Investor-Auditor Dialogues: Reading the Audit Report, Sector Risk Q&A, and Improving Engagement
Financial statement audit remains a critical component of the governance framework and a fundamental input into investment decision-making processes. In our fourth investor-auditor roundtable, held alongside ICGN’s Summer Conference 2026 in Amsterdam, we brought together senior representatives from five audit firms, the global accountancy profession and investment organisations for a practical workshop in three parts: a technical teach-in on how to read an audit report, a sector audit partner panel and Q&A, and facilitated roundtable discussions on how investors, auditors and audit committees can engage more effectively.
Here is what we heard:
Part 1: How to Read an Audit Report
The workshop opened with a technical teach-in on what an audit does, what it does not do, and how investors can get more from the audit report and the financial statements. This write-up reflects what we heard from the teach-in as well as the questions and comments from participants in the session.
How Audit Has Changed
Audit today has changed significantly from what it was a few decades ago.
Conducting an audit once meant arriving at a company, working through a box of invoices, ticking them to the ledgers, checking the trial balance, verifying the evidence supporting the balances, and finishing there.
It now reaches into every aspect of a company’s systems, its culture, board and operations. Across audit firms globally there has been a substantial investment in quality, methodology, software and global consistency over the last decade.
Audit firms have also expanded dialogue with investors at a market level, including dedicated analyst functions that examine a company’s audit through an investor lens.
Knowing how to read and interpret what the auditor has done, what the auditor says, and how the financial statements are set out remains essential to identifying where risks sit within a business.
What an Audit Does and Does Not Cover
The objective of an audit is to give assurance to shareholders that the financial statements are free from material misstatement to a reasonable level of assurance, whether due to fraud or error.
Regarding fraud, the primary responsibility for preventing and detecting fraud rests with the entity’s management and those charged with governance. The auditor has responsibility for identifying and assessing the risks of material misstatement due to fraud in the context of the financial statements as a whole. Fraud risks exist in every company. The auditor’s task is to maintain a questioning mind and critically evaluate audit evidence to obtain sufficient assurance that the financial statements are not materially misstated due to fraud.
What part of the financial statements does the auditor audit, and why don’t auditors cover more than they do?
An audit’s scope is set by standards and legislation, and embedded locally within each jurisdiction. Globally, the International Standards on Auditing (ISAs) set out how auditors approach their work, and then each jurisdiction takes those standards and either implements them as international standards or adjusts them locally.
One of the challenges auditors grapple with is that there are different auditing requirements in each country. Trying to join everything together for a global company operating in different markets can be challenging for an auditor.
For example, in one jurisdiction, an auditor might be required to give less attention to a particular area than in another. This is reconciled by taking everything up to the group level. This means what is required at the group level trumps everything else (in terms of the auditor signing off the group audit opinion). Each subsidiary will then do what it needs to do within its jurisdiction to sign off the audit. This is sometimes why there are several layers of audit work.
Which parts of the annual report are audited?
Only part of a company’s published annual report is audited, although there are some variations by jurisdiction as to what is covered. The financial statements themselves, including the income statement, balance sheet, cash flow statement and notes to the accounts, are audited to a materiality level and an opinion is formed on them. The narrative material that surrounds or accompanies them is “other information”, which auditors are required to read but do not audit. In auditor shorthand, these are the back half and the front half of the annual report, respectively.
Auditors read the front half to check that it is materially consistent with the back half and with the knowledge gained during the audit. The auditor asking for changes to the front half can cause the most contentious debates, arguments and very difficult conversations where a company may be presenting its results in a way the auditor considers could be misleading.
The public, and sometimes investors, may expect that anything a company publishes bearing on its numbers has been examined by the auditor, which can lead to an expectation gap. In practice, auditors are limited by statute in terms of what they can do, and companies can (and do) resist requests to go further, asking auditors to demonstrate where the standards require the additional work.
