The Financial Reporting Council Reports Rising Audit Quality in 2025 Annual Review

The Financial Reporting Council’s (FRC) Annual Review of Audit Quality 2025 delivered encouraging news: audit quality is on the rise.

Now, the regulator has followed up with its latest Key Findings & Good Practice report. It provides practical detail on both the weaknesses identified in audit work and the good practices adopted by firms. This combination of transparency and practical guidance represents a step in the right direction.

The FRC is showing what good looks like and not just pointing out where things fall short. For audit firms working to raise their standards, this approach offers real value. Here’s what we think matters most from the report.

What’s working well

The Audit Quality Review (AQR) process itself deserves recognition. By pairing inspection findings with examples of good practice, the FRC is giving audit firms a genuine opportunity to learn and improve. Rather than functioning purely as an enforcement mechanism, the process now helps the market converge on a shared understanding of quality.

Drawing themes from the twelve largest audit firms creates valuable comparability, and we’re seeing this translate into tangible improvements across several key areas:

• Sharper risk assessment: Teams are conducting more robust risk assessments and tailoring audit procedures to appropriately identified risks.

• Better use of specialists: Audit teams are bringing in specialists more effectively across various areas, from the planning stages through to providing meaningful challenge to clients.

• Stronger oversight of component auditors: Group auditors are actively involved in the work of their component auditors (audit teams who perform audit procedures on parts of the group, under the group auditors direction), including thorough review and challenge.

• Rigorous going concern work: Teams are not only reviewing going concern assessments but challenging the disclosures themselves, and bringing in specialists where needed to address risks properly.

• More effective disclosure reviews: Annual report disclosures are receiving robust review and challenge from audit teams.

These examples of good practice are valuable to the wider audit market. However, in the future, we’d encourage the FRC to provide more detailed case studies.

Richer context and practical detail would give firms, particularly challenger firms looking to develop their capabilities, more explicit guidance on what excellence looks like in practice.

Where the profession needs to step up

The report also identifies areas where audit work needs to improve; these are opportunities to raise standards, as opposed to failures:

• Impairment models need stronger challenge: Teams need to enhance their review and challenge of management’s impairment models, from non-current assets through to inventory valuations.

• Inventory auditing requires more rigour: Testing of inventory costing, year-end valuation, and physical existence needs strengthening across the board.

• Quality control of significant risks falls short: We need more robust review and challenge processes in these areas.

The AQR findings give the profession clear direction on where to focus improvement efforts; this creates an opportunity for the FRC to go further—by helping firms understand how to remediate these themes effectively and publishing that guidance.

Greater transparency on remediation approaches would give stakeholders confidence that standards are genuinely improving.

How do we sustain this progress?

To ensure audit quality continues its upward trajectory, the FRC should continue to provide timely, practical guidance. Examples of good practice published alongside AQR findings set the baseline for what “good” means, and they give firms concrete direction.

But transparency needs to go further. Publishing summaries of how audit firms have addressed key findings would demonstrate to stakeholders that improvements are real and measurable, building trust that standards are genuinely rising.

Where the same weaknesses appear year after year, the FRC should conduct focused thematic reviews and publish the results, ensuring resources and attention go where they’re most needed. This combination of clear guidance, visible remediation, and targeted intervention will help embed improvements across the market.

Our position

We welcome the direction set out in this report. The FRC’s shift towards being an improvement-focused regulator, rather than solely an enforcement agency, supports the kind of lasting change the market needs.

What we need now is momentum. Clear expectations from the regulator, practical examples of excellence, and shared accountability across the profession will help embed these improvements as the new baseline. We’re committed to working with the FRC and our members to make that happen.