Among the areas singled out for particular attention were 'ensuring that the firm's change [restructuring] programme does not have an adverse impact on audit quality', undertaking measures to improve compliance with personal independence requirements' and 'improving the effectiveness of the engagement quality control review process'.
The report also called for improvements to 'achieve greater consistency in audit quality across business units and industry groups' and 'ensure that in all cases sufficient substantive audit procedures are performed, and evidence obtained, in the audit of revenue'.
The AIU found that of the 14 audits assessed, 11 were performed to a good standard withlimited improvements required - up from eight in 2011/12- while two were acceptable overall with improvements required, compared to five in the previous year.
However, one audit 'required significant improvement in relation to the sufficiency of audit evidence relating to the entity's accounting records maintained by service providers, the valuation of the entity's investments and certain other matters'.
PwC, which earned £963m of its £2.6bn turnover in 2012 from audit work, up from £909m in 2011, audited 488 UK entities of which 36 were FTSE 100 companies and a further 60 were in the FTSE 250.
The AIU reported that the firm had taken a number of steps in response to findings in 2012 to achieve improvements in audit quality. These included 'further training for engagement leaders and enhanced pre-issuance quality control procedures for a sample of the firm's higher profile audits'. PWC also 'improved its template for reporting to Audit Committees'.
It reviewed the firm's audit of goodwill and other intangible assets in eight audits, including four FTSE350 entities and two audits 'identified issues concerning the sufficiency of evidence or of challenge of the appropriateness of management's assumptions supporting goodwill and/or other intangible assets'.
In also assessed the firm's audit work in relation to group audit considerations. In one case 'the firm instructed another PwC network firm, as component auditor, to carry out the audit of the whole of the entity, including the audit of the consolidation process'.
'The UK firm was fully involved in the identification of significant and elevated audit risks, in determining the planned response to them by the component auditor and reviewed the component auditor's work on the consolidation. However, under Auditing Standards, a group auditor cannot delegate responsibility for performing the audit as a whole, including the audit of the consolidation process, to a component auditor.'
In terms of audit of revenue, the AIU said in one case 'the group audit team was not sufficiently involved in the planning and conduct of the audit of revenue in a significant component', which resulted in 'insufficient audit evidence in relation to the entity's reported revenue'.
On PwC's off-shore service centres are concerned, the inspection team said the firm expects changes being introduced through its assurance transformation programme to result in 'significantly fewer audit procedures being undertaken by its overseas service centres'.
It said the firm's service centre in Newcastle will continue to be used for review of financial statements for FTSE 350 entities.