FRC raises concerns in E&Y audit review

ERNST & YOUNG’S standard of auditing has been queried in a report by the Financial Reporting Council.

The review pertains to E&Y’s audits undertaken in the year to 31 March 2012, with the inspection having taken place between April 2011 and February 2012, reviewing 11 audits in all.

Concerns were raised by the audit watchdog over revenue recognition and risk assessment, impairment of goodwill and other assets, group audit considerations, audit sampling, reporting to the audit committee and risk-assessment procedures.

On six audits, failings included insufficient evidence of the work performed by the audit teams in assessing either the reasonableness of the growth rates, while source data and methodologies used by management in their projections to assess the potential for impairment of goodwill were also called into question.

“In three of these audits the audit teams did not apply sufficient professional scepticism in reaching their conclusion in this area,” the FRC’s Audit Inspection Unit (AIU) stated in the report.

In the audit of revenue, concerns were raised in one audit over the identification of the severity of risk.

“In one case, revenue recognition should, in our view, have been identified as a significant risk and further testing performed,” the report said. “In addition, on the same audit, insufficient evidence was obtained to support the conclusion that related internal controls were operating effectively.

It went on: “In both this audit and a further two audits, weaknesses were identified in relation to aspects of substantive analytical procedures, such as expectations not being set or not being sufficiently granular and explanations obtained from management not being corroborated.”

Problems relating to group audit considerations were also identified in three audits. In one, the group audit team’s involvement in component auditors’ risk assessments and planned audit responses was found to be insufficient. In another, the audit team’s evaluation of the sufficiency and appropriateness of the audit evidence obtained by the auditors for group audit purposes was in need of improvement.

Additionally, in six of the audits reviewed, the basis on which samples were selected for testing included insufficient evidence to justify the sample selected in four audits, the report found.

The AIU found E&Y has addressed problems identified in the previous year’s report, resulting in improvements to the quality of audits.The AIU also noted that robustness of the firm’s process which helps to ensure that financial statements comply with relevant accounting and disclosure requirements.

E&Y was found to have also taken action to ensure that appropriate professional scepticism is exercised on audits.

In response to the concerns raised by the AIU, E&Y said in a statement: “The AIU have noted areas for improvement and assessed that two of our audits required significant improvement. We have carefully considered the issues identified and we are taking action to address these, with particular focus on recurring issues, as we continue to strengthen audit quality.”