The Financial Reporting Council (FRC) is urging auditors to redouble their efforts to remedy inconsistent audit quality, saying this has become even more important in the face of the unprecedented economic turbulence brought by Covid-19
In its annual Developments in Audit report, the regulator reported audit quality remained too inconsistent in the most recent round of inspections, with 49 out of 130 audits inspected needing either improvement or significant improvement.
The FRC said this inconsistent audit quality was found in audits that were completed before the impact of the Covid-19 pandemic.
Insufficient challenge of the management of audited entities was the most common audit failing identified across all inspections. While supporting evidence for forward-looking judgements can be difficult to obtain, on too many occasions the inspections found auditors only corroborated management’s assumptions, rather than challenging them.
An example is goodwill impairment, where auditors need to assess future assumptions, like expected revenue growth and cost savings, with the FRC pointing out that heightened economic uncertainty resulting from Covid-19 will make effective challenge of management even more important, but harder to achieve.
Its report notes that while audit firms are investing significantly in programmes to improve audit quality, it has not yet consistently seen the difference such investment is making.
The health and resilience of the audit market was also a key focus area in the report. The concentration of the FTSE 350 audit market, where the Big Four firms continue to audit 96% companies, limited choice available for these companies to obtain a high-quality audit, and the market’s vulnerability to the failure of one of the Big Four firms remain risks to market resilience, the FRC found.
David Rule, FRC executive director of supervision, said: ‘Despite there being examples of good auditing, auditors are still not delivering to a consistently high standard.
‘Covid-19 has emphasised the importance of high-quality financial reporting, alongside challenging and rigorous auditing.
‘During the pandemic auditing has become more challenging and audit firms need to redouble their efforts to deliver the required consistency in audit quality.’
To increase transparency further, the FRC reiterated its plans to publish individual audit inspection findings starting from the completion of the current 2020/21 review cycle next July (with the consent of the audit firm and audited entity).