What makes a good audit?

November 19, 2021

The corporate audit regime in the UK has long been criticised by some in the industry for lax standards and poor oversight.

In an effort to address these concerns as part of its ongoing overhaul, the Financial Reporting Council (FRC) recently published a guide, 'What Makes a Good Audit?', designed to set out its ideas of best practice in the industry.

In short, culture, governance and leadership of firms, investment in well-qualified people, training and processes, are the key attributes that contribute to the running of high-quality audit practices, the watchdog says.

The best audits have a diverse team, making the best use of new members alongside those with more experience. Leadership should encourage a culture of internal challenge at the planning stage and throughout the audit.

The report also highlights the importance of planning and risk assessment procedures, taking account of the risk of management bias.

Planning must be completed well in advance of the financial year end, providing sufficient time for auditors to consider the risk assessment and design the appropriate procedures to address risks. This will also allow time for reporting plans to those with governance responsibilities.

Meanwhile, the execution of an audit plan should be individually tailored to the facts and circumstances of the company in question. There is a range of standards that need to be followed for every audit, or when approaches or tests are undertaken, the report states.

The FRC also suggests that good audits demonstrate how the audit team applies its judgement to assess the evidence they have obtained, emphasising the need for "professional scepticism and challenge of management".

The completion stage of an audit is a final opportunity to "stand back" and assess the level of work performed against the audit plan and ensure that sufficient, appropriate audit evidence has been obtained in support of the conclusions and judgements, the regulator says.

FRC chief executive Jonathan Thompson said in an accompanying statement: “It is vital that investors, financial markets and all those who depend on companies in the UK, can rely on the information they publish. Audit is key to assuring investors and others that company reports are both accurate and meaningful in setting out an entity’s affairs and prospects and an important part of maintaining trust in the integrity of corporate Britain.”