In May 2015 The Financial Reporting Council published its 11th annual report on its inspection of audit quality in the UK. The FRC inspected 105 private sector audits and some of their findings should provide food for thought for Irish auditing firms in the context of a statutory legal audit.

Common issues identified

The FRC found that issues common to previous inspections continue to be identified such as:

1. Insufficient scepticism on behalf of auditors in challenging the appropriateness of key assumptions made by audited entities surrounding the areas for example of property valuations and impairment testing.
2. Insufficient or inappropriate audit procedures being performed to many audit areas especially common in areas such as Revenue Recognition.
3. The failure to appropriately identify the threats and subsequent safeguards required to uphold auditor independence and inadequately communicating these to the audit committees.

The top 3 areas of concern

Of the 105 inspected audits in the UK, an analysis of the findings revealed that the top 3 areas of concern that resulted in the greatest number of findings were:

1. Audit of fair value and value in use measurement of findings = 55
2. Audit of allowance for loan losses and loan impairments of findings = 35
3. Reporting to audit committees of findings = 26

1. Audit of fair value and value in use measurement

This category of finding according to the FRC is largely surrounding issues relating to the audit of impairment testing and investment property valuations. The FRC feel that insufficient scepticism in challenging the appropriateness of key assumptions continues to be of concern. The FRC go on to state that ensuring the correctly qualified and experienced staff are used in assessing this audit area is critical in addressing this concern.

2. Audit of allowances for loan losses and loan impairments

The findings in relation to this area were largely driven by prompted concerns in prior years in relation to the audit of audit clients in the banking industry. Loan loss provisions were audited to a better standard according to the FRC where audit firms had access to up-to-date specialist knowledge in IT and other similar areas.

3. Reporting to audit committees

The FRC noted that their findings in relation to this matter generally related to inadequate communication of the planned audit approach. The FRC also went on to comment that the communication of threats and safeguards in relation to the provision of non-audit services also continues to be of concern. The above summary can be viewed in its entirety on the FRC website.

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