FRC Audit Quality Review 2025: What the Results Mean for Non-Big 4 Firms

Tier 1 results: the headline numbers

The FRC reviewed 104 individual audits across the six Tier 1 firms (BDO, Deloitte, EY, Forvis Mazars, KPMG, PwC) in 2024/25. Of those, 86% were assessed as requiring no more than limited improvements. That's up from 74% in 2023/24, 76% in 2022/23, and 70% in 2020/21. Five-year trend is unambiguously positive.

Within that total, 47 were audits of FTSE 350 entities. 85% of those required no more than limited improvements, consistent with 87% the prior year. Five audits across all Tier 1 inspections required significant improvements, and one of those was a FTSE 350 engagement.

ICAEW's Quality Assurance Department reviewed 50 audits across the same firms, weighted toward higher-risk and complex non-PIE engagements. 90% of those were graded good or generally acceptable.

Deloitte, EY, KPMG, and PwC have all shown steady improvement over five years. Their audit quality results are, on average, at the highest level the FRC has recorded. Forvis Mazars more than doubled its positive outcome rate to 90% (nine of ten audits), up from 44% in the prior year. The FRC noted this as encouraging but cautioned it's too early to identify it as a trend.

BDO: the outlier

BDO improved to 50% of audits requiring no more than limited improvements, up from 38% the prior year. But four of fourteen inspected audits were assessed as requiring significant improvements, double the prior year's count. The FRC called this unacceptably high.

Recurring findings at BDO span multiple areas, including quality management. The FRC's language was direct: BDO must urgently reassess how to improve audit quality. The firm will remain under close supervision, with additional activities to assess quality and monitor improvement. A new leadership team has acknowledged the results don't meet consistent standards, but the FRC expects change at pace, not at the speed of a multi-year plan.

For non-Big 4 firms watching from outside Tier 1, BDO's position matters. BDO is strategically important to the UK PIE market because it's the largest firm outside the Big 4. If BDO can't close the gap, the FRC's concern about a widening quality divide between the largest four firms and everyone else becomes harder to dismiss.

Tier 2 and Tier 3: inconsistent quality persists

The FRC inspected 8 audits at Tier 2 firms and 8 at Tier 3 firms in 2024/25. Specific pass rates aren't broken out numerically in the overview report with the same granularity as Tier 1 results, but the FRC's assessment is clear: many Tier 2 and Tier 3 firms are still not delivering adequate quality on PIE audits.

Smaller sample sizes mean greater variability in inspection outcomes. A firm with two audits inspected, one of which receives a significant improvements rating, has a 50% failure rate on a sample that may not represent its full portfolio. The FRC acknowledges this limitation but the results still feed into supervisory decisions, including PIE Auditor Registration assessments.

Findings at Tier 2 and Tier 3 firms overlap with Tier 1 themes (impairment, journals testing) but also include areas less common at larger firms: ethics and independence issues and going concern deficiencies appeared across multiple non-Tier 1 inspections. These are precisely the areas where non-Big 4 firms lack the centralised methodology support that larger firms build into their audit platforms. A Tier 1 firm can push a going concern workflow update to every engagement team via a standardised audit tool. A Tier 3 firm relies on the engagement partner knowing ISA 570 well enough to build the assessment from scratch.

SoQM maturity varies significantly among these firms. The FRC found that most Tier 2 firms and all Tier 3 firms need substantial improvements in the design and operation of their quality management systems under ISQM (UK) 1. Several firms are still in the process of major investment and change.

The FRC's ICAEW monitoring data reinforces this picture. ICAEW's QAD reviewed 401 audit firms and 790 audits in 2025, covering a much broader population than the FRC's PIE-focused sample. ICAEW reported that while good audit work exists across its registered firms, some continue to struggle with factors including staff retention, which directly affects audit quality on complex engagements.

Where the findings are: revenue, impairment, inventory, group audits

Revenue and impairment have been the most common areas of FRC inspection findings for several consecutive years. That didn't change in 2024/25.

