FRC concerned over BDO’s audit scepticism levels

THE LEVEL of professional scepticism by BDO auditors has raised concerns in six of eight audits reviewed by the UK accounting watchdog.

In the latest inspection report into BDO’s work by the audit quality review team of the Financial Reporting Council, issues were found with auditor scepticism in “key audit areas”.

On two audits there was “insufficient challenge” on the principal assumptions relating to asset valuations and loan loss provisions. Reliance was placed upon management’s explanations for variances found in audit reviews, without obtaining sufficient evidence to corroborate the explanations. In a further two audits, auditors failed to ask management for evidence that they had undertaken an impairment review for capitalised development costs and freehold land.

The FRC found failings in BDO’s post-audit note-keeping with a lack of evidence to back up consultations between BDO staff when audit questions arose.

Where audit reports have been extended to provide more detail, under new rules, two of the three audits that fell under the remit were reported inconsistently to the actual work undertaken. For example, the auditor’s report was ‘factually incorrect’ by referring to controls testing relating to revenue that was not undertaken.

Audit committee reporting was found to be of a good standard, but there was an instance where a committee was told that tax work undertaken was by a separate BDO team to that working on its audit, where in fact some of the tax team helped on the assessment of tax disclosures in the audit.

PKF partner rotation plan

Some 20 non-public interest audits that came across following the merger with PKF had an audit partner in place for more than 20 years. While some of these have changed, the FRC has called on BDO to rotate the partner “as soon as is practicable”.

But overall, the FRC said five of the eight were classed as ‘good with limited improvements required’, two ‘required improvement’, while one required ‘significant improvements’.

The firm has removed references to cross-selling that had been contained within the firm’s audit stream business plan.

BDO head of audit Scott Knight, who responded to the FRC in a letter, said audit quality was “top of its agenda”, and welcomed the watchdog’s insights.

“We acknowledge that additional improvements are required in certain areas and we have already made substantial inroads into our action plan responding to the findings of this report,” he added.

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