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Advances in audit

Home / Hermes EOS Blog / Advances in audit

Freddie Woolfe,
01 September 2014
Governance

Given that shareholders are the end-clients of a company’s audit, we have long been concerned about about how defensive and opaque audit reporting is in the UK, especially as a good quality audit can provide plenty of value.

However, following amendments to the UK Corporate Governance Code in 2012 and the implementation of ISA 700 in 2013, audit committees and auditors are now required to produce a much more insightful report. Auditors must, for example, comment on the key risks to the audit, its scope and the manner in which materiality thresholds – to assess the relevance to the assessment of risk to the financial statements – were set. Committees meanwhile must describe the key issues they considered, their assessment of the effectiveness of the external audit and how the independence and objectivity of the auditor is upheld.

With the US Public Company Accounting Oversight Board consulting on enhancing audit reports as well, enhanced disclosure is also gaining global traction.

Now that we have these new disclosures, there is an opportunity and responsibility for investors to read and use them. While the topic initially might not appear the most compelling, audit commentary can be be helpful in engagement. BP’s auditor report, for example, facilitates an understanding of the level of interaction the audit partner had with Rosneft, which gives an insight into its concerns and ultimately helps the reader form a view on the quality of the audit. Equally, bland disclosures give a poor picture of the audit committee’s oversight of the auditor and the rigour and challenge of the audit process, which signals a need for engagement too.

As disclosures improve, we envisage audit becoming an increasingly regular engagement topic for us, not only with audit committees but also with the auditors themselves. The UK Audit Firm Governance Code, introduced in 2010, states that audit firms should engage in dialogue with investors “to enhance mutual communication and understanding.” We find the meetings with auditors and audit committees very helpful and a step in the right direction in bringing auditors and their underlying clients closer together.

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