The latest Audit Quality Inspection (AQI), conducted by the Financial Reporting Council (FRC), took into account eight audits carried out by the auditors at BDO from a total of an estimated 87. These included three FTSE 250 companies and one FTSE 100 company.

The AQI found that four of the audits under inspection were good with limited improvements, while the remaining four required improvements. None of the audits reviewed were assessed as requiring significant improvement.

One of the main issues for the FRC inspectors flagged problems around the audit procedures for audit of revenue, which were not effective. The inspectors concluded that this issue required more than limited improvements.

In one audit there was not sufficient information in order to develop the expectations adequately. In another, there was insufficient evidence of management’s explanations regarding changes from what was expected.

Three audits showed insufficient evidence was collected to show that revenue was collected in the correct period.

In particular, in one audit there were insufficient audit procedures in place to be able to test the accuracy of data used in the testing of revenue through data analytics.

BDO’s response to the problems highlighted by the inspectors stressed that the firm had reviewed the processes used for audit of revenue.

In its response in the AQI report, BDO stated: ‘In carrying out our root cause analysis in this area we have identified a contributory factor to the issues identified which is that our detailed understanding of certain aspects of the audited entities’ revenue systems could have been improved. This resulted in certain aspects of the test design not being focused appropriately.’

The mid-tier firm will also be implementing changes to the methodology and the way in which controls are assessed, as well as improving training and communications about the importance of detailed planning in advance of the audit.

On a more granular level it is conducting a review of its Substantive Analytical Procedures (SAPs) guidance, which will focus on the decision as to whether SAPs are a suitable response to the level of risk identified and will re-emphasise key aspects such as how expectations should be developed and the need to corroborate management’s explanations. This will be released by the end of June 2016.

Improve testing of controls

BDO needs to improve its control testing environment. The report stated that controls need to be tested so that the auditor knows the extent of their reliance. One audit showed that there was not enough data to demonstrate that the cash reconciliation was operating correctly.

A second audit under review was criticised as a change of system had been implemented over the past year but there was not enough testing of changes to the old system or of the effectiveness of the new system.

Poor communication

Once again, BDO was pulled up over the effectiveness of the audit team and partners’ communications with audit committees, effectively their key client contacts.

This was consistent with last year’s findings. Examples of good communications between teams were found but they could be improved.

Changes in approach were not being communicated to the audit committee and there was insufficient reporting on IT control weaknesses and on certain areas of judgment.

Fraud and risk management

On several audits there was not enough focus on the fraud risk characteristics when deciding which journals would be tested. In another case, there was no evidence of journal testing on the largest component within the group.

Independence breaches

‘Following our prior year findings on independence matters, the firm introduced a system to test partners’ financial interests on a rolling basis over an average three year cycle. Given the timing of implementation, the results were not available at the time of our review’ the AQI report stated.

‘The firm should embed the changes to its procedures to enable it to identify ethical and independence breaches on a timely basis.’

Strengthen the monitoring procedures of quality control systems

BDO’s Audit Quality Assurance Review (AQAR) was reviewed. It did not cover some of the areas of quality control which were selected for review. The approach to office inspections was inconsistent.

Over the last 12 months, the firm had made changes to address key failings highlighted in last year's AQI report.

The FRC inspectors found that BDO had responded to recommendations in last year’s report and has instituted a number of measures to address the issues. These included training and enhanced guidance covering AQR findings, other regulatory and internal reviews, and other audit matters. The resources of the firm’s ethics function have been expanded and it has instigated new processes for monitoring and resolving questions arising over independence issues.

Scott Knight, head of audit at BDO LLP, comments: 'Through its Audit Quality Review team, the Financial Reporting Council rightly continues to challenge the profession to raise the standard of audit quality. We welcome its engagement and feedback on BDO’s audit work.

'We continue to put quality at the centre of our audit offering, and are pleased the AQR report identifies that none of BDO’s audits require significant improvements. We will continue to invest in our processes and audit tools to enhance audit quality. We have considered the root causes of the findings of the review and are implementing detailed action plans to address them.'

The BDO LLP Audit Quality Inspection Report 2016 is available here