FRC lists priority areas for inspection focus

The Financial Reporting Council (FRC) has put the impact of Covid-19, fraud, estimates and climate risk top of its list of critical issues it will be considering during next year’s round of audit quality reviews

In selecting corporate reports and audits for review for its programme for 2021/22, the FRC says it will give priority to five specific sectors: travel, hospitality and leisure, retail, property and financial services.  

However, the regulator points out that many sectors are currently under significant pressure given the impact of the pandemic and, consistent with prior years, corporate reports and audits selected for review will not be limited to entities in these particular sectors. 

The FRC’s corporate reporting review team will supplement its routine reviews of corporate reporting with five thematic reviews which are intended to identify scope for improvement, as well as examples of better practices, in areas of key stakeholder interest. 
These are:

  • Going Concern and Viability: the FRC says management’s assessments and disclosures in relation to going concern and viability are of particular importance given the severe pressures that many companies are currently operating under. 
  • IAS 37 – Provisions, Contingent Liabilities and Contingent Assets: issues relating to compliance with this standard have featured in the FRC’s ‘top ten’ findings for several years.
  • Climate Risk follow-up – streamlined energy and carbon reporting: the FRC will review reporting under these new requirements which apply to accounting periods beginning on or after 1 April 2019. This follows on from the FRC's recently published review of climate reporting. 
  • Alternative Performance Measures (APMs): this will be a follow-up to the FRC’s 2017 thematic review to assess the extent to which its expectations on use of APMs have been embedded into reporting practices.
  • Interim Reporting: the FRC says interim reports play an important role as a progress report on companies’ performance and financial position, which is especially necessary in the current environment given the economic uncertainties resulting from Covid-19. The FRC will review compliance with the requirements of the disclosure and transparency rules and IAS 34 to identify areas of better practices.

Audit quality inspections will look particularly at the impact of Covid-19 on going concern, impairment of assets, inventory and group audits. they will also assess auditors’ work on estimates, particularly the application of ISA 540 revised and IAS 37, and how well they identify and assess fraud risks. There will be a focus on how auditors are improving their consideration of climate-related risks when planning and executing their audits.

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