KPMG extended audit 'viewed favourably' by inspectors

KPMG'S EXTENDED AUDIT package for Rentokil is expected to be favourably reviewed by the Audit Inspection Unit, according to senior industry figures.

A sub-division of the Financial Reporting Council, the AIU will publish its annual report in late July, with reports on individual firms appearing one week later.

Sources close to the board said it will find KPMG did not break any rules in providing "extended audit services", as well as upholding the firm's terminology, which distinguishes the package from internal audit.

The AIU's 2009-10 annual report said, following discussions with KPMG, "it appeared that these services were more in the nature of an extended audit rather than a traditional internal audit". This is despite Rentokil's description of the service as "extending audit coverage to some work undertaken by internal audit" in its 2009 half-year report.

The Auditing Practices Board examined the UK ethical standards for auditors and tweaked its guidance on auditors providing internal audit services in light of the Rentokil deal.

It defined as 'audit-related services' certain non-audit services that could be offered without threatening independence and concluded that, under restricted conditions, a narrow band of internal audit services could be outsourced to the external auditor.

Executive director Marek Grabowski said that, to be acceptable, the internal audit service must be at the request of the audit committee and should relate to financial information or controls and only be carried out alongside a full external audit.

As a result of the consultation, the APB included extended audit services within the definition of audit-related services and distinguished external audit from internal audit within non-audit services.

It also drew a line between "assurance activities" – assessing risk controls – and "advisory activities", which are focused on helping management design and implement strong risk and governance systems, and are traditionally a focus of internal audit.

The AIU declined to comment on the contents of its annual report or its examination of KPMG, saying both remained in draft stage. KPMG alsp refused to comment on the forthcoming reports.