THE FRC has blasted PwC over two audits that required ‘significant improvement’ in its annual inspection of the firm’s audit offering.
Its criticism was made as it examined 22 audit engagements undertaken by the Big Four firm, which amassed £1.025bn from its assurance arm in the year ending 30 June 2014.
The audit of a non-EEA entity that reported on the application of the UK Corporate Governance Code was singled out for being conducted in accordance with international standards rather than UK standards, as required by UK Audit Regulations.
The accounting and audit watchdog found that the group engagement partner consulted centrally on whether the audit should be conducted in accordance with UK standards, but was misadvised. As a result, the extended form of audit report required by UK Auditing Standards was not issued, and certain information to be included in the annual report was not received and reviewed before the audit report was signed, as required.
The second audit requiring ‘significant improvement’ concerned the audit of a FTSE 250 outfit, where PwC “did not adequately assess the significance of a self-interest threat which arose by virtue of the substantial amount of fees earned from non-audit services commissioned by a connected party of the audited entity”.
The firm’s report to the audit committee “did not identify the threats to the firm’s independence arising from its relationship with the connected party or include details of the non-audit services arising from this relationship, notwithstanding that processes to gather information regarding these non-audit services had been established”.
On a more positive note, the FRC noted that 16 of the 22 audits it probed were conducted to a good standard with limited improvements required, while four audits needed improvements.
Meanwhile, the FRC has announced that it is to scrutinise the relationship between retailers and suppliers following the Tesco accounting scandal in which the retailer overstated its first half profits by £250m.
The watchdog has already launched an investigation into Tesco’s accounts after the supermarket giant misstated payments from suppliers, said it plans to make the retail sector a priority sector for audit inspections this year.
Paul George, the FRC’s executive director of conduct, said the events at Tesco “did have an influence” on its decision but that more retailers than Tesco are involved in complex suppler arrangements.
“Given the focus in recent months in respect of supplier arrangements, food, drink and consumer goods manufacturers and retailers have been designated as a priority sector. These inspections will pay particular attention to the extent to which the audit team has challenged and corroborated the appropriateness of how complex supplier arrangements are accounted for,” it said in its annual audit review.
The annual review audit quality in the UK, which inspected 109 private sector audits, found that overall quality had improved but that further improvement is required.
According to the FRC, 67% of audits inspected for the year ended 31 March were found as either good or only in need to limited improvement. Nevertheless, a third of all audits inspected failed to meet the FRC’s standards while ten audits required significant improvements.
Entities outside the FTSE 350 were found to most likely show a need for significant improvement in their audits, the FRC said.
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