Alongside that, concerns were raised over analytical review procedures in the audit of revenue; the extent to which corroborative evidence is used in the testing of journals; and ensuring the ethics partner is always consulted on matters of independence.

In all, five, or 63%, of the eight BDO audits assessed were considered ‘good or requiring limited improvements’; 25% were found to require improvements; and 12.5% were considered to be in need of ‘significant improvements’.

In 2015/16, BDO was given a clean bill of health, while in 2014/15 one audit required significant improvement.

In the three audits assessed as requiring more than limited improvements, the FRC identified ‘inadequate evaluation’ by BDO ‘of whether an auditor’s expert’s report provided sufficient and appropriate audit evidence in relation to certain provisions, and reporting this to the audit committee’.

It also found there was ‘insufficient challenge relating to the lack of disclosures for significant uncertainties, and reporting this to the audit committee,’ and ‘insufficient evidence of involvement of the group audit team in the audit of a significant overseas component and the sufficiency of challenge on the appropriateness of the inventory provisions’.

In its root cause analysis, BDO said ‘improvements could be made to the review process’.

It added the ‘knowledge and understanding of the client and the audit committee is of particular importance to audit quality as requirements become more complex. Smaller companies do not always have the sane resources as larger listed companies’.

The firm said it is ‘currently designing new communications for new and existing clients detailing the legal and ethical regimes in place for public interest entities’.

Communication

A key FRC finding was that, while there are examples of good communication, there were instances where ‘insufficient information and evidence of challenge on estimates: the audit team did not provide the audit committee with the necessary detail to enable them to understand the uncertainties surrounding the related estimates used as a basis for the provisions’.

It was also found there was ‘insufficient discussion of the adequacy of disclosures in the financial statements: not providing the audit committee with sufficient information on contract-related risks to help assess whether relevant disclosures were adequate’, and ‘insufficient reporting of control weaknesses: not providing details of control weaknesses identified in the audit’.

BDO said it has established a project team to examine improving its communications with ‘those charged with governance’.

‘This includes revising our report templates, making them easier to prepare and properly focused on key issues. We will be including visualisations for subjective judgments and estimates to enable audit committees to appreciate alternative potential outcomes,’ the firm added.

Quality of evidence

On the quality of audit evidence and challenge to management in relation to the audit of provisions, the FRC found cases where the audit team did not ‘adequately evaluate whether an auditor’s report provided sufficient and appropriate audit evidence in relation to certain provisions’.

It also identified instances where the audit team failed to ‘provide sufficient challenge to management in respect of the level of inventory provisions’.

In relation to both issues, BDO found it teams were ‘not following ISA 540 Auditing Accounting Estimates, including Fair Value Estimates precisely, although they were embracing the overall requirements’.

As a result, the firm said it has now created a ISA 540 workbook which was released in March 2017.

Ethics

Ethical standards require that, for listed companies, where fees for non-audit services for a financial year are expected to exceed the audit fees, the audit engagement partner should discuss the circumstances with the ethics partner.

The FRC found cases where the required consultation had not taken place, had taken place retrospectively or should have taken place earlier.

In cases where non-audit services involve providing advice to management, the audit team should consider whether management are adequately informed and have the appropriate skills and competencies to make their own decisions. The FRC identified a case where ‘the firm noted that management were competent enough to make an informed decision’, but it was unclear how BDO had arrived at this conclusion.

In its response, BDO said partners ‘are required to complete a number of different forms for different reasons, which means the process is not always efficient and information can be missed – we are reviewing this process and the potential for simplification’.

It went on to say audit clients mays ‘engage directly with other parts of our business for non-audit services without fully appreciating the complexity of the independence requirements’. It said it is ‘designing new communications for new and existing clients covering the legal and ethical regime’.

Scott Knight, head of audit at BDO said:  ‘We are pleased that an increasing number of our audits have been reviewed as good or requiring limited improvements. However, we recognise that one of the audits reviewed required significant improvement.

‘We take audit quality extremely seriously and have a robust track record of delivering quality audits. We have considered the root causes of the findings and are implementing detailed action plans to address them.’

BDO performed 77 audits of UK entities in 2016/17.

BDO's full AQI report is  bdo_llp_-_audit_quality_inspection.pdf.

Report by Calum Fuller