Following in the footsteps of the Financial Reporting Lab, the FRC has set up an Audit and Assurance Lab (A&A Lab) with audit committee reporting as its first project.
In its first phase, the Lab considered how investors’ confidence in audit is enhanced by, and audit quality promoted through, external reporting by audit committees in the annual report and accounts, as well as views on good practice in audit committee reporting. A second phase will review external auditors’ reports to audit committees, including how they can better support external reporting by audit committees.
In a report published in December 2017, the Lab provides feedback on the views of audit committee chairs (ACCs), companies, investors, representatives of audit firms, and officers from a professional body who participated in the first phase of the project.
The report covers:
- Questions to assist ACCs and investors
- The role of audit committees, engagement with investors and writing the report
- External auditor - appointment and tendering
- External auditor – effectiveness
- Reporting on significant issues, and
- Internal control, risk management systems and internal audit.
The report also provides examples of audit committee communication favoured by those taking part.
Investors value the role played by the audit committee and place reliance on its work. Some regard the content of the Audit Committee Report (ACR) as providing valuable insight into the quality and rigour of the audit committee.
Investors want disclosures on significant issues to:
- Provide the context of the issue, for example quantification
- Describe the audit committee’s actions in the year
- Clearly describe the conclusion
- Explain the rationale for that conclusion
- Include cross-references to where other information can be found.
Investors look to the ACR to give them confidence in the committee’s work in areas such as the appointment of the external auditor and monitoring the auditor’s independence and objectivity. Both investors and ACCs overwhelmingly agree that audit quality should be the key selection criterion. Investors want confirmation in the ACR that quality is paramount.
While the companies participating in the project were largely FTSE 350 companies, the results may nevertheless be of interest to other listed companies, public interest entities and other entities voluntarily applying the UK Corporate Governance Code.
Read the Audit Committee Reporting A&A Lab project
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