AQI 2019: PwC required to stem ‘unsatisfactory’ decline in audit quality

The Financial Reporting Council (FRC) has highlighted a ‘notable’ decline in audit quality at PwC in its annual quality inspection (AQI) particularly in relation to the firm’s FTSE 350 audits, where the number judged to be good has fallen to 65%, well below the regulator’s 90% target

The audit regulator is calling for prompt and targeted action to reverse the deterioration.

The FRC’s inspection of 26 PwC audits in total judged 20 to be ‘good or limited improvements required’, while four required improvements, and two were assessed as needing ‘significant’ improvements. In comparison, the firm had no audits in the ‘significant improvements’ category in each of the preceding three years.

Overall, the FRC assessed 77% of the firm’s reviewed as requiring no more than limited improvements, compared with 82% in 2017/18.

However, of the FTSE 350 audits reviewed this year, only 65% achieved this standard compared with 84% in 2017/18.

The FRC stated: ‘We consider the notable decline in inspection results, particularly for FTSE 350 audits, by comparison to prior years to be unsatisfactory and have required the firm to take prompt and targeted action to address this decline.’

Review findings

Key issues highlighted by FRC include the need for PwC to improve the audit team’s challenge and supporting evidence in relation to the audit of long-term contracts, and to improve the consideration and challenge of growth assumptions in relation to the impairment of goodwill and other assets.

The firm should do more to assess and challenge management’s estimation of certain provisions and, in particular, enhance the audit work performed for aspects of revenue and inventory for retailers. 

PwC also needs to strengthen the firm’s systems and procedures relating to non-audit services approval. Currently, the firm’s systems do not require audit engagement partner approval before service teams obtain engagement codes to charge their time. The systems also do not incorporate the ethical standard changes or functionality to help engagement teams identify non-permitted services.

The review acknowledged that the firm is reliant on changes to global systems to address this, although it noted that these systems will not be fully implemented in 2019.

Long-term contracts

The FRC review identified insufficient challenge, or insufficient evidence of such, in relation to long-term contracts on several audits. This included inadequate testing or insufficient evidence of assessment of whether costs to complete and profit margins had been appropriately estimated by management.

For recognised contract claims and variations receivable, and contracts where late profit adjustments were made, the audit team had not sufficiently challenged management’s explanations (including claims which were not at an advanced stage of negotiation) or obtained sufficient corroborating evidence (for example, where they were informed that an oral offer had been made).

In relation to contracts that had been identified as potentially onerous (or could have been), PwC was found not to have obtained sufficient evidence of adequate audit procedures to assess whether the key assumptions were appropriate or that there had been adequate challenge of forecast revenues.

For the accounting for multiple-element and complex contracts that impacted the amount of revenue recognised, the review said there was insufficient evidence of the audit team’s consideration and challenge relating to the recognition of revenue. The FRC said the firm should consider whether assistance could be obtained from the firm’s experts in relation to the audit of long-term contracts.

The AQI review looked at the audit of impairment of goodwill and other assets on all audits it inspected where this was identified as an area of significant risk. While PwC’s audit work on other key assumptions was generally performed to an acceptable standard, the review identified findings relating to the consideration of the future short-term growth estimates.

As regards goodwill impairment, while cash flows were agreed to board approved plans, additional audit procedures were largely based on discussions with management. There was insufficient evidence of the audit team’s challenge or corroboration of the estimated short-term cash flow forecasts in management’s plans or that the historical business levels were sustainable.

In addition, there was insufficient evidence that management’s historical cash flow forecasting accuracy had been adequately assessed and/or that the impact of recent market and business changes had been sufficiently considered.


The review also made specific findings in relation to PwC’s auditing of retail stores (based in the UK), saying that where impairment reviews had been undertaken for individual stores, the audit team did not challenge the appropriateness of using a standard growth rate across all stores. In addition, there were cases where the audit team did not sufficiently challenge the forecast short-term growth rates, even though they were in excess of recent actual growth rates.

The review also raised findings relating to the evidence of appropriate consideration or challenge of certain provisions including tax, conduct, regulatory and loan loss provisions on some audits.

In particular, for onerous lease provisions, in one case the audit team’s consideration of the appropriateness of management’s policy only to provide for stores that had closed was judged to be  inadequate. In another case, there was insufficient evidence to explain why a provision was not required for leases of loss-making stores. In both cases, there was also insufficient evidence that the appropriateness of excluding central costs from the onerous lease provisions had been considered, including to what extent central costs may have been attributable to the loss-making stores.

The review made further findings as part of the FRC’s focus on auditing retailers as a priority sector in this inspection round.  This included the assessment that PwC’s audit team did not perform sufficient procedures over aspects of revenue, in one case, in relation to the testing of key reconciliations and, in another case, in relation to the need to obtain additional evidence over the occurrence of the transactions.

In addition the audit approach to inventory counts for multi-location stores was not adequately considered in relation to the stores attended, the timing of the attendance or the nature of the count testing on some audits. There were also cases where audit teams relied on management’s information to support the calculation of the stock provision without adequately verifying the basis of the underlying methodology.

PwC response

Hemione Hudson, head of audit at PwC, said: ‘We are disappointed that the results of the AQR inspection are below the high standards we are committed to achieving on all of our audits. Last month we launched a wide-ranging audit quality action plan to ensure we consistently deliver high quality audits.

‘Our action plan targets three key areas: additional investment in training, people and technology; further alignment of our business behind audit quality; and a reinforced focus on culture and quality control. With £30m additional investment per year our significant audit quality programme over the next three years not only aims to address the FRC’s inspection findings, but also to reinforce our quality-first culture.’

In its response to the FRC’s AQI report, PwC added: ‘We have undertaken root cause analysis (RCA) on the inspection results, identifying causal factors and actions relating to the identified specific areas for improvement. Broader causal factors, including those relating to audit culture, and auditor behaviours have helped inform the need for this investment.

‘In June 2019 we announced our “Programme to enhance audit quality”, a package of board approved measures with the primary objective of improvement in delivering consistently high quality audits.’

The AQI review identified a number of examples of good practice within PwC, including group audits and the use of specialists and experts and data analytics.

Pat Sweet

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