Audit
inspections of four of the largest UK UK
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.