This distinction does not diminish the importance of audit quality: auditors must perform their work diligently, apply professional scepticism, and comply fully with applicable standards, which have continued to strengthen over time. However, unless these standards and related legal frameworks evolve globally, auditors cannot extend their responsibilities beyond the scope of their mandate or report matters that they are not required or permitted to disclose.
Investors seeking more assurance are in a powerful position to ask companies to commission it, whether asking for a private or a public report.
Red Flags in an Audit Report
Several signals were identified as red flags for investors reading audit reports.
One is the qualified audit opinion, of which there are various forms.
Separate from this is an “emphasis of matter” paragraph, where the auditor draws the reader’s attention to a key judgement or uncertainty disclosed in the notes which, if it turned out to be wrong, would have a material impact on the numbers. An emphasis of matter does not modify the auditor’s opinion.
A particularly serious signal is a material uncertainty related to going concern, which appears in its own section of the auditor’s report. This arises where the auditor has no evidence to refute a risk to the company’s viability, but equally not enough to accept it as fact, for example where a credit line is due for renewal. This can be a difficult area for the auditor.
Financial statements are prepared on a going concern basis where the company has credible options available to continue operating and there is evidence to support their viability. Those options do not need to have been executed, only evidenced. Material uncertainty arises only where one or more scenarios cannot be evidenced as viable routes. The threshold described for preparing accounts other than on a going concern basis in the UK context was that the company must be facing administration or liquidation within the next twelve months.
A further red flag can include delays in sign-off reported in the press which may reflect issues emerging during the audit process, whether inadequately disclosed problems, unsupported numbers, or going concern questions.
Key/Critical audit matters (KAMs or CAMs depending on where you are in the world) are a further source of insight. Where a company’s KAMs/CAMs are not in line with its peers, investors should take note, since the riskiest areas of an audit might be expected to be consistent across an industry.
Frequent auditor rotation might also warrant attention, for example if this is much more frequent than local market norms or requirements. The company controls the narrative around auditor changes. Auditors are required to produce a resignation statement, but these are among the most litigated documents in the audit ecosystem, as some companies may resist disclosure of the real reasons for a resignation or departure. Audit firms have become considerably more robust here over the last decade, and more information is now available on listed companies than was previously the case.
Auditor Tenure and Rotation
Long auditor tenure was raised in the context of companies audited by the same firm for decades, with only the audit partner rotating. An audience member asked whether partner rotation alone is sufficient in those circumstances, noting that some investors treat long tenure as a governance concern and reflect it in their voting.
The response was that tenure is determined by the company rather than the firm. Any company can change its auditor whenever it wishes, and in the United States, for example, a company may appoint an auditor for any length of time.
One option investors have, therefore, is to ask the company directly why tenure has been so long. There may be good reasons, including acquisitiveness requiring other firms for diligence, debt raising, listing work or IT implementation, or it may simply be inertia. That is where investors could press for change.
US independence rules are very restrictive, which limits what an incumbent auditor can provide outside the statutory audit and shapes the preference there for long tenure with other services sourced elsewhere. Companies with substantial tax, finance transformation or systems needs can run out of available firms quickly.
Mandatory rotation and tender requirements in the United Kingdom and European Union were described as well-intentioned, though the practical effects were described as mixed. The UK market has now completed its first ten-year cycle. Some boards, audit committees and finance teams found it disruptive and expensive, while others found it a positive experience. Investors tend to be very supportive of this requirement and think that the short-term costs of rotation are outweighed by the importance of enhanced independence and auditor refreshment. Approximate figures cited in the session indicated that around thirty per cent of the FTSE 350 changed auditor over that ten-year period. From a regulatory and governance perspective this suggests genuine rotation rather than a procedural exercise, though it is likely that not all companies would agree with this framing.
The overall message was that the audit report rewards close reading, and that investors who know what to look for can learn a good deal about where risk sits in a business.
Part 2: Sector Audit Partner Panel and Q&A
The second session brought together a panel of senior audit partners for a sector-focused discussion, followed by an extended Q&A covering audit quality, the role of the audit committee and the future of assurance.
