Auditors need knowledge of accounting standards as well as standards related to auditing. Yet audit quality review findings by ICAEW’s Quality Assurance (QAD) during 2020/21 raised concerns around the number of disclosure errors caused by lack of knowledge of the UK Financial Reporting Standard (FRS) 102 or by failure to use available disclosure checklists during audits.

There are various ways for firms to avoid and address these issues, and raise audit quality more widely. Consider some simple questions and your answers.

1. When did you last risk assess your audit portfolio?
2. Do you and your staff have sufficient, up-to-date knowledge of accounting, auditing, ethical and quality management standards?
3. Do you and your staff have the necessary training and knowledge to deal with more complex audits?
4. Do you have sufficient resources and appropriate policies for adequate manager and partner (or second partner) reviews?
5. Do your partners and managers have the depth of experience and eye for detail to identify errors and mistakes that even the most experienced staff will make from time to time?

The importance of your responses to these questions is highlighted in the QAD case study (see panel below). Disclosure checklists and appropriate policies on their use can both play important roles, but they are not infallible. Adequate resources and policies for manager and partner reviews are vital, as are the training and continuing professional development needed to provide auditors with the knowledge of financial reporting standards that their roles demand.

ICAEW support

ICAEW makes various resources available that audit firms may find useful. Some of these resources are available only to members of the Financial Reporting Faculty, but some of its specialist resources are freely available.

A hub page on FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland, is open to all (at icaew.com/technical/financial-reporting/uk-gaap/frs-102-the-financial-reporting-standard).

It offers links to a host of useful Financial Reporting Faculty articles, guidance, helpsheets, webinars and other FRS 102 resources. It also reminds ICAEW members and students about the specialist financial reporting resources that are available to them via the ICAEW Library and through Bloomsbury Professional’s comprehensive online library.

To find out more about the Financial Reporting Faculty’s resources and how they might benefit you, visit icaew.com/joinfrf

QAD case study

At an audit firm with two audit partners, QAD reviewers identified significant gaps in financial statement disclosures for an audit client that had made a material acquisition during the year. None of the required disclosures for business combinations and no related party transaction disclosures were included, despite the existence of material related party transactions

When the firm conducted root cause analysis it found that no disclosure checklist was used by the audit team during that year’s audit. The firm’s policy was to use the checklist once every three years on the assumption that little may change on an individual client. While this was not an unreasonable general policy, such a policy had not been effective in this case where significant changes to the client during the year meant that a disclosure checklist was particularly important.

The firm has now changed its policy so that all audit teams will now consider whether changes at the client require use of a disclosure checklist every year, and it will be completed annually for all large clients as a mandatory requirement.

QAD considered that another root cause was the adequacy of manager and partner review, as disclosure checklists are not infallible, especially when completed by less experienced staff. The firm also recognised this aspect and decided – for large and complex audit clients – that a second audit manager will complete a disclosure checklist independently from the manager of that audit.