FRC publishes guidance on what makes a good environment for auditor scepticism and challenge

The FRC has published a paper setting out the principal attributes of a good audit environment that facilitates professional scepticism and challenge. "What Makes a Good Environment for Auditor Scepticism and Challenge" (available here) marks the latest addition in the FRC's ‘What Makes a Good…’ series; following the FRC's ‘What Makes a Good Audit’ published in November 2021 (available here). As with the previous paper in the series, the FRC's latest guidance largely codifies existing good practice rather than presenting a significant shift in expectations. 

Although much of the guidance will not be new to auditors, the FRC identifies inconsistent application of professional scepticism and challenge as a key factor contributing to the most significant quality issues identified by the FRC over a number of years. Audit firms should expect to see the new guidance relied upon by the FRC in future supervisory and enforcement actions. 

The guidance will also be of relevance to audit committees and the management of audited entities to understanding the role they play in enabling increased scepticism and challenge on an audit. 

What good looks like

The FRC's guidance sets out what the FRC considers to be the "key attributes of a high-quality audit environment that enable professional scepticism and challenge in an audit". The guidance draws on examples of good practice gathered by the FRC’s Audit Market Supervision team and the findings of an independent report conducted by BritainThinks, which conducted a series of focus groups and interviews with audit partners and employees from PwC, KPMG, EY, Deloitte, Grant Thornton, Mazars, and BDO. 

The guidance focuses on four key areas:

  1. the learning environment;
  2. the culture;
  3. the operating model of the audit firm; and
  4. the interactions that the audit firm has with parties in the wider ecosystem.

For further information see the FRC’s press release, available here.