In this review cycle, the FRC looked at seven GT audits, of which six were judged as a good with limited improvements required, while just one needed improvements.

This contrasts with the results for 2013/15 when out of eight audits assessed, three required significant improvements, two needed improvements and only three, or under half of all the audits examined, were judged to be good.

The FRC stated: ‘In response to our last inspection report, the firm has strengthened its guidance and training regarding the application of professional scepticism. As part of a Grant Thornton International Limited (GTIL) initiative to develop a new global audit methodology and software platform, the firm has been providing enhanced audit technical training to its staff that is aligned to the specific requirements of International Auditing Standards.’

However, the FRC makes clear it would like GT to go further, saying the firm needs to do more to  raise its audit quality benchmark for partners; strengthen its audit quality monitoring arrangements; improve awareness and monitoring of ethical and independence matters; strengthen procedures related to the direction, supervision and review of group audits; improve the accuracy or precision with which audit procedures are described in audit reports; and improve the quality of communications with audit committee.

The regulator points out that the principal issue resulting in one audit being assessed as requiring more than limited improvements in 2015/16 was insufficient audit evidence in relation to revenue. The audit team should have considered an alternative audit approach such as testing the operating effectiveness of key internal controls and/or performing additional substantive analytical procedures.

In general, the FRC says there are number of areas where GT could be viewed as placing insufficient importance on safeguarding and enhancing audit quality. As an example, it says the firm allowed audit partners to set an audit quality objective for 2015 which was to achieve at least a 2B assessment in an external regulatory audit review, when this was the second lowest of four categories (where improvements to the audit are required).

In its response on this specific issue, GT said the audit quality goal for the firm's 2015/16 performance review was set centrally, and in view of previous results of quality reviews, the priority was to eradicate poor gradings whilst improving overall quality.

‘The results of recent internal and external quality reviews demonstrate that this goal has achieved its desired outcome and did not drive behaviour that only aimed for a 2B assessment. For 2016/17 we will set a goal that further emphasises that the expected standard is at a higher level,’ GT stated.

The AQI report says it was also not clear whether some quality concerns raised as part of the partner recruitment processes had been adequately addressed. GT has a number of quality metrics for partners that feed into the overall partner appraisal process, and the FRC says at times discretionary overrides were made to these metrics during the moderation process (thereby increasing or decreasing the remuneration of those individuals) without sufficient evidence to justify this.
The FRC’s review of GT’s Audit Quality Monitoring procedures (AQM) identified some shortcomings, including insufficient independent testing of the firm’s quality control processes, resulting in insufficient coverage over key central systems.

There were also some concerns about ethical and independence issues, including the lack of mandatory independence training for partners and staff. The FRC says GT did not identify that a new staff member was subsequently found guilty by their professional body of misconduct relating to a previous employment. The individual was also found to have inappropriately signed off the EQCR work steps for an AIM listed entity where an EQCR had not been involved.

In addition, the AQI flagged up continuing weaknesses in the firm’s audit software for changing and re-setting electronic passwords, and said immediate action needs to be taken by the firm to strengthen procedures over access rights and signing authorities.

The FRC is also concerned about instances where approval was given for non-audit services to be provided on a contingent fee basis on the basis that they would be completed before the commencement of the next year’s audit. There was an example of an existing contingent fee arrangement not being identified prior to accepting a new audit.

Other areas of concern included the way in which GT handled audit work with overseas components. On one audit, where all of the audited entity’s operations were overseas, there was insufficient evidence of review and challenge by the group audit team over intangible assets capitalised in the year, a significant risk area.
The FRC also thought GT could do more to improve communications with the audit committee, particularly with regard to the reporting of misstatements and disclosure omissions and the reporting of a significant risk area.

GT responds

GT said: ‘We have carried out a root cause analysis of the findings that are set out in this report and are implementing an action plan to address each of the key findings. A number of actions have already been taken or have been built into our 2016 year-end procedures.

‘Our root cause analysis gave us comfort that our framework of firm-wide policies and procedures was fundamentally sound but in certain areas we had perhaps placed undue trust on individuals to "do the right thing" or had assumed that checks had been undertaken. We will therefore enhance our oversight and compliance monitoring in certain areas.’

The FRC estimates that the firm audited 218 UK entities within the scope of independent inspection as at 31 December 2014, of which 58 were listed companies. They included one FTSE 100 and three FTSE 250 companies.

The AQI inspection report on GT is here