Audit Contract Monitoring Report 2023/24

Adherence to Professional Standards and guidance

Corporate audits

20. The FRC produce an Annual Review of Audit Quality which summarises its findings from the inspection of corporate audits and firm-wide quality control processes. Their July 2025 report sets out their view of audit quality and provides an overview of the challenges and opportunities facing the market.
21. It covers the implementation of the International Standard on Quality Management (UK) 1 at Tier 1 firms (i.e. BDO, Deloitte, EY, FM, KPMG, and PwC, not all of which deliver audits for PSAA) as the Standard has applied for the whole inspection period. It reports significant improvement in the overall quality of the audits delivered by Tier 1 firms. Five out of six achieved positive audit quality outcomes on 90% or more of their audits.
22. The most common and significant findings continue to relate to the audit of revenue and impairment in areas such as contract accounting, analytical procedures, and testing of sales rebates and cut-off. For impairment, weaknesses were noted in evaluating key assumptions, judgements, and the challenge of management.
23. There has been a reduction in the frequency of findings in four key areas – revenue, impairment, provisions (including expected credit losses), and journals testing – indicating progress. However, there is an increase in findings related to the audit of inventory and oversight of group audits, highlighting areas requiring further improvement. 
24. For non-Tier 1 firms, the report noted some improvement in the inspection results from the prior year, with many of these results continuing to be below the level required for firms operating in the PIE market, and a significant gap between the inspection results for Tier 2 and Tier 3.

Major Local Audits

25. Information on the firms’ adherence to professional standards and guidance comes from the results of professional regulatory reviews completed by the Audit Quality Review team (AQR) for the Financial Reporting Council (FRC), and the Quality Assurance Department (QAD) for the Institute of Chartered Accountants in England and Wales (ICAEW), who are the Recognised Supervisory Body (RSB) for local audits in England.
26. The AQR’s role is to inspect a sample of the largest local government and NHS audits. These are known as ‘Major Local Audits’ (MLAs) and are those bodies with income or expenditure above £500 million. The QAD reviews a sample of local audits that fall below this threshold. Just over 40% of the 535 local government, police authority and related pension fund audits are MLAs within the FRC’s inspection regime. The rest are inspected by the ICAEW’s QAD inspection arrangements. Inspections cover both the audit of financial statements and Value for Money (VFM) arrangements work.
27. As part of the government solution to tackle the audit backlog the FRC and ICAEW agreed to suspend their routine inspections of local government audits for financial years up to and including 31 March 2024, unless there was a clear case in the public interest to do so. This was to enable auditors to focus on clearing the backlog and supporting the recovery and reset phases of the local audit overhaul.
28. The FRC’s latest report on the quality of local audits was published in November 2024. It provided the results of a limited number (eight) inspections of audits up to 2022/23, covering six NHS and two local government audits. The report also included the results from four QAD inspections.
29. The FRC will not be publishing an audit quality report in Autumn 2025 as outlined in their July 2025 press statement. That statement also reported the most recent results of their NHS MLA inspections, which were predominantly audits for the financial year ended 31 March 2024. All six were assessed as good or with limited improvements required for both the financial statements audit and work on VFM arrangements.

Financial Statements

30. Auditors must give an opinion on whether the financial statements of an audited body give a true and fair view of its financial position and of its income and expenditure for the reporting period. They have other reporting responsibilities with respect to the preparation of the financial statements and other information published with them, and the remuneration report.
31. The FRC’s inspection report of November 2024 stated that none of the eight audits of the financial statements required significant improvement and 75% required no more than limited improvement. The QAD inspections of two EY audits and two GT audits found their work to be of a good standard, with all reviews graded either good or generally acceptable.
32. Table 1 shows the results of these inspection reviews. Given the reduced number of inspections compared to previous years, the FRC did not provide direct feedback at a firm level. It is worth noting that the FRC reports on inspection cycles that include audits from previous years.

Table 1: Financial statements – gradings by annual inspection cycle for prior year audits

Grading	Year of inspection cycle
	2023/24	2022/23	2021/22
Good or Limited improvements required	83% (10)	100% (10)	78% (29)
Improvements required	17% (2)	0% (0)	11% (4)
Significant improvements required	0% (0)	0% (0)	11% (4)

33. The AQR inspections identified the following themes for general improvement: the auditing of group accounting and the evaluation of uncorrected misstatements (including whether they are material by nature, and the use of substantive analytical procedures). They highlighted good practice at individual audits on professional scepticism and challenge, the valuation of investment properties, oversight of component auditors, and VFM arrangements reporting in Auditors’ Annual Reports. The QAD inspections found good practice in the audit of property valuations.

Value for money arrangements

34. The NAO’s 2024 Code of Audit Practice came into force on 14 November 2024 and applied immediately. It introduced the requirement for a draft auditor’s annual report to be issued by 30 November starting from the 2024/25 audits.
35. Table 2 shows the results of the AQR and QAD inspection reviews by AQR and QAD for audits up to 2022/23, which also reflects the reduced number of inspections compared to previous years.
36. In all cases inspected firms’ work on VFM arrangements met the required standards, being judged as either good or limited improvements required (or good or generally acceptable as defined by QAD).

Table 2: VFM arrangements – gradings by annual inspection cycle for prior year audits

Grading	Years of inspection cycle
	2023/24	2022/23	2021/22
Good or Limited improvements required	12	9	23
Improvements required	0	0	0
Significant improvements required	0	0	1

Transparency Reports

37. Four of our contracted firms undertake MLAs (EY, FM, GT and KPMG) so under the FRC’s Local Auditors (Transparency) Instrument 2015, they must report annually on information specific to their local audit responsibilities including:

• a statement on the effectiveness of the functioning of internal quality monitoring arrangements in relation to local audit work;
• a description of independence procedures and practices, including a confirmation that an internal review of independence practices has been conducted;
• a statement on the firm’s policies and practices to ensure that Key Audit Partners (KAPs) continue to maintain their theoretical knowledge, professional skills and values at a sufficiently high level; and
• confirmation that all KAPs are competent to undertake local audit work and staff working on such assignments are suitably trained.

38. All four firms published a Transparency Report on their website. Table 3 provides weblinks. All reports contain the required information which also provide details on the results of regulatory reviews and the firms’ responses to the matters raised. Some provide more detailed information on the firm’s approach to audit quality matters and comment on the local audit position.
39. We did not identify any wider contractual concerns within the Transparency Reports.

Table 3: Transparency reports for firms who undertake Major Local Audits

Firm	Link	Period covered
Ernst & Young	October 2024	Year end is June 2024
Forvis Mazars	December 2024	Year end is August 2024
Grant Thornton	March 2025	Year end is December 2024
KPMG	January 2025	Year end if September 2024

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