Audits of large listed companies are improving but there’s room for improvement, particularly for audit of companies outside the FTSE 350, the Financial Reporting Council says. It’ll focus on audits of supply chains in the next year.
Audits of large UK companies improved in the last year but there’s room for improvement in preventing recurring problems at companies and protecting auditor independence, the financial reporting watchdog said in its annual review of audit.
Around 67% of 109 private sector audits inspected in 2015/2015 were judged either good or only requiring limited improvements. That compares to 60% a year earlier.
The quality of audits of companies in the FTSE 350 share index is higher than other categories of audits inspected with only 6% assessed as requiring significant improvements (10% for all audits inspected), the FRC said.
Despite the improvement in audit quality the FRC said it was concerned that 33% of all audits inspected in 2014/15 (40% in 2013/14) required improvements or significant improvements.
Companies outside the FTSE 350 are most likely to show a need for significant improvement in their audits, the FRC said.
“The FRC recognises that smaller companies have less resource to put into the preparation of their financial statements and this can make the audit more difficult. However, investors consistently say they rely particularly heavily on the quality of reporting in smaller listed companies given the absence of other analysis.”
The FRC said it will publish a report on this subject shortly.
After the accounting scandal at Tesco, which involved payments to suppliers, the FRC said that in the next year it will include a focus on the audits of businesses where “complex supplier arrangements are prevalent”; mainly food, drinks and consumer goods manufacturers and retailers.
“We will pay particular attention to the extent to which the audit team has challenged and checked the appropriateness of how these arrangements are accounted for,” it said.
The FRC also plans to inspect a number of first year audits to assess the extent to which changes in auditors have an impact on audit quality.
FRC executive director, conduct, Paul George said: “We were pleased that firms responded positively to the new extended auditor reporting requirements. We hope to see further improvements in the clarity of reporting by auditors of how they have addressed the assessed risks.
"We also expect auditors to discuss findings from our inspections to audit committees and will monitor closely how companies report our findings to their shareholders.”