Failed NMCN audit prompts FRC to pen ‘How to write a good audit’
By Jenny McCall
09:34, 16 November 2021
Today, the Financial Reporting Council (FRC) released a ground-breaking report that outlines what is expected from audit firms on how to deliver a high-quality audit.
Last month, accountancy firm BDO Global (BDO) was reportedly being investigated by the FRC over its audit of construction company NMCN’s financial statements and its final accounts before the company collapsed on 4 October. And this year alone, almost 30% of audits have failed to meet the FRC’s standards.
As the first blueprint of its kind, the report has been published with the aim of providing investors, employees, pensioners and savers with high-quality information to ensure the audits they produce and digest are accurate and comprehensive.
So exactly how do you write a good audit?
Capital.com has outlined some key points to help with the process, as below.
A high-quality audit will contain the following attributes:
- It should provide investors and other stakeholders with the assurance that financial statements are both true and accurate.
- It should comply with auditing regulations and standards.
- It should take robust risk assessment seriously and contain drivers to ensure it is upheld.
- It should be supported by rigorous due process and audit evidence.
- It should avoid conflicts of interest.
- It should have strong quality-management that involves a robust exercise of professional scepticism.
- It should challenge management effectively and ensure it has sufficient audit evidence to back up the conclusions reached.
- It should report the auditor’s conclusions on financial statements unambiguously.
Risk assessment and planning stages
The first stage of the audit process is risk assessment. This part of the audit process should be based on inherent risks – for example, the management’s integrity.
Auditors must also consider the external information they have, such as any concerns spotlighted in the news or raised by individuals connected with the business.
“Having performed the risk assessment, firms may identify that a particular audit is a ‘higher-risk engagement’ and then the firm must provide additional and appropriate support to the audit team in mitigating the specific high-risk factors identified,” the FRC report states.
The next stage of this process is the planning phase. This must be performed on a timely basis and in advance of the financial year-end. Auditors need sufficient time to consider the information presented in the risk-assessment stage, and then design the appropriate audit procedures to address the risk and report their plans to governance.
The next stage of the audit process is the execution stage. The execution of the audit plan is a vital step in the process – all fieldwork must comprise execution of the agreed audit plan.
These also must follow the International Standards on Auditing (ISA) (UK)’s and the FRC’s ethical standards. They should also make use of the firm’s audit methodologies, tools and other resources as needed by the audit team.
“Good audits will demonstrate how the audit team has applied high-quality judgement to assess the evidence they have obtained. Such evidence should be both corroborative and contradictory,” the FRC statement said.
The final stage of the process is the completion phase. This is the last part of the audit process, which allows the auditor to stand back and assess the level of work performed against the audit plan, and ensure sufficient evidence has been obtained in support of the conclusions drawn by the auditor.
“A good audit will have had two-way dialogue with those charged with governance throughout the process, but nevertheless will also communicate about the audit as a whole.” the FRC report states.
According to the FRC, “including the assessed risks (and any changes to them); the work done and matters arising against those risks; findings from other areas of audit work; a summary of the adjusted and unadjusted misstatements identified; matters relating to independence; and relevant conclusions” is also essential to a good audit.