AQI 2018: Deloitte pulled up on its assessment of component auditors’ work

Deloitte has been criticised over its audit team’s oversight and assessment of component auditors’ work, especially in areas of risk, while also being hauled up over auditing of tax exposures in foreign jurisdictions, in the latest Audit Quality Inspection (AQI) report from the Financial Reporting Council (FRC), reports Amy Austin

The FRC reviewed 25 individual audits undertaken by Deloitte in 2017/18, of which the majority (76%) were ranked as good or requiring limited improvements, compared to 78% in 2016/17, while six audits (24%) required improvements, up from two the previous year, and zero required significant improvements, down from two (9%) the previous year.

Out of the FTSE 350 audits reviewed, 79% required limited improvements compared to 82% in 2016/17, with the FRC’s target set at 90% for 2018/19.

The FRC said: ‘Where we identified concerns in our inspections, they related principally to aspects of group audit work, audit work on estimates and financial models, and audit work on provisions and contingencies.

‘During the year, the firm has continued to develop the use of “centres of excellence”, increasing the involvement of the firm’s specialists in key areas of the audit. We have no significant issues to report this year in most of the areas we reported on last year.’

Component auditors

Group auditors are responsible for the overall supervision of the audit and are expected to properly assess the work performed by component auditors. A component auditor is an auditor who, at the request of the group engagement team, performs work on financial information related to a component for the group audit. Group auditors often need the support of component auditors who may be based in different countries and be from different firms.

In four of Deloitte’s reviewed audits the FRC had concerns with the adequacy of audit work on taxation where the audit was largely carried at by component auditors. On three of these audits, there was insufficient evidence of challenge and oversight over the appropriateness of provisions for uncertain tax exposures in foreign jurisdictions. On two of these audits there were also concerns over the recoverability of deferred tax assets.

In response, Deloitte said: ‘Our root cause analysis identified that assumed knowledge was a causal factor, where the audit teams had very deep business understanding of the audited entity and industry knowledge but at times had not included sufficient evidence of that within the audit file.’

Management challenge

On two of Deloitte’s audits, the FRC criticised the firm’s insufficient challenge of management over revenue growth assumptions in cash flow forecasts. Also, a group audit with an acquisition in the same year failed to gather sufficient audit evidence to assess aspects of the judgments, assumptions and methodologies for acquired technology and customer relationships.

The FRC has also suggested that Deloitte’s audit team should address the risk of conscious or unconscious bias and demonstrate challenge of management to ensure disclosures and year end balances are appropriate.

Deloitte said: ‘We are developing a publication to be shared with audited entities to highlight and provide guidance on the need for sufficiency of supporting documentation which they should gather and assess in forming their own analysis and conclusions ahead of audit challenge of that evidence.’

Ethics

As with the other Big Four firms, the FRC reviewed how Deloitte was dealing with the revised Ethical Standard with enhanced requirements and stricter prohibitions. There were concerns that the firm’s global non-audit services approval system does not include rules on the revised Ethical Standard. Deloitte has not centrally monitored compliance with audit firm rotation requirements for certain categories of its public interest entity (PIE) audits.

Deloitte said that it has worked to develop changes which will enhance its non-audit approval system to include a question set in each service request and information required from non-audit engagement teams that is tailored to the requirements of the revised Ethical Standard.

The FRC commended Deloitte on its use of data analytics to obtain audit evidence.For one property company, data analytics were used to assist the audit team in the audit of property valuations and on another analytics were used to extract and analyse data from a group database to calculate expected rental income.

According to the AQI report, Deloitte had 413 audits within the scope of the AQIs, including 22 FTSE 100 and 66 FTSE 250 audits.

Stephen Griggs, managing partner for audit at Deloitte, said: ‘We value the insight provided by the annual audit quality inspection and welcome the FRC’s perspective on the quality of our audit work.

‘We take seriously the FRC’s recommended areas for improvement and have already taken action to address their findings. Through the investments we have made and the programmes we have in place, we remain committed to improvements in audit quality.’

Report by Amy Austin

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