The Financial Reporting Council's (FRC's) latest review of audit quality at BDO is critical of the firm's 'tone from the top' and raises concerns about its failure to address weaknesses identified in a previous inspection.

The audit quality inspection report states: 'We were disappointed to find that certain issues arising from our 2009 review had not been adequately addressed and that additional matters arose as a result of some of the changes made. We expect the firm to monitor more closely the effectiveness of actions taken in response to our findings.'

The recurring problems included disclosure deficiencies, which were highlighted in two prior inspections, and which the report says 'calls into question the quality of the firm's overall review of disclosures'. There were also ongoing issues with the audit of related party transactions.

The report says that the firm should ensure it 'demonstrates its commitment to enhancing audit quality by implementing changes to its audit procedures and processes in response to deficiencies identified in quality reviews at the earliest opportunity'.

Of the audits assessed as part of the current review, two were rated as good and three as acceptable. Two were identified as requiring significant improvements, one because of a lack of appropriate involvement in the conduct of the group audit and the other in respect of the audit of revenue, fixed assets and stock.

On five audits the FRC identified concerns about the level of professional scepticism applied in key audit areas. In one case, the audit team did not appropriately challenge the inputs to management's collective impairment model, while on another there was a lack of challenge of management in relation to the appropriateness of valuing plant, machinery, land and infrastructure on a fair value basis.

On a further two audits, the audit team failed to challenge appropriately explanations received from management, and on the fifth the audit team did not show appropriate scepticism when reporting to the audit committee on the directors' valuation of a property asset.

The FRC also criticised BDO's Audit Stream Business Plan and other key performance indicators which it says suggest that the provision of non-audit services to audited entities appears to be one of the firm's strategic goals. It states: 'We have commented on these and similar matters in the past, as they are unacceptable and must not continue.'

The FRC calls on BDO to review the firm's audit strategy and remove any references that focus on, or could be interpreted as focusing on, the cross-selling of non-audit services to audited entities. It also wants what it calls 'the significant deficiencies identified in the firm's ethical processes and guidance' addressed.

In response to the report's finding, Paul Eagland, BDO's head of audit and tax, said: 'We will continue to engage fully with the FRC, and are pleased that they recognise our "emphasis on overall systems of quality control", as well as our "co-operation and assistance".

'We are committed to continuous improvement in everything we do and therefore keen to act on constructive feedback in the context of the high standards that we already apply throughout our work, and for which we regularly receive positive feedback from clients and regulators.'