FRC: Audit inspection reports on Deloitte, Ernst & Young, KPMG and PwC

15 June 2012

The Professional Oversight Board (POB), part of the Financial Reporting Council (FRC), published the findings of the Audit Inspection Unit's inspections of Deloitte LLP, Ernst & Young LLP, KPMG LLP and KPMG Audit Plc, and PricewaterhouseCoopers LLP.

Key messages to Deloitte LLP:

The firm should pay particular attention to the following areas in order to enhance audit quality:

• Ensure group audit teams are adequately involved in discussions with component audit teams and that there is evidence of those discussions and the review of the component auditors’ work.
• Provide further guidance and training to audit teams regarding the assessment of the impairment of goodwill and other assets, especially in relation to key assumptions and disclosures, including the relevant financial reporting requirements.
• Ensure audit teams pay more attention to planning and performing the audit of revenue, with appropriate focus on identifying and responding to significant risks.
• Provide further guidance on the use of sampling for substantive testing purposes, particularly in relation to judgemental sampling.
• Ensure audit quality is considered in the performance evaluation of audit staff and that there is a direct impact on partner remuneration resulting from quality review findings.
• Ensure that the firm’s annual review of the quality of its audits is more focused on monitoring areas where there have been recurring inspection findings on audits.

Key messages to Ernst & Young LLP:

The firm should pay particular attention to the following areas in order to enhance audit quality:

• Introduce more specific training in relation to the audit of goodwill impairment, including the assessment of the reasonableness of growth rates and the methodologies used by management in their projections.
• Review the training and audit guidance available in relation to the audit of revenue and, where appropriate, enhance it in the light of the issues raised in this report.
• Ensure that the firm’s quality review processes place more emphasis on recurring findings from both internal and external inspections.
• Revise the appraisal process for senior staff so that audit quality is separately rated as well as providing an overall rating.
• Apply greater rigour in the assessment of partners’ quality ratings and ensure that the quality of partners’ relationships with the entities that they audit is not included in this assessment. Take action in relation to individual partners who have clearly sought credit in their appraisals for sales of non-audit services to entities that they audit.

Key messages to KPMG LLP and KPMG Audit Plc:

The firm should pay particular attention to the following areas in order to enhance audit quality:

• Provide further guidance and training to audit teams regarding the assessment of the impairment of goodwill and other assets, especially in relation to key assumptions and related disclosure requirements.
• Ensure there is effective communication with component auditors throughout the audit and that the group audit team review and assess the adequacy of the work performed by component auditors for group audit purposes.
• Continue to ensure audit teams sufficiently challenge management on the appropriateness of collective provisioning for loan losses.
• Ensure that more emphasis is placed on obtaining direct confirmation of the existence and accuracy of assets and liabilities from third parties.
• Ensure that, in the second year of using the firm’s new eAudIT software tool, the firm is able to demonstrate that, in all cases, the evidence to support the conclusions reached had been obtained and reviewed before the firm’s audit report was signed.
• Improve communications with Audit Committees, especially the reporting of independence threats and safeguards in connection with the provision of non-audit services.

Key messages to PricewaterhouseCoopers LLP:

The firm should pay particular attention to the following areas in order to enhance audit quality:

• Ensure an appropriate level of professional scepticism is exercised in the audit of goodwill and other intangible assets and plant, property and equipment.
• Ensure appropriate involvement by group auditors at the planning stage in component auditors’ risk assessments and planned procedures as well as at the completion stage in the evaluation of the sufficiency and appropriateness of their work for group audit purposes.
• Ensure the nature and extent of threats to the firm’s objectivity and independence arising from non-audit services provided to audited entities and related safeguards are reported to Audit Committees.
• Ensure the partner performance appraisal process is improved, in particular that partners evaluate their performance against audit quality-related objectives.
• Ensure there is no adverse impact on audit quality as a result of the firm’s initiatives to improve audit efficiency in the light of competitive pressures.

Press release

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