The FRC’s 2013/14 inspection reviewed 17 of KPMG’s audit engagements, including a follow-up on one which had been inspected the year before. Overall, the firm’s rating improved, with 10 audits judged as a good standard, compared with seven previously, and four requiring improvements compared with six in 2012/13.

However, this year two audits required significant improvements in relation to the audit of intangible assets and revenue, whereas there were none in this category the year before. An assessment of the quality of one audit was not finalised.

The FRC described its findings as ‘diverse’ and identified no common themes, although the regulator said it was concerned about KPMG’s rate of progress in addressing prior year findings relating to the use of other auditors in undertaking letterbox company audits. While revised guidance is under development, the FRC said ‘appropriate action should have been taken on a more timely basis’.

The regulator also stated it is important that KPMG takes prompt action in response to the recommendations of an external review it commissioned of the firm’s ethical policies and procedures, which reported in February 2014.

The FRC’s review found that on three audits there was insufficient evidence that the audit team had given appropriate consideration to independence threats, and related safeguards, arising from the provision of non-audit services. On a further audit, there was insufficient evidence of approval by the firm’s ethics partner of certain non-audit services which included a contingent fee arrangement, while on two audits a senior partner with a client relationship role accompanied the audit engagement partner to certain meetings with the audit committee.

In addition, the FRC wants KPMG to reconsider its approach to the pre-issuance reviews of financial statements, a recommendation the regulator has made for the two previous years and which it says would bring the firm in line with established practice. It wants KPMG to introduce to a requirement for its accounting and reporting technical department to review the clearance of any significant matters it raises in a pre-issuance technical review prior to the audit report being signed.

Tony Cates, KPMG’s head of audit, said: ‘We take very seriously observations and recommendations made by the FRC and have developed a detailed action plan that responds to these matters together with those identified through other internal and external review processes.

'Reflecting our desire for continuous improvement, many of these actions are well progressed having been developed as issues emerged through the inspection process.’

The FRC’s inspection report is available here: https://www.frc.org.uk/Our-Work/Publications/Audit-Quality-Review/Audit-Quality-Inspection-Report-May-2014-KPMG-LLP.pdf