FRC advice for audit committees in evaluating audit quality

The Financial Reporting Council (FRC) has issued guidance notes to assist audit committees in evaluating audit quality in their assessment of the effectiveness of the external audit process

The FRC is responding to requests for guidance in this area, in light of the UK Corporate Governance Code provision, introduced in 2012, that the audit committee report should include an explanation as to how it has assessed the effectiveness of the external audit process.  

The 25-page document focusses on assessing audit quality and has been developed  based on feedback from audit committee members, investors, financial management and auditors.

As well as setting a framework for the committee’s evaluation, the aid  sets out practical suggestions on how audit committees might tailor their evaluation in the context of the company’s business model and strategy; the business risks it faces; and the perception of the reasonable expectations of the company’s investors and other stakeholders.

The framework set out in the practice aid focuses on understanding and challenging how the auditor demonstrates the effectiveness of key professional judgments made throughout the audit and how these might be supported by evidence of the following critical auditor competencies:

  • A mindset and culture that exhibits integrity and objectivity and is aligned with the expectations and interests of users of their reports;
  • The skills and knowledge to develop a thorough understanding  of the company’s business and industry, the environment in which it operates and of the applicable legal and regulatory framework, and the strength of character to provide effective challenge in performing the audit; and
  • The ability to establish effective quality control by putting in place the processes necessary to deliver a consistently high quality audit.

Audit committees are encouraged to see their evaluation as integrated with other aspects of their role related to ensuring the quality of the financial statements – obtaining evidence of the quality of the auditor’s judgments made throughout the audit, in identifying audit risks, determining materiality and planning their work accordingly, as well as in assessing issues.

Melanie McLaren, executive director, codes & standards at the FRC, said: ‘The FRC encourages audit committees to develop their own approach to their evaluation of audit quality, tailored to the circumstances of their company.

‘Audit committees need evidence that the auditor has the competence to and has:

  • made appropriate judgments about materiality;
  • identified and focused on the areas of greatest risk;
  • designed and carried out an effective investigation;
  • understood  and interpreted the evidence they obtain;
  • made reliable evaluations of that evidence; and
  • reported with clarity and candour.

‘The practice aid gives practical suggestions, based on what audit committees have told us they do, on how to obtain such evidence. We hope the Practice Aid will also enable audit committees to provide colour and insight and to avoid ‘boilerplate’ in reporting on their evaluation.’

The Practice aid for audit committees is available here

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