Sector Discussion: Audit Risk in Fast-Moving Consumer Goods
The panel focused on the Fast-Moving Consumer Goods (FMCG) sector, chosen because the pace of change in the sector makes judgement particularly important.
The sector has traditionally faced cyclical pressures. Panellists described it as currently undergoing a more fundamental change, with weakening demand, greater cost uncertainty and margin pressure prompting companies to review their business and commercial models, alongside an expansion of disclosure and assurance requirements.
The audit risks that have always applied to the sector continue to apply. Revenue recognition and inventory valuation remain the principal areas of focus, because both involve significant judgement. What is changing is the effect of AI, with the disruption of certain industries expected to generate more impairment and valuation questions, and possibly going concern challenges. Management override of internal controls is a longstanding audit risk, but AI is making the methods available more complex and harder to detect. Cyber was described as a persistent and escalating risk that will reach a different level again with AI.
Revenue is one area where considerable audit work is required, particularly in understanding whether reported revenue is durable, including how far promotional activity is driving it and whether that activity is sustainable or one-off, and how a company’s commercial arrangements affect when revenue can be recognised.
Inventory is another. An important point for investors is that the audit establishes only that inventory is not carried at more than it will realise on sale. It does not indicate whether that inventory will convert into revenue at the margins the company has historically achieved, which depends on forecasts and judgement rather than on anything the audit tests specifically.
Reading Beyond the Audit Report
Investors asked how they might judge whether a company tends to account for its performance conservatively or aggressively, given that the audit report does not convey the auditor’s experience of working with the company.
The response acknowledged the limitation. Auditors review the first draft of a company’s financial statements as well as approve the published version, and the improvement in disclosure quality between the two is often significant. Investors only see the end result. The audit report is the only channel available, which is why the KAMs/CAMs deserve careful reading, including how the audit committee presents the auditor’s work and what nuances the KAMs/CAMs contain.
A difference between markets was noted. Investors in US companies will be familiar with material weaknesses (deficiencies in internal control serious enough that a misstatement might go undetected), which must be publicly reported and which hold the audit committee and board to account until remediated.
In the United Kingdom, Europe and the wider ISA environment there is no equivalent requirement, and the audit report says relatively little formally about a company’s internal controls, although significant deficiencies would normally be expected to be reflected in the KAMs, and increasingly are. Some in the profession have argued for change, on the basis that more reporting on governance and controls would give investors greater clarity, though there is no consensus that changes to standards are required.
The Netherlands offers two exceptions. For Dutch listed companies within the relevant legal and corporate-governance framework, management provides reporting on risk management and internal controls. Dutch arrangements also provide for the external auditor to attend the general meeting in relevant circumstances and answer questions concerning the audit opinion. Softer elements of an audit cannot readily be captured on paper, which makes that dialogue valuable, though these matters do sometimes surface in key audit matters.
What Makes a Good Audit Committee
Investors asked what distinguishes an effective audit committee, given that committee members are often more accessible to them than auditors are.
Independence of mind was identified as a key ingredient, including the willingness to challenge the auditor as well as management. Private sessions between the committee and the auditor, without management present, were highlighted as one of the most informative formats. The focus should be on whether the financials tell the right story rather than on compliance, and difficult discussions should not be avoided.
Diversity of perspective matters, so that a range of questions can be asked. In FMCG a central risk is forecasting, so audit committee members need to understand the business and the assumptions underpinning forecasts, and to ask questions that are not solely financial. A recurring observation was that committee members frequently ask good questions but do not always listen carefully to the answers. Effective committees keep digging rather than stopping at the first layer.
Forecasts drive the quality of debate on FMCG risk, but they are typically discussed in the boardroom rather than the audit committee, and the auditor only attends the latter. Helping the auditor reach that understanding of forecasts is essential.
Historic Information and Forward-Looking Judgement
An investor challenged how important audited financial statements, which may appear months after the fiscal year end, really are, when management accounts are more current and forward-looking. Would a more forward-looking approach be helpful?
