The UK's biggest audit firm has come under fire from the accountancy watchdog for not tailoring audit methodologies and guidance for financial services clients, and for failing to include substantive audit evidence on the files of some audit clients. In a report on PricewaterhouseCoopers, the auditors of failed Northern Rock, the Financial Reporting Council's Audit Inspection Unit said: 'While certain informal guidance exists for financial services audits, we understand that some of it is considered by the firm to be out of date. In our view, certain areas of the firm's audit methodology and guidance need to be tailored for financial services audits.' The AIU reviewed the quality of 14 individual audits undertaken by PwC for its 2008/9 inspection, which related to FTSE 100, FTSE 250 and other major public companies with financial year ends that fell between March 2007 and May 2008. According to the AIU, areas that require significant improvement among the firm's audits included that of obtaining substantive audit evidence. On one listed audit, the AIU had to seek oral explanations from the audit team after concluding that there was insufficient substantive audit evidence on the audit files for revenue and trade and other payables, both material areas of the financial statements. In the first reports, which began last year, the AIU questioned PwC's policy of allowing and rewarding internal specialists (such as tax partners) involved in audits, and key audit partners to sell non-audit services to audit clients, on the basis that they are not considered to be part of the 'audit team'. This time round, the AIU noted conflict in this area again, concerning the firm's communications - while they state that the firm will not reward audit team members for selling non-audit services, one communication also stated that demonstrable effort in following up client contracts in order to identify opportunities to 'add value' would be rewarded. The AIU cautioned that ' it is not appropriate to reward audit team members on the basis of whether the identification of specific opportunities results in sales of non-audit services to those audit clients'. PwC was also censured for failing to identify revenue recognition as a significant fraud risk in the majority of its audits - inconsistent with the firm's audit guidance that states that only in limited circumstances should revenue recognition not be treated as a significant risk. The inspectors further took issue with the firm's efforts to improve profit margins through audit efficiencies such as eliminating duplicated work and maximising reliance on clients' controls. Of this, the AIU commented that while it is appropriate to identify ways of improving efficiencies on audits, such objectives must not affect audit quality. The AIU also remarked on the firm's strategy and communications. which demonstrated the importance of quality audits, but which lately placed increased focus on financial growth. 'Although there is no evidence to suggest that this has detracted from the focus on audit quality, in our view it is important for the firm to send a consistent message that achieving the other areas of the strategy is subject to the overriding requirement of achieving quality audits,' the AIU said. PwC was also criticised for producing a transparency report that was less informative than its previous report and those of other Big Four firms. Overall, the AIU said PwC has 'generally made good progress in addressing our overall findings from last year' although 'certain issues continue to recur'. The firm, in its response, said it remained committed to working constructively with the AIU.