AQI 2017: EY criticised over audit completion procedures

The Financial Reporting Council (FRC) has raised concerns over EY’s audit completion procedures; auditing revenue; rigour in challenging management assumptions in goodwill and impairment; and the quality of written communications with audit committees, the regulator’s 2016/17 Audit Quality Inspections (AQIs) have found

Overall, 88% of EY’s audits were considered ‘good or limited improvements required’, slightly below the 90% target set by the FRC, but up on 2015/16’s 85%.

However, more than 90% of EY’s FTSE 350 audits inspected this year were assessed as requiring no more than limited improvements, with its two audits requiring improvements derived from outside the FTSE 350.

The regulator’s report focused on applying increased rigour in challenging management’s estimates and assumptions in impairment testing and valuations of investments; improving the design of audit procedures for revenue in particular in relation to data analytics and completeness; and improving the quality of written communications with audit committees.

The FRC examined 17 EY audits, made up of four FTSE 100 companies; eight FTSE 250 businesses; one ‘other’ listed company; two AIM listed enterprises; and two ‘other’ entities. In 2015/16, 20 EY audits were inspected, with three FTSE 100 businesses looked at; 13 FTSE 250; two ‘other’ listed businesses; and two ‘other’ listed entities. No AIM audits were considered last year.

An issue that lay behind one of the sample audits which required improvements was ‘insufficient’ attention to the audit completion procedures, adding ‘certain audit working papers had been amended after the date on which the audit file should been completed or after we had notified the firm that the audit would be reviewed’.

The other required improvement, highlighting ‘insufficient evidence that internal development costs should be capitalised and a lack of rigour when challenging management’s assumptions in goodwill impairment testing.

EY said in response its analysis found its teams ‘did not always appreciate what was required in order to convey the level of challenge and rigour they had applied,’ and in some cases its teams ‘did not step back to consider the completeness of their evidence’.

It added its 2016 training programme included focus on applying and evidencing professional scepticism in the audit of valuations and impairment assessments.

Audit procedures for revenue

On the audit of revenue, although the FRC found improvements on 2015/16, it highlighted the use of data analytics was ‘dependent on a high correlation between revenue and cash’. Insufficient testing was, however, planned and performed over key cash reconciliations upon which the data analytics relied.

It also found there was insufficient testing of the completeness of certain revenue transactions recognised during the year. For example, where the audit was designed to focus primarily on revenue deferred at the year end, rather than revenue recorded in the year.

The FRC also found EY was taking insufficient sample sizes to audit revenue.

EY said that its teams ‘lacked familiarity’ with aspects of the use of data analytics for audit purposes, while it also said its teams had ‘prioritised higher risk aspects of revenue’. It has provided training in these areas, it said.

Communication

Insufficient detail was reported by EY to audit committees in its written communications, the FRC found in its inspections.

In particular, the firm’s reporting to the audit committee did not include the impact of management’s assumptions for certain contracts on the goodwill impairment assessment and the recognition of deferred tax assets.

The regulator also found that reproducing the risks section of the auditor’s report in the written communications with audit committees was ‘not an appropriate substitute for reporting the auditor’s findings on significant risks’.

The FRC also found ‘insufficient detail’ was provided to audit committees on the ‘rationale for, and effect of’, valuing investments using assumptions that were ‘more conservative than those used by similar parties’.

EY said that on the occasions where its reporting to audit committees was ‘less extensive’, the teams had ‘covered matters in discussions’ or that the audit committee ‘had expressed a preference for more concise reporting’.

‘Evidence of these discussions with the audit committee was not always sufficient’, it said in its response.

Staff appraisals

The FRC recommended EY improve its staff appraisal process, having reviewed a sample completed in 2015, the most recent available.

It called for a strengthening of the link between assessment of audit quality and overall staff performance. In the FRC’s sample of appraisals, it found audit quality did not appear to have a ‘direct impact on the staff appraisal process’.

There was also a call for tighter controls over the completion of staff objectives. The FRC found a ‘significant number of staff’ had not completed their objectives ‘three months after the firm’s deadline’.

For its part, EY said it had ‘increased investment’ into ‘all key aspects’ of its annual staff appraisal process.

The firm has issued ‘detailed guidance on the importance of audit quality in the performance management and year end rating process’.

It has also launched a ‘comprehensive compliance programme’ in relation to completion of staff objectives, including monitoring, escalating and following up with individuals.

Hywel Ball, EY’s head of audit for UK & Ireland said: ‘Audit quality is key to promoting confidence in the capital markets and we are committed to sustaining our achievements through continuous improvement and innovation.

‘We have established a long-term audit quality programme in the UK and a dedicated Audit Quality Board, which are aligned to the steps we have taken globally. We continue to invest in new technology, data analytics software and training for our people. We are also rolling out the findings of a study of our highest performing audit teams, in order to help coach our people and replicate their behaviours.’

In all, EY undertook 272 audits of UK entities in 2016/17.

The FRC's Audit Quality Report for EY is here: PDF iconey_llp_-_audit_quality_inspection.pdf

Report by Calum Fuller

Calum Fuller |Assistant editor, Accountancy magazine (up to 2018)

Calum Fuller is former assistant editor of Accountancy magazine and Accountancy Daily, published by ...

View profile and articles

0
Be the first to vote

Rate this article

Related Articles
Subscribe