In its latest annual Audit Monitoring Report (2023/24), ICAEW has confirmed that 71% of the 761 audits examined by its Quality Assurance Department were deemed to be ‘good’ or ‘generally acceptable’.

The figure rises to 88% when looking at non-PIE audits from the six largest audit firms. Meanwhile the biggest improvement was seen at FRC Tiers 2 and 3 firms where audit file quality went up from 72% to 79%.

Reviewers select the most complex and challenging audits to check, meaning that the figure is not necessarily representative of average audit quality, which is likely to be higher.  

Outside of the larger firms, the majority of firms reviewed change each year, making year-on-year comparisons very difficult, but Rama Krishnan, Chair of ICAEW’s Audit Registration Committee, confirmed that there hadn’t been any dip in quality. “While there has been no deterioration in the overall result this year, it is slightly disappointing that overall performance has not improved,” she said.

Changing audit market

Krishan cites changing market conditions, as a potential reason why audit quality has not seen an improvement.

“An unprecedented movement of complex audits from larger to smaller firms is requiring those smaller firms to move quickly to upscale their risk and quality processes,” she said. “Greater visibility of this movement is important so that the institute can check proactively that firms have the right expertise and experience to take on new larger audits.”

“That is why the committee fully supports the proposal by the ICAEW Regulatory Board to change the Audit Regulations to require firms to report the acceptance of new audits falling within certain criteria.”

Once the current changes in the audit market work through, Krishan’s hope is that audit quality levels will at least recover to the overall pre-pandemic result of 75–76%. She said: “We are already seeing much better results at ICAEW’s largest registered firms who have invested heavily in their quality assurance processes.”

Resource challenges

The report suggests that there are several factors contributing to quality levels that are behind those seen before the pandemic, many of which focus on resources.

Alongside a ‘significant shortage’ of staff, the report suggests that firms are experiencing some increased workloads from new auditing standards and are continuing to adapt to remote working.

The challenge of engaging with client staff in person, who are used to remote working, was also highlighted, as was the impact of new or revised audit systems and methodologies.

ISQM implementation

The report suggests that ISQM1 can offer firms a way to spot and rectify any weaknesses in their audit processes. It states: “The annual ISQM1 evaluation requirement is the opportunity for all firms, from sole practitioners to the very largest, to stand back and assess whether their procedures are adequate, or whether further work is required.”

The audit monitoring visits showed that 90% of firms had implemented the new standard. One concern raised by these firms was around the embedding effective root-cause analysis for deficiencies and who will complete this work.

With the concept relatively new for many firms, ICAEW suggests that good practice will evolve, but that once in place effective root cause analysis will facilitate open and constructive discussions on ‘what went wrong’ and have “wider benefits in strengthening a positive culture of accountability rather than blame”.