On 13 June 2012, the FRC’s Audit Inspection Unit published its Annual Report on Audit Quality Inspections for 2011/2012, as approved by the Professional Oversight Board.
The report notes that there has been an improvement in overall inspection results, with only 10% of the audits reviewed now requiring significant improvements. The number of audits assessed as good with limited improvements required remained consistent with previous years, at around 50%.
The report states that firms need to ensure that audit quality is not compromised in light of a greater emphasis on audit efficiency. Central safeguards should be established to ensure that total audit hours, the determination of materiality and the extent of work performed are maintained at a level to protect audit quality. It was noted that this is particularly important where significant fee reductions have been agreed.
There are concerns that audit teams do not always fully understand the accounting and reporting requirements in relation to the impairment of goodwill and other intangible assets, which were still not being vetted sufficiently. In addition, the FRC remains critical of the extent to which auditors exercise professional scepticism in relation to key judgements and, separately, recommend firms reconsider the adequacy of their procedures to ensure auditor independence.