Adherence to Professional Standards and guidance
- Information on the firms’ adherence to professional standards and guidance comes from the results of professional regulatory reviews completed by the Audit Quality Review team (AQR) for the Financial Reporting Council (FRC) and the Quality Assurance Department (QAD) for the Institute of Chartered Accountants in England and Wales (ICAEW), the Recognised Supervisory Body (RSB) for local audits in England. The information which we are able to include in this report is much reduced from previous years as a consequence of the audit backlog.
- The AQR inspects a sample of the largest local government and NHS audits. These are known as ‘Major Local Audits’ (MLAs) and are those bodies with income or expenditure above £500 million. The QAD reviews a sample of local audits that fall below this threshold. The inspections cover both financial statement and VFM arrangements work. The publicly reported results cover all local government bodies, including those which have not opted-in to the PSAA appointing person arrangements, as well as NHS bodies.
- The regulatory reviews focus on identifying areas where improvements are required and individual ratings will reflect a wide range of factors, which may include size, complexity and risk of the individual audits selected for review. The FRC notes that because of this and the small non-statistically valid nature of the review sample, the inspection findings may not be representative of audit quality across a firm’s entire major local audit portfolio and that they were unable to select local government audits for inspection based on risk. The FRC stated that its ability to inspect higher risk audits was severely restricted by the backlog and that most of these audits were incomplete, in some cases for several years. It follows therefore that the results are not expected to be representative of all audits undertaken in the local government and NHS sectors. However, our judgement is that normally we are able to use the general findings as reported to inform and support our contract monitoring arrangements.
- On 8 December 2023, the FRC published its annual report on the quality of major local audits (FRC report). This contained the results of its audit quality inspections of engagements completed in 2022/23. The report highlighted that the FRC had significantly reduced its inspection programme because of the limited number of completed audits available to inspect. The backlog and reduction in the number of inspections had implications for the content and format of the FRC’s report. Unlike previous years the FRC report only includes the results of its own inspections and no information from the ICAEW. Previously the report also contained information from the results of the firm’s internal monitoring and those of the ICAEW’s QAD inspections. The FRC report commented regarding the significant audit delays that ‘Timeliness is an important part of audit quality’.
Financial Statements
- Auditors are required to give an opinion on whether the financial statements of an audited body give a true and fair view of its financial position and of its income and expenditure for the period then ended. They have other reporting responsibilities with respect to the preparation of the financial statements, the remuneration report and other information published with the financial statements.
- The FRC performed 10 inspections in this cycle, comprised of six health and four local government audits. All audits inspected were judged as requiring no more than limited improvements.
- Table 3 shows the results of this year’s reported inspection reviews by AQR, together with those from the previous two years by AQR and QAD. As noted above the number of inspections is much reduced from previous years and as a result it was not possible for the FRC to provide direct feedback at a firm level.
Table 3: Financial statements – inspection review gradings
Results of the reviews completed by review year.
| Grading | Total 2022/23* | Total 2021/22* | Total 2020/21* |
|---|---|---|---|
| Good or Limited improvements required | 10 100% | 29 78% | 29 78% |
| Improvements required | 0 0% | 4 11% | 7 19% |
| Significant improvements required | 0 0% | 4 11% | 1 3% |
*sample could include NHS and other bodies not within the PSAA contract
Source: FRC audit quality inspection reports
- The AQR reported that limited audit improvements were required in the testing of expenditure with cut-off testing and the accuracy of the accruals process highlighted. No key findings were reported on auditors’ work on operational property and pensions.
- Good practice points were identified on professional scepticism and challenge and Key Audit Partner (KAP) oversight. The AQR also highlighted the use of detailed risk assessments to target audit testing at the higher risk elements within operational property valuations.
- As part of their oversight of firms’ quality control processes the FRC considers annually audit quality initiatives and the root cause analysis process. In 2023 they also looked at:
- Compliance with the Ethical Standard;
- Partner and staff recruitment, appraisals, remuneration and promotion;
- Acceptance, continuance and resignation procedures; and
- Audit methodology.
- The sample testing performed included local auditors, for example in recruitment, appraisals, remuneration and promotion. The key findings and good practice identified are reported in each firm’s Audit Quality Inspection and Supervision Report for 2023 which the FRC published in July. The FRC did not consider it necessary at this time to extend their work to cover matters specific to local audit.
- From next year the FRC will conduct this monitoring against the control arrangements introduced by all audit firms to design and implement a system of quality management following the requirements of International Standard on Quality Management 1 (ISQM 1) by 15 December 2022. This has replaced the existing International Standard of Quality Control (ISQC 1). Our contract monitoring arrangements with firms include coverage of ISQM1 where relevant to local government audit work.
Value for money arrangements
- The NAO’s 2020 Code of Audit Practice applies from 2020/21 onwards, and requires that auditors provide a commentary on bodies’ VFM arrangements as part of an Auditor’s Annual Report, rather than as previously a conclusion contained within the opinion on the financial statements.
- Table 4 shows the results of this year’s reported inspection reviews by AQR, together with those from the previous two years by AQR and QAD. As noted above the number of inspections is much reduced from previous years and no direct feedback at a firm level was published.
- The AQR reported that in all cases, they assessed that the arrangements met the required standards, being judged as either good or limited improvements required.
Table 4: VFM arrangements – inspection review gradings
Results of the reviews completed by review year.
| Grading | Total 2022/23* | Total 2021/22* | Total 2020/21* |
|---|---|---|---|
| Good or Limited improvements required | 9 | 23 | 32 |
| Improvements required | 0 | 0 | 0 |
| Significant improvements required | 0 | 1 | 0 |
*sample could include NHS and other bodies not within the PSAA contract
Source: FRC audit quality inspection report
- The AQR reported that limited audit improvements were required at some audits in the risk assessment process. This needed to be performed in a timely manner, including arrangements for the governance of subsidiaries, and subject to updating as necessary for changes at the body concerned.
- At another firm the FRC report highlighted the comprehensive nature of the risk assessment undertaken and the comprehensive and well-structured reporting and communications that supported the work.
Transparency Reports
- The FRC’s Local Auditors (Transparency) Instrument 2015 requires firms that conduct major local audits to report annually on information specific to their local audit responsibilities and includes:
- a statement on the effectiveness of the functioning of internal quality monitoring arrangements in relation to local audit work;
- a description of independence procedures and practices, including a confirmation that an internal review of independence practices has been conducted;
- a statement on the firm’s policies and practices to ensure that KAPs continue to maintain their theoretical knowledge, professional skills and values at a sufficiently high level; and
- confirmation that all engagement leads are competent to undertake local audit work and staff working on such assignments are suitably trained.
- All of our suppliers published Transparency Reports that contained the required information. The reports also provided information on the results of regulatory reviews and the responses of firms to the matters raised. They are published on the firms’ websites.
- We noted that the Transparency Reports also provide information where firms had received ‘unsatisfactory’ reviews from the regulator, both in terms of the response to audits being judged as requiring significant improvement, or where the FRC had taken measures against the firm.