Ernst & Young has improved the quality of its audit work through staff training but issues remain regarding recognition of revenue, goodwill impairment, group audits and internal control tests, the Financial Reporting Council has assessed in its annual review of the firm.

While the Audit Quality Inspection Report for 2012/13 commends E&Y for placing 'considerable emphasis on its overall systems of quality control and, in most areas, has appropriate policies and procedures in place', the inspectors found similar issues that had been raised 12 months ago and 'expect the firm to take further action to address them'.

The FRC sampled 12 of the 288 estimated E&Y audits of UK entities and found 10 were 'good with limited improvements required', in comparison to only six that were judged to be of the same standard in 2011/12. The firm also reduced the number of audits considered 'acceptable overall with improvements required' (from three to one) and those with 'significant improvements required' (from two to one).

The firm was ordered last year to improve goodwill impairment training for staff and the FRC considers this an area that remains a weakness at the firm. Of the eight audits sampled by the regulator, two had 'insufficient evidence of assessment of the reasonableness of the growth rates' and methodologies used by management in impairment review persist. In one of the selected audits, the firm's audit team was also admonished for 'not exercising appropriate professional scepticism in reaching their conclusion'.

The audit of revenue was reviewed on all the sampled audits, with 50% (6) considered by the FRC to have issues requiring attention. The sample of contracts were selected from 10 months - rather than the full year's information - while in one audit, 'no justification was given for the sample size and why it was considered adequate' in one of the audits.

In a review of the firm's policies and procedures, impartiality concerns were raised as 'some partners continue to seek credit for the sale of non-audit services to entities that they audit'.

Additionally, E&Y was admonished for 'not having a process in place for central notification of secondments and, as a result, is unable to undertake monitoring procedures to ensure that the new policy is being correctly applied and that the requirements of ethical standards are being met'.

Last year, FRC raised the issue that ethical standards required authorisation by those charged with governance but noted that 'the error remained in the current version of the firm's policy.'

Responding to the report, E&Y's managing partner assurance, Hywel Ball, welcomed the FRC's recognition of the firm's 'overall improvement in audit quality', but addressing the areas requiring improvement said: 'While we do not always share the FRC's view on the significance of individual matters, we value the FRC's recommendations and have already implemented a number of actions in response.'

The full report is available HERE