Monday, February 11, 2019

Auditors Urged To Improve Work On Other Information

FRC report highlights shortcomings in audit work of the “front end” of company reports

The Financial Reporting Council (FRC), the UK regulator of audit firms with Public Interest Entity (PIE) audit clients, has published a new audit quality thematic review report highlighting deficiencies and inconsistencies in the quality of auditors’ work on so-called “other information” that is included in the front end of company reports outside of the financial statements.

The inadequacies arise for two main reasons:

  • The requirements of International Standards on Auditing (ISAs) in this area are somewhat non-prescriptive
  • The guidance for audit teams produced by audit firms themselves is often similarly vague

As a result, the FRC identified considerable variation in audit approach in this area, both between firms and between different audit teams within firms. Whilst this can inherently be a difficult area to audit, too many instances were identified where the quantity and quality of audit work was inadequate.

Other information has been an area of significant growth within company reports in recent years, typically now occupying more pages than the financial statements themselves. The FRC rightly highlights the consequences of material misstatements in other information, given the increasing value placed on it by investors.

The FRC is looking for auditors to place more emphasis on the work performed on other information to:

  • Ensure staff with sufficient experience are assigned to this part of the audit
  • Focus on key non-financial information
  • Undertake targeted audit procedures
  • Maintain a high level of professional scepticism, especially regarding the completeness of information such as risk disclosures.

Firms are encouraged to improve the quality and prescriptiveness of their guidance to auditors, and company boards are urged to prepare adequate supporting documentation to support the other information on a timely basis, to allow auditors sufficient time for a thorough review.

The FRC report can be viewed here.

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