On 15 July 2025, the Financial Reporting Council (FRC) published its annual review of audit quality (available here). The 2025 review underscores the strong gains made by Tier 1 firms but notes that the position in respect of Tier 2 and 3 audit firms remains inconsistent.
Some key themes are identified below.
Tier 1 audit quality is continuing to improve…
The trend we have seen in recent years towards improving audit quality is continuing. Notably this year, five out of the six Tier 1 firms achieved positive audit quality outcomes of 90% or more. This is a substantial rise on the previous year and the FRC noted the significant investments firms have made in culture, leadership and systems and controls to address many prior year findings.
…whilst Tier 2 and 3 audit quality remains inconsistent
The FRC’s inspection results indicate that many Tier 2 and Tier 3 firms are still not delivering an adequate level of quality on their PIE audits. The position varies significantly between firms. In some cases, Tier 2 firms have had 100% of their audits categorised as good or requiring only limited improvements over the last three years, whereas others have had 0% assessed as such over the same period.
Where is the FRC still seeing issues in audits?
Inspection findings vary between the Tier 1 and the Tier 2 and 3 firms. The most common findings for Tier 1 are broadly consistent with the previous year, being revenue, impairment of non-current assets, inventory, provisions, group audit oversight and journal testing.
The smaller sample size of audit inspections for Tier 2 and 3 firms means there is a greater variability in inspection findings. Some themes, such as impairment of non-current themes and journals testing, are also present but notably ethics and independence and going concern issues have also been identified across a number of inspections.
The end of the three tiers and a new approach to overseeing audit quality
This report is the last to group PIE audit firms using the traditional tiering system, which the FRC recognises risks creating a de facto ‘league table’ of audit firms that overly focuses on the individual file reviews.
The FRC is undertaking a comprehensive review of its approach to audit supervision. As part of the FRC‘s Future Audit Supervision Strategy (FASS), the FRC will consider how its approach to supervision will evolve. Future oversight will emphasise proportionality, outcomes and the effectiveness of firms’ own quality management systems, rather than relying primarily on individual audit file inspections. In addition, the FRC also undertaking an end-to-end review of its enforcement process (see here for further information).
The FRC’s review of its approach to audit supervision and enforcement coincides with incoming changes to senior personnel at the regulator, including the announcement that Sarah Rapson, the current Executive Director of Supervision, will be leaving the FRC later this year. It remains to be seen how these changes will impact the FRC’s approach going forwards.
For further information, please contact:
Rebecca McGregor, Partner, Linklater
rebecca.mcgregor@linklaters.com
