In the 2016/17 inspections, which reviewed eight Grant Thornton audits, four were ranked as good or requiring minimal improvements (50%), one required improvement (13%) and three were seen to need significant improvements (37%).

This contrasts with last year’s results for 2015/16 when six out of the seven audits assessed were ranked as good or required limited improvements and no audits needed significant improvements.

In its response to the AQI report, Grant Thornton UK LLP spokesperson told CCH Daily: ‘The FRC audit quality review process is an important part of ensuring we deliver the highest quality audit work. We are disappointed with today’s results which are out of step with previous reports, and with broader internal and external reviews of our audit work.

‘However, these are important findings and we have already taken steps to address the issues raised in the report.’

In line with this, Grant Thornton has appointed a director to lead the update to the design and implementation of the root cause analysis.

On a positive note, the FRC identified examples of good practice in several of Grant Thornton’s audits relating to financial investments, in particular the auditors’ level of challenge, and pension balances which included effective communications and consultations with the firm’s internal specialists.

The issues which require significant improvements include the failure to evaluate the entity’s methodology, assumptions and judgments used in determining provisions; insufficient testing of income; and insufficient audit procedures in relation to investments.

Ethics

There were eight instances where consultations on non-audit to audit fee ratios were completed later than required by the Ethical Standards but none of these had been reported as breaches. Another five were reported at a later date.

The Ethical Standards are in place to ensure that the firm and all those in position to influence an audit, act with integrity, objectivity and independence. It is required for all firms to establish the policies and procedures to assure that the ethical requirements are complied with.

Grant Thornton told the FRC that no testing of partner personal independence had taken place at the firm for three years. The firm’s internal audit review to monitor prohibited investments showed that the partner responsible for the system did not report to the ethics partner, was not subject to oversight and his team were unaware that they had to escalate issues to the ethics partner.

Grant Thornton has now created a new role, head of quality, ethics and excellence, which reports directly to the CEO and is tasked with improving the firm’s compliance in this area.

In its 2016 report, the FRC noted that the firm had to provide a more detailed description of audit procedures in its auditor reports. Grant Thornton has developed in this area but still needs further improvement as one audit stated a lower audit materiality than was actually applied. Another failed to accurately describe the level of audit evidence obtained or the procedures performed in relation to pension scheme assets and a separate audit implied that more procedures were carried out than was the case.

Grant Thornton commented: ‘The actions we have already undertaken have gone some way to improve things and we are pleased this is acknowledged in the review as a positive development.

There is however more to do and the issues identified relate to the precision of the description of the risk and the audit procedures performed in relation to that risk.’

Auditing revenue

A review of one of the audits revealed the sampled used by the firm was too small making it unclear whether sufficient audit evidence over the revenue balance had been obtained. It was also found that insufficient audit work was performed over the integrity and accuracy of management’s income report and the disclosure of income by region.

Grant Thornton’s communications with the audit committees also needs to be improved as there was insufficient evidence that the audit team had communicated the resolution of outstanding matters to those in charge of governance before signing the auditor’s report.

The firm is currently updating the guidance used for communication with audit committees, which is currently in its last stage and will be issued this month. The requirement for the final resolution of outstanding matters to be documented has also been made clearer.

Internal controls and appraising staff

The FRC report found that when promoting a senior member of staff to audit director the firm failed to take into account the individual’s involvement in an audit which was recently assessed by an AQI as requiring significant improvements. It also found that another director was given the highest level for their annual performance rating despite being part of an audit team that received a ‘marginal fail’ on an internal file review and required improvements according to a previous AQI.

It was also noted that in three instances, the performance review for three senior members of staff appeared to take into consideration the selling of non-audit services to audit clients, which goes against the Ethical Standards which became effective in June 2016.

Grant Thornton said: ‘The firm does not incentivise people for the selling of non-audit services to audit clients nor is this considered in performance reviews or remuneration discussions. However, the language used in the individual performance reviews was misleading.’

The FRC estimates that the firm audited 78 UK entities within the scope of independent assessment as at 31 December 2015, of which 65 were listed companies. They included one FTSE 100 and four FTSE 250 companies.

Read Grant Thornton's AQI report:  gt_llp_-_audit_quality_inspection.pdf.