The UK’s Financial Reporting Council (FRC) on May 19 published a Thematic Briefing: The audit of cash flow statements, noting the results of the FRC’s constructive engagement findings and the efforts audit firms have taken to shore up the audit of cash flow statements.
“Errors in cash flow statements remain a recurring issue in Constructive Engagement cases,” FRC Executive Director of Supervision David Rule said in a statement accompanying the report.
“The steps taken by audit firms to strengthen the audit of cash flow statements are a good response to prevent the need for restatements and errors occurring. It is recommended that all audit firms carefully look at how they undertake the audit of cash flow statements,” Rule said.
Cash flow statement cases have increased between 2019–2020 and 2020–2021 from 9% to 17% of cases resolved through Constructive Engagement, according to the report. This increase suggests that further action is needed to improve the quality of the audit of cash flow statements to prevent the need for restatement and errors, the report said.
A common root cause is that internal consistency checks by the audit team across the financial statements are not picking up basic errors in the cash flow statement, the report said. This also may result in classification errors between sections of the cash flow statement.
The report also cited other common causes, such as:
- The audit team did not always adequately challenge management on the accounting policies applied and disclosures made affecting the cash flow statement.
- Guidance available to the audit team to deal with technical and complex judgments was not always sufficient or embedded through staff awareness methods and training.
- The review process did not always identify and adequately respond to matters identified in the audit.
- The use of spreadsheets and the manual nature of cash flow workings by companies increases the complexity of auditing the consolidated cash flow statement.
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