KPMG told to improve audit of impairments

THE ADEQUACY of audit work carried out by KPMG in connection with carrying the value of goodwill has been called into question by the Financial Reporting Council’s audit inspector.

In its review of KPMG’s audit engagements between April 2011 and January 2012, the FRC’s Audit Inspection Unit (AIU) raised concerns about the Big Four firm’s auditing of impairment of goodwill and other assets.

Failings included insufficient consideration of the reasonableness of growth rates, source data and methodologies used by management in considering the potential for impairment.

“Additional sensitivity analysis should have been considered in some of these cases and a greater level of scepticism applied to the growth rate assumptions used,” the report said.

The AIU also identified problems with certain aspects of risk assessment procedures performed by the group audit team. Two audits were found to have had insufficient evidence of appropriate two-way communication with component auditors, while weaknesses in procedures associated with the group audit team’s interaction with the component auditors were found in six audits.

“These included a lack of evidence of the work performed by component auditors on certain consolidation returns, insufficient review by the group auditors of work performed by the component auditors and a lack of evidence in respect of certain aspects of the work performed by the group auditors on the consolidation,” the AIU said.

KPMG was also told to be more challenging of management explanations, particularly with regards to revenue recognition and collective provisioning for loan losses. According to the AIU, in some instances improvement was required in relation to the sufficiency of audit evidence, challenge and corroboration for revenue and profit recognition.

“More extensive corroboration of management’s explanations in relation to the contracts selected for review should have been obtained in order to confirm the appropriateness of the revenues recognised,” the report said.

The AIU added that on seven audits there was a lack of evidence that the audit team had given appropriate consideration to independence threats arising from the provision of non-audit services.

In response to the AIU’s findings, Tony Cates, KPMG’s head of audit, said the firm has already taken action to address the issues raised.

“While we may not always have the same view as the AIU on the significance of individual matters, we share the objective of wishing to continue to improve the quality of auditing and are always keen to take on board any suggestions with this aim,” Cates said.

During the year the AIU noted enhancements and improvements to the firm’s policies and procedures. In particular, KPMG introduced a new requirement for all planned substantive analytical review procedures to be approved by the engagement leader.

KPMG also took a number of initiatives in the year to reinforce the importance of professional scepticism. These included the roll-out of KPMG’s Professional Judgement Framework to all staff and a number of workshops and presentations highlighting the importance of professional scepticism.

Of the 14 audits reviewed, six were performed to a good standard, seven were performed to an acceptable overall standard with improvements required, and one audit required significant improvement, particularly in relation to the audit team’s assessment of the potential impairment of goodwill.