For revenue (scoped into inspections at virtually every firm), specific issues included shortcomings in contract accounting, substantive analytical procedures, and sales rebates and cut-off testing. ISA 315.26 requires the auditor to identify risks of material misstatement at the assertion level. Revenue recognition assertions (occurrence, completeness, accuracy, cut-off) remain the area where FRC inspectors most frequently find insufficient work.

For impairment of non-current assets, weaknesses centred on evaluation of key assumptions and the challenge of management's models. Under IAS 36.33, the auditor must evaluate the reasonableness of assumptions used in discounted cash flow models. When the assumptions aren't challenged, the impairment test is a rubber stamp.

Inventory findings appeared in 50% of scoped inspections (unchanged from 2023/24). Group audit oversight findings rose to 32% (up from 22%), which the FRC flagged as an area requiring further action by firms. And provisions including expected credit losses dropped to 46% from 71%.

Journals testing findings fell to 19% from 24%. Given that ISA 240.33 requires the auditor to test the appropriateness of journal entries, the downward trend is welcome, but the absolute rate suggests firms are still getting this wrong on nearly one in five inspections where it's reviewed.

SoQM inspection results: what the FRC found

This was the first inspection cycle where ISQM (UK) 1 was applicable for the full period. The FRC inspected all twelve largest audit firms' SoQM components on a rotational basis.

For Tier 1 firms, the scoped components were Governance and Leadership, Information and Communication, Human Resources, and Relevant Ethical Requirements. For Tier 2 and Tier 3 firms, only Governance and Leadership plus Relevant Ethical Requirements were scoped in.

The four largest firms (Deloitte, EY, KPMG, PwC) have well-established SoQMs with overall well-functioning processes for monitoring and annual evaluations. FRC findings for these firms related to ensuring timely monitoring of responses to quality risks, enhancing monitoring procedures to test each step of a process, and improving evidencing of annual evaluations (particularly the review of root cause analysis results and effectiveness of remediation).

BDO and Forvis Mazars have invested significantly in their SoQMs, but the FRC identified findings in more fundamental areas: the design and implementation of responses to quality risks, the assessment of other sources of information (such as RCA themes, prior period adjustments, and staff engagement insights), and the identification of findings and deficiencies for the annual evaluation.

Among Tier 2 and Tier 3 firms, the FRC found significant variation in SoQM maturity. Most Tier 2 and all Tier 3 firms require major improvements across design, implementation, monitoring, remediation, and evaluation. Several are still mid-build. The FRC is supporting these firms through benchmarking, roundtables to share better practice, and individually agreed action plans with prioritised timelines.

The end of tiered reporting

This is the last FRC report to use the Tier 1 / Tier 2 / Tier 3 classification. The FRC acknowledged that the system has been perceived as a league table, which was never its intention. Future reporting will emphasise proportionality and outcomes rather than file-level pass rates on a small inspection sample. The effectiveness of firms' own quality management systems will carry more weight.

The FRC's Future Audit Supervision Strategy (FASS) project is reviewing the supervisory approach. Changes are expected to include richer conversations with firms about their own risks, more targeted interventions for specific quality issues, and less reliance on broad-brush requirements. Draft audit reform legislation has been delayed (confirmed by the Department for Business and Trade on 21 July 2025), so this evolution in supervision is happening within the existing legal framework.

For non-Big 4 firms, the shift away from tiered reporting could cut both ways. Removing the league table removes a reputational pressure point. But a more outcomes-focused approach that inspects SoQM quality (not just file quality) raises the bar for firms with immature quality management systems. A firm that passes most of its file reviews but has a weak SoQM annual evaluation may find itself under closer supervision than before.

The FRC also signalled a broader concern about the audit market structure. Developments in technology (including AI in audit), ownership structures (private equity investment in audit firms), and the business environment are all creating new challenges. The FRC explicitly stated that it does not want its supervisory approach to create disproportionate barriers to entering or remaining in the PIE market. That's a signal to smaller firms that the regulator recognises the market needs them, even while holding them to standards they're currently not meeting.