The response noted that audited financial statements contain considerably more forward-looking information than is generally understood. Going concern analysis is one example, and much of the value carried on the balance sheet requires forward-looking analysis. The most useful information for investors is often not the primary statements but the notes covering significant judgements, significant estimates and sensitivity analysis, which can be taken directly into investor models. Post-balance sheet events were also highlighted. Events occurring after the reporting date are assessed under the applicable reporting framework. Some require adjustment to the financial statements, while material non-adjusting events may require disclosure.
Continuous auditing has been requested by some companies, but no participant claimed a robust capability to deliver it, and this was framed as part of the expectation gap.
In the Dutch context, the director’s report includes a future outlook on the coming year. Auditors cannot provide assurance on it, but can confirm consistency with the rest of their work.
The Future of Assurance
Sustainability information is moving from voluntary narrative to a structured, evidence-based discipline. For FMCG companies this is a significant development, because the underlying data sits outside normal financial systems. Scope 3 was identified as the most difficult area, given the need to assure information across the whole value chain. Compared with the established position on financial internal controls, sustainability data remains difficult to source reliably, with heavy reliance on estimation and third-party data. Avoiding a further expectation gap was stressed.
Standardisation through ESRS, with limited assurance currently required, represents a substantial effort, though the scope of companies caught has been revised and value chain information has moved in places from mandated to voluntary. Requirements are expected to continue increasing beyond sustainability, including product-level disclosure and, in due course, disclosure and assurance relating to technology, cloud and AI. For FMCG companies handling large customer bases and substantial data, this was identified as a significant challenge ahead.
Part 3: Investor and Auditor Roundtable Discussions
The final session brought investors and auditors together in several roundtables to discuss how engagement between them might work better in practice. The following common themes were raised in the subsequent feedback session.
Engagement on audit is much less developed than engagement on pay
Investors described a marked contrast between the two. Remuneration policies attract extensive dialogue with companies ahead of the AGM, and there is a reasonable degree of shared expectation among shareholders and shareholder bodies about what good looks like. The equivalent cannot be said for audit. Several participants acknowledged that investors have simply not devoted comparable time to it, and reported that when they have approached audit committee chairs, those chairs welcomed the contact because so few investors get in touch.
One investor described an audit committee that used such contact deliberately, raising a concern about material conflicts of interest and looking to shareholders to help press the issue. The example was offered as an illustration that the relationship can run in both directions, with committees drawing on investor influence where it is useful to them.
Formal access does not always produce useful dialogue
An example was provided from the Netherlands, where the external auditor attends the shareholder meeting. This allows questions to be put directly to the auditor. Participants observed that this is helpful but not sufficient on its own, partly because those attending a shareholder meeting are not necessarily representative of the shareholder base as a whole. Dialogue ahead of the AGM was seen as more valuable, because it allows both sides to establish what is genuinely at stake before the meeting itself.
What investors might usefully ask
Where investors do have access to the auditor or the audit committee, several lines of enquiry were suggested. These included how mature the company’s arrangements are relative to its peers, how the company uses benchmarking and in what circumstances, whether the composition of the audit committee matches the scope of what it is being asked to oversee, and how the committee balances independence against technical competence.
Trust and the level at which engagement should happen
Trust between investors and audit committees was identified as fundamental to any of this working, including a willingness on both sides to come back with an answer where one is not available in the moment.
It was also questioned whether some of these issues are better pursued at system level than company by company. Where the difficulty lies in the framework itself, such as what auditors are permitted to report on, individual engagement may achieve less than collective work with standard setters and regulators.
So, what’s next?
Audit and assurance matters are fundamental considerations for those charged with governance. The quality and reliability of company-reported information play a vital role in supporting investors’ decision-making, engagement, and voting activities.
ICGN will continue to actively engage with audit standard setters, regulators, and audit firms to share investor perspectives on the future of audit and to provide opportunities for members to build their understanding and engagement on these issues.
We will hold further investor-auditor roundtable discussions, including at our forthcoming ICGN conference in Toronto.
If you are an ICGN member and you would like to take part, please e-mail policy@icgn.org for more information.
