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A Third Of Audits Inspected By FRC Are Flawed

Posted on June 1, 2015 at 10:30 AM

We are always told to encourage children by praising the positive - and working on the negative. So, it is, it seems, with the UK industry regulator and the big accountancy firms - except they are not infants. Those of us who have been through the child-rearing process know all about the 'progress prize.'

The Financial Reporting Council (FRC) says it is looking for "continuous improvement" when it comes to audit, which it is finding.  It says that the quality of UK audits is improving "but audit firms have more work to do to tackle recurring themes." It clearly has its work cut out.

Its own analysis finds that a third of all inspected audits either required improvements, or significant improvements - compared with 40% in 2013-14.

Here is the FRC Audit Quality Inspections Annual Report.   Have a look at the specific reports on its website_ try EY - In a hurry ? Try just page 8 ....

"On two of the four audits, the scoping section of the auditor’s report was liable to misinterpretation as the reported percentages related to the total amounts at the principal locations rather than the balances that were subject to audit procedures.

On two of the four audits, there was no evidence to support statements made in the auditor’s report relating to audit procedures performed. On one of these audits, the auditor’s report did not explain that materiality was based on an adjusted profit figure.

On one of the four audits, given the magnitude of an identified prior year error, the auditor’s report should have provided an understanding of the qualitative factors considered in determining whether the error required disclosure or correction" -FRC  (my emphasis)

These are common issues, not relegated solely to any one of the Big Four. And then we have the problem of third country auditors, or those outside the UK.

"During 2013 we selected Ernst & Young Qatar for inspection. Ernst & Young Qatar are the auditors to Commercial Bank of Qatar QSC. The Qatar Central Bank wrote to the firm denying us access to the audit working papers. Accordingly we are currently unable to carry out an inspection of this audit. We have drawn this matter to the attention of the Financial Conduct Authority."

It seems to me this should be a pretty big story..

But there is more to come. In 2015/16 the FRC is going to include a focus on the audits of businesses where complex supplier arrangements are prevalent: predominantly food, drinks and consumer goods manufacturers and retailers.

It says' "We will pay particular attention to the extent to which the audit team has challenged and checked the appropriateness of how these arrangements are accounted for."

Businesses  - and their auditors - stand warned.

Categories: Governance, Accountability, Measurement