Worked example: reading the findings against your own files

Scenario: Greenshaw Audit LLP is a Tier 3 firm with four PIE audits and a broader portfolio of 60 non-PIE statutory audits. Revenue is £4.2 million. The FRC inspected one of Greenshaw's PIE audits this cycle.

1. Revenue testing

The FRC identified an other finding on Greenshaw's audit of a distribution company with £180 million turnover. The audit team performed substantive analytical procedures on revenue but did not set an expectation independent of management's data. Under ISA 520.5, an analytical procedure requires the auditor to develop an expectation. Using the client's own budget as the benchmark doesn't meet that standard.

Documentation note: Record in the revenue section of the audit file that the expectation was developed using an independent source (for example, prior year revenue adjusted for known volume changes confirmed by non-management sources). Document the threshold at which the difference between expected and recorded amounts triggers further investigation.

2. SoQM annual evaluation

Greenshaw's annual evaluation concluded the SoQM was effective but the FRC found the evidencing insufficient. Root cause analysis results from the firm's internal cold file reviews were referenced but not analysed in the evaluation document. Under ISQM (UK) 1.54, the firm must evaluate the SoQM based on the severity and pervasiveness of deficiencies, including those identified through monitoring.

Documentation note: In the annual evaluation document, include a table listing each RCA finding, the severity rating assigned, the remedial action taken, and the assessed effectiveness of that action. Cross-reference to the monitoring file.

A reviewer would see that Greenshaw has a documented evaluation with traceable evidence linking monitoring to outcomes. That's what distinguishes a proportionate SoQM from an incomplete one.

Practical checklist

1. Compare your firm's internal cold file review pass rate to the FRC's Tier 1 benchmark of 86% positive outcomes. If your internal rate is substantially higher than your FRC or ICAEW inspection rate, your internal reviews may not be calibrated strictly enough
2. Review your revenue audit procedures on every engagement scoped for revenue risk. Confirm that the analytical expectation is built from a source independent of management's own data (ISA 520.5)
3. Pull your impairment files from the past two years. Check whether the audit team challenged at least one key assumption in management's model with an independently derived alternative (IAS 36.33)
4. Check your SoQM annual evaluation for the link between monitoring findings, root cause analysis, and remedial actions. If the evaluation document doesn't reference specific RCA results, it's incomplete under ISQM (UK) 1.54
5. If your firm performs group audits, review whether the group engagement team documented sufficient oversight of component auditors, including the review of component auditor working papers on significant risks (ISA 600.42)
6. Brief your engagement teams on the FRC's finding that journals testing deficiencies appeared in 19% of scoped inspections. Confirm ISA 240.33 procedures are documented, including the criteria for selecting journal entries for testing

Common mistakes

• Treating the FRC's positive Tier 1 trend as evidence that the profession is fine. The 86% figure applies to six firms. Tier 2 and Tier 3 results remain inconsistent, and the FRC explicitly warned that the quality gap may be widening (FRC Annual Review of Audit Quality 2025, page 11).
• Running a SoQM annual evaluation that concludes "effective" without documenting the analysis of monitoring findings and RCA results. ISQM (UK) 1.54 requires an evaluation based on severity and pervasiveness of aggregate deficiencies, not a summary conclusion.

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Further reading and source references

• FRC Annual Review of Audit Quality 2025: The primary source for all inspection results, finding rates, and SoQM assessments discussed in this post. Published 15 July 2025.
• FRC individual firm reports 2024/25: Detailed findings for each Tier 1 firm, available on the FRC website.
• ISQM (UK) 1: Quality Management for Firms that Perform Audits or Reviews of Financial Statements. The standard governing SoQM design, implementation, monitoring, and evaluation.
• ISA (UK) 240: The Auditor's Responsibilities Relating to Fraud. Governs journals testing requirements (paragraph 33) discussed in this post.
• ISA (UK) 520: Analytical Procedures. The standard requiring independent expectations in substantive analytical procedures (paragraph 5).
• IAS 36: Impairment of Assets. The standard governing impairment testing assumptions (paragraph 33) that generated findings at multiple inspections.