FRC’s AQI report finds only 55% of audits at mid-tier firm require no more than limited improvements following dire 2019 report
Four out of nine audits at Grant Thornton have been deemed to below the good or limited improvement threshold set by the Financial Reporting Council’s Audit Quality Inspection regime. Two of these four required significant improvement.
The news will be a blow to the mid-tier firm as it seeks to improve on a very poor 2019 report which identified similar levels of inadequate performance. As a result of the poor 2019 report, the firm was subject to ‘increased scrutiny’ in this round of inspections.
In its report, the FRC stated: ‘The overall inspection results remain unacceptable following poor inspection results last year. We continue to have recurring findings that contributed to this year’s inspection results.
‘These include the effectiveness of the audit of revenue and appropriate levels of challenge and scepticism in areas of judgment. The firm needs to ensure that the specific actions taken to address the root causes of our findings also consider the actions needed to deal with the recurring nature of the issues.’
In response to the very poor audit quality identified in the FRC’s 2019 report, the firm initiated an audit quality plan, which it referred to as its Audit Investment Plan in Spring 2019. The FRC increased its scrutiny of the firm but due to the timing of the plan, it had not yet had any significant impact on the quality of the audits reviewed in this inspection cycle.
The FRC report said Grant Thornton had taken steps to address the key findings in the 2019 report, including focused training and standardising the firm’s audit work programs. But the regulator still was able to identify improvements, for example, in the audit of going concern, a key finding last year.
However, it also identified good practice in a number of areas of the audits, including delaying signing the audit opinion until all evidence had been provided by the audited entity, and in the firm-wide procedures, including engaging external consultants in its root cause analysis process.
The FRC’s key findings related principally to the need to further strengthen the effectiveness of the audit of revenue, ensure audit teams urgently apply appropriate levels of challenge and scepticism, in particular on areas of judgment on high risk audits, ensure materiality is consistently set at an appropriate level, enhance the quality of the audit of inventories, and improve certain quality control procedures on audits.
The FRC continued to find problems in the firm’s audit of revenue. Insufficient relevant and reliable audit evidence was obtained to conclude on the occurrence and accuracy of the significant revenue stream. In particular, on one audit the audit team took assurance inappropriately from client systems rather than testing effectiveness of controls or obtaining evidence from independent sources.
At the same time, insufficient evidence was obtained to confirm the effective operation of management’s key controls over revenue recognition. On one audit, the audit team did not recognise that the control tested did not relate to the basis of revenue recognition under certain contracts.
Insufficient evidence was obtained to mitigate control weakness identified during IT general control testing on a key system relied on for generation of revenue data, while analytical procedures were insufficiently detailed.
Also, insufficient procedures were performed to conclude on the completeness of a sales returns provision.
Challenge and scepticism
Previously, the FRC reported that the firm should urgently improve the extent and rigour of challenge of management in areas of judgement. The FRC’s report stated that it had seen some improvement, but was concerned that it still saw instances of inadequate or insufficient challenge.
The report also highlighted concerns over the level of audit evidence obtained to confirm the existence and valuation of inventory, and the need to improve quality control procedures.
A spokesperson for Grant Thornton said: ‘We acknowledge today’s announcement, relating to the regulator’s review of a sample of audits conducted in 2018 and early 2019. As recognised by the regulator, the measures we have put in place since last year to strengthen audit as a specialism at our firm and ensure more consistent quality, are not fully represented in this years’ review, owing to the timeframes of the review cycle.
‘Audit quality remains a priority for us, and we are encouraged by the indicative progress we have made over the past year in enhancing our audit quality.’