KPMG must improve review procedures

KPMG MUST IMPROVE its review procedures and exercise more scepticism to information provided by audited entities, the Audit Inspection Unit (AIU) has said.

The AIU's report said that the audit teams "should apply appropriate professional skepticism to information provided by audited entities".

There were recurring problems from previous years in the areas of review procedures. "On four audits we identified weaknesses in the substantive analytical review procedures performed in respect of the income statement," it said. "In three cases the analytical review procedures were not, in our view, performed in sufficient depth." It acknowleged that, since those audits, the firm had made improvements.

The AIU reviewed 14 audits and said that two of those required "significant" improvements. One of the audits was lacking in terms of "the sufficiency of audit evidence for revenue and profit recognition", while the other needed improvements to loan impairments and IT general controls. Ten audits were performed to a good standard, and two were performed to an acceptable standards.

There were problems in the independence of senior staff in the audits. It pointed to one example where an IT partner had been involved in the same audit for nine or ten years.

The inspectors also criticised KPMG for staff appraisal forms that included goals related to selling non-audit services to audit clients, which the firm had in common with many of the other firms inspected. "The firm should ensure that managers and their appraisers are in no doubt that such objectives must not be set as such sales are not to be taken into account in performance assessments or remuneration decisions," the report said.

KPMG was praised for making improvements in communicating with audit committees, and the signing and dating of working papers and audit reports.

In its response, KPMG said: "The AIU has commented on our emphasis on professional scepticism within our training programme and notes our significant progress in enhancing our systems and procedures and addressing issues in their application.

"We accept that our efforts with regard to substantive analytical review have not been sufficiently effective and as noted in the report we have taken further action this year. The effectiveness of this action will be a focus of our 2011 quality performance review process and we will take further steps where necessary."