SoQM). The new standard is complex, and requires a significantly different approach to the management of risks to audit quality. The findings below should be understood in the context of a first year adoption of a new standard.
1.15In its self-evaluation of the SoQM, (which was concluded after the required time stipulated by the Standard) the NAO concluded that except for matters related to identified deficiencies that have a severe but not pervasive effect on the design, implementation and operation of the system of quality management, the system of quality management provided the organisation with reasonable assurance that the objectives of the system of quality management were being achieved.
1.16Our inspection identified several deficiencies in different aspects of the SoQM. These have been reported to the NAO, and an action plan agreed to address the deficiencies.
1.17Our key findings in these areas related principally to aspects of: - Design and implementation, since there was no evidence that the quality system had been fully implemented by 15 December 2022, as required by ISQM1, and incomplete mapping of identified risks to responses to mitigate those risks; - Monitoring and Remediation, since no monitoring of the ISQM1 system was planned or undertaken to assess the design, implementation and operating effectiveness of responses to mitigate risks to audit quality or to assess whether such risks were sufficiently mitigated; - Evaluation, since this was not completed and approved by 15 December 2023, as required by ISQM1 and because it was not clear how all identified deficiencies were due to be remediated on a timely basis and how their aggregate impact was not considered severe or pervasive; - Required communications about the conclusions reached in the evaluation, since these were not issued on a timely basis. - Contracted out audits, since the NAO's existing monitoring processes for contracted out audits were not clearly linked to ISQM1 requirements.
Progress made in year
1.18We have previously raised concerns over delays in the NAO's Internal Quality Monitoring (IQM) process. The IQM process consists of a sample of completed audit files being selected each year by the NAO for a retrospective internal audit quality inspection. This year there has been a noticeable improvement in the timeliness with which the IQM inspections were completed, as 21 of 23 inspections of 31 March 2023 audits were completed by 31 May 2024, with the final review concluded on 12 August 2024. In the previous year this process was completed in September 2023. We recommend an action for the NAO to assess the level of resources allocated to the IQM process so that all IQM inspections can be completed before the following year end date, and remedial actions in response to their findings implemented in those next year's audits.
1.19We are providing additional support to the NAO from this year with the allocation of a supervisor to work alongside the NAO to assess the effectiveness of the NAO's audit quality initiatives, including reviewing the formulation and progress on action plans, root cause analysis and quality improvement plans.
Financial Reporting Council
12 November 2024
Financial Reporting Council Contact
E03213047 ISBN 978-1-5286-5203-2
Financial Reporting Council 8th Floor 125 London Wall London, EC2Y 5AS
+44 (0)20 7492 2300 www.frc.org.uk
Follow us on Linked in or X @FRCNews
-
Audit inspections are graded as Good; Requiring limited improvements; Requiring improvements or Requiring significant improvements. The first row of the table combines Good and Requiring limited improvements. ↩