Audit Ethics in the FRC Audit Inspections 2022
Ethical considerations are a fundamental requirement of auditing. Yet 3 of the 7 audit inspection reports released in 2022 by the FRC found firms lacking and needing to make improvements. While ethical considerations are certainly more complex in the largest of audits, there are plenty of takeaways for smaller firms seeking to ensure ethical standards are high.
Having strong guidance
Having clear, documented audit ethics policies which are tailored to the firm and address the ethical considerations audit teams will face is a foundational building block. This includes when formal consultation on independence matters is required. Ensure your firm has the right policies in place to support audit teams with their ethical considerations.
Independence clearance should be obtained on a timely basis and consultations performed where required. It is also important to stand-back from the assessment of threats and safeguards to consider the broader impact and ethical issues in aggregate. Put yourself in the shoes of an objective third party to critique your team’s ethical considerations.
Evaluating non-audit services
The starting point for evaluating the impact of non-audit services on independence must
be explaining why such services are permissible, followed by the safeguards put in place. Monitoring of non-audit fees during the year is essential when there is any risk these will hit levels of significance to audit independence. On group engagements, group auditors must perform monitoring and independence considerations across the group as a whole. Having the right processes and tools to monitor and evaluate non-audit services is critical.
Scrutinising component auditors
Group engagement teams must pay close attention to component auditors. Clear guidance to support group teams is important, as is reviewing and monitoring the Partners leading component audits. Ensure you are adequately scrutinising the impact of component auditors on independence from the group entity.
Communicating any issues identified
Potential independence matters or breaches must be communicated to Audit Committees and other groups charged with governance in sufficient detail and on a timely basis. Where breaches are identified, audit opinions must appropriately highlight issue to users of the financial statements. Be sure to adequately communicate potential issues or breaches.
Smaller firms can take several ethical considerations away from the FRC’s latest audit inspection results. These issues are not exclusive to the largest firms auditing the most complex entities. Many issues can be addressed through robust, well documented policies and appropriate consideration by engagement teams.
If you are keen to embrace these and other learnings on your next audit or across your firm, download the full Inflo guide analysing the 2022 audit inspection results from the FRC. Use our handy quick reference cheat-sheets as a valuable support tool. 15 ethics tips are listed below. Download the guide for more tips on revenue testing, journals testing, group audits, estimates, impairment, and the EQCR process.
- Improve firm guidance on how to consider the perspective of an Objective Reasonable and Informed Third Party, particularly stakeholders such as informed investors or shareholders.
- Clarify independence matters that need formal consultation.
Proper consideration of independence matters
- Consider the objective, reasonable and informed third party test when assessing any threats and safeguards, and the cumulative impact of the ethical issues on the audit.
- Consult formally on independence matters when necessary.
- Obtain independence clearance in a timely manner.
- Explain adequately why non-audit services performed are permissible.
- Monitor non-audit fees in relation to audit fees and consult when the ratio is expected to be exceeded.
- Document adequately why incremental safeguards applied address self-interest/review or familiarity threats that may arise.
- Evidence the group audit team’s adequate assessment of the actual or perceived independence threats from the provision of non-audit services in a group audit.
- Provide detailed guidance to group audit teams on assessing whether network firms or component auditors may have conditions or relationships that could compromise independence.
- Monitor the length of involvement of component audit partners on group audits.
- Consider whether the partner of a component auditor is a covered person, and consider perceived threats.
- Sufficiently communicate potential independence matters identified to the Audit Committee.
- Communicate and report any breaches identified on a sufficiently timely basis.
- Ensure the auditor’s report states that prohibited non-audit services were provided when a breach has been identified.