Saturday, June 02, 2012

UK Auditor Overseer Inspections of Large Audit Firms Find Problems in Communications with Audit Committee and Disclosure

Audit inspections of four of the largest UK audit firms by the audit inspection unit of the UK Financial Reporting Council revealed concerns with auditor communications with the client company’s audit committee and disclosures, as well as going concern assessments.  The audit firms inspected are UK members of global audit networks.

The audit inspection of Mazars LLP revealed problems with the auditor’s communications with the company’s audit committee. In all four of the audits conducted, the staff found weaknesses or omissions in the communications with audit committees. Information required to be communicated to audit committees was either communicated to the Finance Director only, or was not communicated in sufficient detail. In one audit, planning information and significant findings from the audit were communicated to the chairman and executive directors only, rather than to the audit committee, and identified disclosure errors were not communicated to either management or the audit committee.

In another audit, the communications regarding the recoverability of a deferred tax asset did not demonstrate that an appropriate level of professional skepticism had been exercised. In two audits, the inspection staff identified weaknesses in the communication of threats and safeguards regarding non-audit services provided. In one case, there was no communication regarding non-audit services provided to those charged with governance. In the other case, threats and safeguards relating to various non-audit services provided were communicated only to the Chair of the audit committee.

In two audit inspections of the five reviewed engagements undertaken by the CroweClark Whitehill LLP firm, the Board found that significant risks of material misstatement and threats to independence and safeguards adopted for non-audit services were not adequately reported to the audit committee.

The inspection unit reviewed seven audit engagements undertaken by the PKF (UK) LLP firm and found that, in two audits, the auditor’s final views were not communicated to the audit committee. Further, in one of these audits and in a third audit, the auditor discussed the significant findings arising from the audit with the audit committee on the day that the approval of the Annual Report was expected to take place. The Council emphasized that communication of the auditor’s final views on a timely basis to the audit committee ensures that any significant matters arising are considered fully by the committee prior to the approval of the Annual Report.

Disclosures and Materiality

The Council urged Crowe Clark Whitehill to improve the audit of disclosures, including obtaining sufficient evidence and recording key judgments. On five audits, staff identified weaknesses in the audit of certain disclosures, including, on three audits, insufficient consideration of whether amounts held should be disclosed as cash or short-term investments.

Similarly, the Council said that PKF(UK) should give increased focus and attention to the audit work performed in respect of disclosures. In five of the seven audits reviewed, the audit inspection unit found insufficient or no audit work was performed in respect of certain disclosures, including disclosures concerning related party transactions, long-term contracts, financial instruments, and operating leases.

In the Baker Tilly UK Audit LLP inspection report, the Council noted that Auditing Standards require audit teams to determine materiality for the financial statements as a whole, called overall materiality, together with a lower performance materiality for the purposes of determining the nature, timing and extent of audit procedures. Performance materiality is set to reduce to a low level the risk that the aggregate of uncorrected and undetected misstatements exceeds overall materiality.

While the firm’s methodology provided for both an overall materiality level and performance materiality level to be determined, in the Council’s view the firm’s approach resulted in too high an overall materiality figure. Staff were informed that the audit firm had instructed audit teams to ignore this figure and instead use the lower performance materiality figure at all times. The Board described such guidance as inconsistent with the rationale underlying the relevant Auditing Standard requirements and recommended that it be revised.   

Going Concern

The Council urged Mazars to give increased focus and attention to the audit of going concern, including the need to ensure that a going concern assessment is undertaken by the audited entity; and the need to perform appropriate audit procedures to evaluate this assessment and the adequacy of related disclosures. The staff found weaknesses in the evidence obtained to support the going concern assessment in three of the four audits reviewed. In two cases, a formal going concern assessment was not obtained from the audited entity and there was no evaluation by the audit team of the assumptions underlying the forecasts used to assess going concern.