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Report of the Independent Supervisor on Auditors General Pursuant to Section 1229(5A) of the Companies Act 2006 (November 2026)
Financial Reporting Council Limited
Report of the Independent Supervisor on Auditors General
Presented to Parliament pursuant to paragraph 10(3) of schedule 13 of the Companies Act 2006.
Ordered by the House of Commons to be printed on 3 November 2026.
HC 680
OGL
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ISBN 978-1-5286-6822-4
E03690748 11/26
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Report of the Independent Supervisor on Auditors General
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.
2During 2025/26, the Financial Reporting Council's (FRC) 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 a review of the quality of selected aspects of 5 of the 65 statutory audits carried out by NAO staff in respect of financial periods ended 31 March 2025.
3Since the NAO audits the FRC safeguards are in place to ensure the independence of their respective roles as Independent Supervisor of Auditors General and Auditor of the FRC.
4The population from which the risk-based sample of audits was chosen varied in complexity, size and risk, with 29 of the 65 companies having revenues of between £10 million and £500 million and 8 having revenues in excess of £1 billion. For the sample of audits inspected revenue ranged from £0.9 million to £7.3 billion.
5Our AQR team select audits for inspection based on risk rather than 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.
6Audit quality at the NAO, as reflected in AQR inspection outcomes, has remained high, although there was one audit (2025: nil) which required improvement. Four (80%) of the five audits inspected this year were assessed as requiring no more than limited improvements. This compares to a figure of 79% overall at the major audit firms.
Audit quality key findings
7The table below summarises our AQR team's quality assessment of the inspections undertaken during 2025/26 covering the C&AG's statutory audits of the 2024/25 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 2025/26 | Number of inspections in 2024/25 | Number of inspections in 2023/24 |
|---|---|---|---|
| Good or requiring no more than limited improvements | 4 | 5 | 3 |
| Requiring improvements | 1 | - | 1 |
| Requiring significant improvements | - | - | 1 |
| Total audits reviewed | 5 | 5 | 5 |
8The 2025/26 audit inspection results (covering companies with March 2025 year ends) indicate audit quality has been maintained compared to the previous inspection cycle, with four of the five audits inspected rated as good or requiring no more than limited improvements. There was one audit, though, which did not meet this quality threshold, so there remains room for improvement. The NAO should continue to focus on delivery of its Quality First plan to help ensure a high level of quality is sustained.
9The audit which did not meet the quality threshold had findings in a number of areas: * insufficient testing of data inputs and insufficient evaluation of some significant assumptions in a financial model used to calculate expected credit losses on loans; * lack of challenge where management's accounting appeared to be inconsistent with accounting standards; and * not sufficiently following up one matter in a report prepared by an Auditor's expert.
The NAO has accepted these findings and has put in place remediating actions.
10The 2025/26 AQR inspection cycle has identified 4 examples of good practice.
11On a group audit the audit team undertook a thorough and detailed risk assessment, evaluating risks at both group and component levels to determine the appropriate audit scope. This responded to the complexities in the group itself and also the changes in auditing standards.
12On one audit the audit team performed a well-corroborated assessment of going concern, obtaining external evidence to validate the sponsoring department's funding support and the timing of an important Government initiative, including direct engagement with sponsor-department officials. It also proactively consulted the NAO's technical team, ensuring that its conclusions and annual report disclosures were robust and aligned with auditing standards. This combination of thorough evidence-gathering and timely technical consultation demonstrated strong professional scepticism and contributed to high-quality audit execution.
13On the audit of an investment entity the audit team obtained and retained on the audit file the working papers prepared and used by its external expert in support of the conclusions set out in the Auditor's expert memorandum. This enabled the audit team to evaluate and, where appropriate demonstrate its challenge of, the work performed by the Auditor's expert. On the same audit the audit team performed detailed procedures to corroborate the valuation of material underlying investments in funds, specifically for those funds without a service Auditor's report and where the fund's year end differed from that of the audited entity. This included an independent understanding of the underlying material investments, the nature of those businesses and the market within which they operated. This understanding was used to assess how changes to those businesses would, or would not, impact the fund valuation.
14On one audit the audit team independently reperformed the consolidation to address the significant risk it had identified over management's consolidation process.
15This 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 requiring only limited improvements and the other assessed as requiring improvements.
Progress made in the year
16It is clear from the FRC's regular meetings that the NAO has prioritised audit quality and the continued roll out of new tools to support this, which ensure audit teams have the necessary skills and equipment to deliver quality audits. We have seen positive actions where the NAO has taken steps to address the findings in our previous reports, including the roll out of new software for testing journals, enhancement to template workpapers and further development of and investment in the centres of expertise. As a result of this year's inspection findings, the NAO is reviewing its Expected Credit Loss audit methodology and will be introducing enhancements to address the issues identified.
System of Quality Management
17Our 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 NAO has made significant progress in addressing the matters we raised in our previous reports but acknowledges that there are further improvements to be made and has plans to achieve these.
18In its self-evaluation of the SoQM, the NAO concluded that the system of quality management provided the organisation with reasonable assurance that the objectives of the system of quality management were being achieved.
19Our inspection identified some weaknesses in aspects of the SoQM. These have been reported to the NAO, and an action plan agreed.
20Our findings in these areas related principally to aspects of: * The assessments of the design and implementation of responses to address risks; * Elements of the monitoring of responses and other sources of information and assessment of identified findings; * Monitoring the technology used on audit engagements and the broader operation of the SoQM; * Monitoring over firms performing contracted out audits to ensure complete reporting of matters that could impact the NAO's compliance with the Ethical Standard.
21The findings in the 2024/25 inspection cycle were varied, covering various aspects of the SoQM, including risks to quality objectives, design and implementation, monitoring and testing, and the use of technology in the SoQM. The NAO has addressed many of these findings, but as noted above, there remain some matters still to address.
22In previous reports we have noted that the proportion of audits where the NAO adopts controls (including IT controls) testing, placing reliance on the design, implementation and operating effectiveness of management's internal controls, was lower than that at major audit firms. The proportion of audits testing controls is now similar to that found at major audit firms, where approximately 10% of audits use this approach.
23The NAO's Internal Quality Monitoring (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 all inspections of 31 March 2025 audits were completed by 31 March 2026 allowing remedial actions in response to their findings to be implemented in audits for the 31 March 2026 year ends.
24We 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. 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.
25Following the allocation of a dedicated supervisor, the FRC has enhanced its engagement with the NAO to support its ongoing efforts to improve audit quality. Recent engagement has included discussions on technology and the NAO's culture and behavioural initiatives. We will continue to support the NAO, sharing insights and good practice, including in areas such as root cause analysis.
Financial Reporting Council 3 November 2026
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Footnotes
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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. ↩