Mario Christodoulou, Accountancy Age, Thursday 22 July 2010 at 00:45:00

FRC's Audit Inspection Unit raises concerns after investigating 109 audits inthe UK

Two FTSE 100 audits needed ?significant improvement?, according to an annualreview of the UK?s largest eight audit firms released this week.

Auditors have also been accused of altering documents before handing them toregulators and putting cost savings ahead of quality, in the review by the AuditInspection Unit (AIU). It has raised a number of concerns following itsinspection of 109 audits in the UK.

The FTSE 100 audits found to be wanting were among 14 of concern, lifted fromlisted companies on AIM and the FTSE 350.

The report also found some cases where partners signed audit reports beforethe audit was complete and, in one instance, an auditor tried to alter aninternal file after the AIU requested it. The report also found auditors hadchanged their internal materiality thresholds, reducing their workload, and hadnot applied enough scepticism to internal asset valuations.

?In particular, in certain cases, it was unclear from the audit files whetherthe audit teams had obtained an adequate understanding of the basis upon whichthe prices used had been determined,? the report stated.

The release follows a joint Financial Services Authority/FRC report, releasedthis month, which found auditors displayed a ?worrying lack of scepticism? intheir scrutiny of managements? valuation models. The AIU report also foundauditors were sending work to internal offshore service centres to reduce costswhich, it believes, sent the wrong message to partners.

Paul George, director of the Professional Oversight Board which carried outthe inspections, said auditors needed to change their behaviour, and show morescepticism when inspecting management judgments.

?We continue to find a rump of audits which don?t meet the standards weexpect. To eliminate this will require not just changes to policies andprocedures but also behavioural changes to ensure there is sufficient challengeto management,? he said.

?Developments in auditing have not kept pace with developments in financialreporting,? George added.

Liz Murrell, director of corporate reporting at the Investment ManagementAssociation (IMA), said investors are worried about audit quality, when auditorsthemselves are under commercial stress. ?In particular, investors are concernedin the current economic climate that fee pressure on audit firms could impactaudit quality,? she said.

PwC?s head of audit, Richard Sexton, said audit quality was the ?foundation?of the firm?s practice, while also conceding the need for reform. ?The integrityof our people and their behaviours are also vital components of a quality audit?Process alone will never be the answer,? he said.

Oliver Tant, UK head of audit at KPMG, said he is ?acutely aware? of the needfor auditors to be sceptical. ?We are not complacent, however, and look forwardto a wider debate across the profession on the issue,? he said.

The AIU will release reports on individual audit firms in September.

In our view

Auditors have long conceded that there is a need to reform audit ? but wherethey talk about procedures and structures, regulators talk about attitudes andbehaviours. The industry seems intent on changing the structure of audit.Regulators want to change auditors? attitude.

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