What Makes a Good Audit?

1 What Makes a Good Audit? November 2021 FRC | What Makes a Good Audit? 2 The FRC does not accept any liability to any party for any loss, damage or costs however arising, whether directly or indirectly, whether in contract, tort or otherwise from action or decision taken (or not taken) as a result of any person relying on or otherwise using this document or arising from any omission from it. The Financial Reporting Council Limited 2021 The Financial Reporting Council Limited is a company limited by in England number Office: 8th Floor, 125 London Wall, London EC2Y 5 ASThe purpose of the FRC is to serve the public interest by setting high standards of corporate governance, reporting and audit and by holding to account those responsible for delivering | What Makes a Good audit ?

2 3 ContentsForeword 4 Key attributes of a good audit 6 - Risk assessment and planning 8 - Execution 12 - Execution Professional scepticism and challenge of management 14 - Execution Specialists and experts 16 - Execution Group oversight 17 - Execution Consultation and oversight 18 - Completion and reporting 19 Key attributes of a high-quality audit practice 21 - Firm s quality risk assessment process 22 - Governance and leadership 22 - Performance monitoring and remediation 23 - Quality monitoring 25 - Resources Resource planning and people management 25 - Resources Appraisals and rewards 26 - Resources Methodology and technology 27 - Information and communication 27 FRC | What Makes a Good audit ?

3 4 ForewordIt 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 Financial Reporting Council is often asked what does a good audit look like? This paper sets out our views of the key elements that make up a good audit as a contribution to the debate within audit firms of how they should improve audit quality. As our inspections work has consistently demonstrated, standards of audit quality in the UK are not acceptable, with just 71% of inspected audits meeting the relevant standards.

4 This is not just a UK phenomenon, but a global challenge. This paper is primarily focussed on the activities of the audit firms and different sections may be of particular interest to different stakeholders. For example, audit committee chairs may be more interested in the communication from their auditor on audit findings . Conducting a high-quality audit is not just about the audit itself, but just as much about how well the audit practice is run. Evidence from our work on individual audit inspections, as well as our thematic reviews of how firms operate elements of the audit practice and our audit firm supervision, gives us insight into best practice in these twin dimensions of delivering audit paper sets out our views on what conducting a good audit should look like.

5 We consider there are three key elements; risk assessment and planning; execution of the audit and completion and reporting. Delivery of the various aspects within these elements depends on a high performing audit practice. We consider there are six elements to achieving this; assessing firm quality risks; mindset, culture, governance and leadership; performance monitoring and remediation; quality monitoring; resources (including recruitment and training) and information and communications. This paper sets out these nine elements, highlighting best practice we have seen in each. We also recognise that auditingAudit is key to assuring investors and others that company reports are both accurate and Jonathan ThompsonChief Executive Officer, FRCFRC | What Makes a Good audit ?

6 5requires the application of judgement within a principles-based framework. It is not just a rules-based compliance exercise. As a result, it is vital that a good audit recognises the need for an audit team to not only have the necessary skills and experience but that it also approaches the engagement with the right behaviours and paper is relevant to audit in any sector (including the public sector). It should be used by the major firms to support their plans to improve audit quality, by challenger firms to help frame their considerations of audit quality as they move and/or expand into the PIE (or local audit ) market and by audit committees to support their engagement with their paper does not attempt to cover all the elements of an audit that must be undertaken, but instead focuses on the areas where the good audits stand out.

7 Although not part of this paper, we also recognise the important contribution that the management of the audited entity and those charged with governance can make to a robust and comprehensive audit . A well governed company, which reports transparently, and has clear and robust evidence that underpins that reporting, as well as effective internal controls are all important in underpinning a high-quality FRC is committed to working with audit firms, and other stakeholders, to improve audit quality and, as a result, ensure better outcomes for stakeholders who rely on the accuracy and integrity of a company s financial performance and prospects. This paper does not provide a definitive answer to what a good audit looks like, but we hope this is a helpful contribution to inform the debate amongst all our stakeholders about what constitutes a good audit and a high performing audit practice, which are inextricably is vital that an audit team approaches the engagement with the right behaviours and | What Makes a Good audit ?

8 6 Section A. Key attributes of a good There are a range of procedures undertaken by audit firms and engagement teams before an audit commences, such as decisions to tender, accept (or continue) an audit engagement. These are important steps for both an engagement team and the audit firm. Every firm and team must ensure that they have no conflicts of interest or threats to independence that cannot be properly mitigated and that they only undertake audits for which they have the skills, capabilities and capacity to deliver to the required standards. There are also various preconditions for accepting an audit , without which an engagement cannot be accepted.

9 These include management accepting their responsibilities for preparing financial statements, necessary internal controls and providing the auditor with information. Being clear on this from the beginning is important for delivery of a good quality The FRC defines high-quality audits as those that: provide investors and other stakeholders with a high-level of assurance that financial statements give a true and fair view; comply with both the spirit and the letter of auditing regulations and standards; are driven by a robust risk assessment, informed by a thorough understanding of the entity and its environment; are supported by rigorous due process and audit evidence, avoid conflicts of interest, have strong quality management, and involve the robust exercise of professional judgement and professional scepticism; challenge management effectively and obtain sufficient audit evidence for the conclusions reached; and report unambiguously the auditor s conclusion on the financial An audit is a dynamic and complex activity with many inter-related activities.

10 The requirements and obligations of an auditor in respect of each phase of the audit are set out in International Standards on Auditing (UK) (ISAs (UK)) and in the FRC Ethical Standard. Meeting the requirements in those standards is fundamental to a good audit , and full compliance with those standards is always expected. Figure 1 highlights some of the key aspects which, when done well, contribute significantly to the delivery of a good firm and team must ensure that they have no conflicts of interest or threats to independence that cannot be properly requirements and obligations of an auditor are set out in ISAs (UK) and in the FRC Ethical Standard. FRC | What Makes a Good audit ?