Criticism was also made of the firm’s auditing of tax provisions and valuation of assets and impairment.

The FRC reviewed 27 of PwC’s audits, comprising seven FTSE 100 companies; 14 FTSE 250 businesses; two ‘other’ listed companies; and four ‘other’ entities. No audits of AIM businesses were assessed. In 2015/16, four audits FTSE 100 companies were considered; 13 FTSE 2015; three ‘other’ listed; two AIM businesses and; three ‘other’ entities.

PwC was the only firm inspected to achieve over 90% ‘good or limited improvements required’, with 93%, up from 84% in 2015/16.

Of the 27 PwC audits inspected, 25 were found to be ‘good or limited improvements required’, two were identified as requiring improvements and none were found to require significant improvements. In 2015/16, 25 were examined, with 21 were ranked as good with limited improvements required while four audits were flagged as requiring further improvement. Again, none were identified as poor.

The report focused on the assessment of key assumptions made in audits; quality of audit evidence and; independence and ethics.

The issues that lay behind its two sample audits which required improvements were ‘insufficient’ evidence of the audit team’s consideration and challenge as to assumptions and; insufficient consideration or evidence of challenge in relation to the basis of uncertain tax provisions and insufficient evidence obtained to support the level of use of internal audit test of IT general controls.

Ethics

On independence and ethics, the FRC highlighted insufficient monitoring of compliance with the firm’s independence policies and procedures.

Most identified breaches related to the holding of ‘prohibited investments’ and the commencement of non-audit services for audited entities, in advance of obtaining the audit partner’s approval. The FRC notes in its report that this is ‘similar to last year’.

In 2015/16, the number of independence breaches rose in the previous year. Nearly all of those instances related to the holding of prohibited investments and the late approval of non-audit services, both problems highlighted in the last annual review, and not addressed.

This year, they also included cases where PwC’s ethics partner was ‘not consulted on a timely basis’ regarding the level of independence threats associated with non-audit fees for listed entities exceeding audit fees.

Some of the holdings of prohibited investments had not been self-declared and were later identified through the firm’s personal independence testing, which covers a sample of partners each year.

PwC said in its response to the FRC that it had provided a new ethical standard in 2017 and provided training and updated guidance to partners and staff ‘throughout the firm’.

The FRC introduced a new ethical standard in April 2016 as part of a wider package of revised standards released by the regulator. It included non-audit services restrictions for public interest entities (PIEs); changes to restrictions for other listed entities, particularly in relation to tax services and; changes to personal independence restrictions.

On impermissible investment holdings, PwC said the responsibility for ensuring data in the firm’s systems ‘accurately reflects client structures’ rests with the audit engagement partner. It added that by June 2016, all assurance staff completed mandatory training on the importance of maintaining accurate client information.

In the case of timely approval of non-audit services, the firm said all staff and partners had completed two ‘firmwide’ independence training modules by September 2016.

Tax

The FRC was also critical of the quality of PwC’s audit evidence to support the level of tax provisions. In particular, it highlighted ‘insufficient supporting evidence or challenge’ regarding the level of certain tax provisions’.

‘Insufficient evidence supporting certain long-standing tax provisions’, was also found, in particular the extent to which audit evidence from prior years had been brought forward or reconsidered in the current year.

The FRC also flagged up ‘insufficent challenge’ relating to the adequacy of disclosures relating to the judgments made and ‘related sensitivities’ for the tax provisions.

For its part, PwC said its engagement teams ‘leverage the expertise and experience’ of its tax specialists and its audit of tax training, which it provided in late 2016 and early 2017 responded to the findings of the 2016/17 inspection process.

Valuation of assets and impairment

The FRC called on PwC to improve its evidence of appropriate consideration and challenge in relation to the valuation of assets and impairment reviews.

It noted the audit work was ‘often’ performed to a good standard, but noted in relation to the valuation of properties, there was insufficient evidence that corroborating information for some of the changes in market values was obtained to support management’s expert’s explanations.

It was also found there was insufficient evidence if the audit team’s consideration and challenge as to why no brand values were recognised on the majority of acquisitions in the year.

For impairment reviews, insufficient challenge was made of the discount rates used by management and insufficient evidence given that the audit team had adequately challenged whether a cash-generating unit was significant and should therefore have been separately disclosed in the financial statements.

In response, PwC said professional scepticism has been ‘embedded alongside coaching, review and supervision’ in its training programme.

It added its training has been supported by ‘refinements’ in its guidance and the publication of a ‘12-point auditing estimates practice aid’.

PwC said in a statement: 'We value the FRC’s perspective on the quality of our audit work, policies and procedures. We are pleased with the continued trend of improvement in our results and will use the FRC’s insights, together with our own reviews, to continue to improve how we deliver high quality audits.'

Overall, PwC undertook 472 audits in the 2016/17 period.

The FRC's Audit Quality Report for PwC is here:  pwc_llp_-_audit_quality_inspection.pdf.

Report by Calum Fuller