The audit regulator has issued a Final Decision Notice under the Audit Enforcement Procedure flagging that the statutory audit report for Associated British Engineering signed off by Haysmacintyre did not satisfy the relevant requirements.

ABE was an engineering company based in the UK which delisted from the UK stock exchange in August 2019. Its core operating activity was manufacturing and supplying diesel engines and spare parts for diesel engines and providing associated repair services. Reported revenue for financial year 2018 was £1.6m.

FRC described the audit as having ‘pervasive failures by the respondents in the manner in which they conducted the audit. The audit failed in its principal objective: that of providing reasonable assurance that the FY2018 financial statements were free from material misstatement’.

Issues with the quality of the audit resulted in separate sanctions for the audit firm and the lead engagement partner.

Haysmacintyre, which has audited the listed company for three years, was given a severe reprimand and a financial penalty of £125,000, discounted for mitigating factors, admissions and early disposal so that the financial penalty payable is £70,000.

Cox, the lead audit partner, was also given a severe reprimand and a financial penalty of £17,500 discounted for mitigating factors, admissions and early disposal so that the financial penalty payable is £10,000. He was also criticised in the final decision for spending less than five hours on the audit, mainly spent in management meetings with the client company.

Haysmacintyre and Cox admitted breaches of relevant requirements in six areas of audit work, including inventory, journal entry testing, revenue recognition and debt recovery, defined benefit pension scheme, documentation of audit work on going concern, and review and supervision of the audit.

The breaches admitted were ‘pervasive, extensive and, in relation to the audit of inventory, serious’, the FRC said in a statement.

The requirements of multiple International Standards on Auditing (UK) (ISA(s)) were breached including ISA 220 (quality control for an audit of financial statements), ISA 230 (audit documentation), ISA 240 (the auditor’s responsibilities relating to fraud) and ISA 330 (the auditor’s responses to assessed risks).

In their audit work on inventory, the respondents failed to exercise both sufficient professional scepticism and reasonable professional judgment; and they did not obtain sufficient appropriate audit evidence to provide a reasonable basis for the auditor’s opinion.  

In two other areas (journal entry testing and defined benefit pension scheme) the respondents failed to conduct the audit so as to obtain sufficient appropriate audit evidence in accordance with ISA 500.

Revenue recognition and recoverability of debtors was also identified as a significant audit risk and as a key audit matter in the audit file. The firm’s audit work in this area did not comply with the requirements of ISA 701.

The final decision notice does not make a finding that the 2018 financial statements contained any misstatement and Executive Counsel has accepted that ‘the breaches of relevant requirements were not intentional, dishonest, deliberate or reckless’.

The sanctions determined by Executive Counsel reflect, among other things, the fact that Haysmacintyre has already undertaken an extensive programme of remedial measures designed to address the shortcomings evident in the audit work in question following a report by the FRC’s Audit Quality Review team on the audit of the 2018 financial statements.

 Claudia Mortimore, deputy executive counsel to the FRC, said: ‘Haysmacintyre’s audit contained a number of significant failings, including a failure to exercise sufficient professional scepticism, failure to obtain sufficient, appropriate audit evidence and a failure to document the audit work properly.

‘The imposition of the sanctions, and the FRC’s oversight of the extensive programme of remedial measures agreed with the firm, should lead to audit quality improvements.’

The respondents will also pay Executive Counsel’s costs of £43,924 for the investigation.

FRC Final Decision Note, Haysmacintyre audit of Associated British Engineering plc