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Report of the Independent Supervisor on Auditors General Pursuant to Section 1229(5A) of the Companies Act 2006 (November 2025)
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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 2024/25, our Audit Quality Review (AQR) team's inspection of the Comptroller and Auditor General's (C&AG's) Companies Act audit work included a review of a selection of the National Audit Office's (NAO's) policies and procedures supporting audit quality that applied to these audits. It also included a review of the quality of selected aspects of five of the 65 statutory audits carried out by NAO employees in respect of financial periods ended 31 March 2024.
1.3Since the NAO audits the Financial Reporting Council (FRC), safeguards are in place to ensure the independence of the FRC's and NAO's respective roles as Independent Supervisor of Auditors General and auditor of the FRC.
1.4The population from which the risk-based sample of audits was chosen varied in complexity, size and risk, with 27 of the 65 companies having revenues of between £10 million and £500 million and six having revenues in excess of £1 billion. Among the sample of audits inspected, revenue ranged from £186.8 million to £5.7 billion.
1.5Our AQR team does 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 the NAO's performance and are not necessarily indicative of any overall change in audit quality.
1.6Audit quality at the NAO, as reflected in AQR inspection outcomes, has improved significantly, and is now the highest it has been since we started to inspect NAO audits in the 2009/10 inspection cycle. All audits inspected were assessed as requiring no more than limited improvements. This compares to a figure of 86% overall at the Tier 1 audit firms.
Audit quality key findings
1.7The table below summarises our AQR team's quality assessment of the inspections undertaken during 2024/25. It covers the C&AG's statutory audits of the 2023/24 financial year and, for comparison, those relating to the five audits our AQR team reviewed in the previous two inspection cycles.
| Assessment1 | Number of inspections in 2024/25 | Number of inspections in 2023/24 | Number of inspections in 2022/23 |
|---|---|---|---|
| Good or requiring no more than limited improvements | 5 | 3 | 1 |
| Requiring improvements | – | 1 | 1 |
| Requiring significant improvements | – | 1 | 3 |
| Total audits reviewed | 5 | 5 | 5 |
1.8The 2024/25 audit inspection results (covering companies with March 2024 year-ends) indicate a significant improvement in audit quality over the previous inspection cycle, with all of the audits inspected rated as good or requiring no more than limited improvements. The NAO should continue to focus on delivery of its Quality First plan to help ensure this level of quality is sustained.
1.9The 2024/25 AQR inspection cycle has identified five examples of good practice. On one audit of a highly specialised entity, which the NAO was auditing for the first time, it identified the need for additional technical expertise, sourced appropriate training for the audit team and appointed an auditor's expert to assist with the audit. The effectiveness of this approach was evident in the audit file, which demonstrated the audit team's good understanding of the entity and its business environment.
1.10On another audit, which involved highly complex valuations and significant management judgements, there was robust challenge by the audit team, including a thorough consideration of the relevant accounting standards. In response to challenge from the Engagement Quality Reviewer, the audit team carefully evaluated the information received from both its own expert and management's expert in line with relevant auditing standards. This led to reporting to the Audit Committee that was comprehensive and transparent. On the same audit, in addition to the standard NAO audit procedures, the audit team performed further bespoke analysis of the journal population, identifying a subset of entries with high-risk characteristics that were specifically tested.
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 two companies in the financial services sector or with financial services-related balances. One of these audits was assessed as good and the other assessed as requiring only limited improvements.
Progress made in the year
1.12It is clear from the FRC's regular meetings that the NAO has prioritised audit quality and the continued roll-out of its new tools to deliver high-quality audits. We have seen positive actions where the NAO has taken steps to address the findings in our previous reports, including ensuring that the team responsible for a new complex audit received appropriate training, the roll-out of new audit software, enhancements to the hot and cold review programmes, and further development of the centres of expertise. The audits inspected this year were also the first undertaken using the NAO's new audit software, Apex. We have observed, however, 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 2023/24 inspection cycle were varied, covering insufficient audit challenge of key assumptions and management judgements, incomplete risk assessments, inappropriate scoping of group audits, insufficient testing of data used in complex valuations, and insufficient journal testing to address the risk of management override. There have been no similar findings this year.
System of Quality Management key findings
1.14Our firm-wide work focused on the NAO's application of the International Standard on Quality Management (UK) 1 (ISQM 1) and the NAO's System of Quality Management (SoQM). The standard is complex and requires a significantly different approach to the management of risks to audit quality compared to the previous quality standard (ISQC1), which applied until December 2022. The findings below should be understood in the context of the application of a relatively new standard.
1.15In its self-evaluation of the SoQM, 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 SoQM, the SoQM provided the organisation with reasonable assurance that the objectives of the SoQM were being achieved.
1.16Our inspection identified a number of 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 findings in these areas related principally to aspects of:
- Component risk registers, since there was inconsistency in the granularity with which risks were identified, some expected risks were omitted, and risks were not updated to reflect the results of monitoring activities;
- Design and implementation of responses to address risks, since the assessments of these were not sufficiently granular and did not adequately set out how the responses mitigated all related risks;
- Monitoring, since the control testing approach adopted did not cover a sufficient
- number of controls and risk responses, root cause analysis for deficiencies identified in this testing was not undertaken, and there was no assessment of the effectiveness of remediating actions; and
- Technology, since not all relevant IT applications were identified and evaluated.
1.18The findings in the 2023/24 inspection cycle were varied, covering different aspects of the SoQM, including design and implementation, monitoring and testing, evaluation, required communications, and not incorporating existing monitoring processes into the SoQM. The NAO has addressed many of these findings, but as noted above, there remains work to do on monitoring and testing and in ensuring that existing processes and controls are appropriately incorporated, tested and evaluated in accordance with ISQM1.
1.19Currently, the NAO adopts only limited controls testing where they rely upon the design, implementation and operating effectiveness of management internal controls. In 2024/25, only 19 audits (6.2% of all audits that are not contracted out to external firms) tested the operating effectiveness of internal controls, including four large Government departments where controls were relied on for the first time. Controls testing is typically applied to the largest and most complex audits in the NAO's portfolio. We note that the proportion of controls-based audits is lower than found at major audit firms, which is approximately 10%. We encourage the NAO to continue to seek opportunities with its audited bodies to increase the number of audits that test controls, particularly on the largest entities subject to audit, providing some assurance and reliance on the internal controls environment.
1.20We 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 an improvement in the timeliness with which the IQM inspections were completed, as all inspections of 31 March 2024 audits were completed by 31 March 2025.
1.21For the first time this year, and following our request to the NAO, we have engaged with audit committee chairs for each of the entities whose audits we have inspected. Discussions with audit committee chairs help us to have a better understanding of the interaction between the audit committee and auditors, and help us to plan the scope of our work. We have also provided a copy of our individual inspection reports to them. This has aligned our inspection approach with the one we use at the major audit firms. The audit committee chairs were complimentary about the quality of the audits undertaken by the NAO. The NAO has also continued its programme of discussions and conferences with the audit committee chairs of the bodies it audits to promote audit quality.
1.22We have also provided 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
5 November 2025
Financial Reporting Council
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ISBN 978-1-5286-5999-4 E03455948
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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. ↩