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FRC finds Baker Tilly audit quality issues

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25th Apr 2014
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The Financial Reporting Council (FRC) highlighted shortcomings in Baker Tilly's audit work following a regulatory inspection.

The FRC's Audit Quality Review (AQR) team looked at six individual audit engagements at the firm, including one it previously reviewed. It also reviewed the firm’s policies and procedures supporting audit quality.

In a resulting report, the FRC identified areas improvements needed in the firm's its audit policies and procedures.

The regulator expressed concern that the firm had not yet adequately addresses some of the issues identified in an earlier review of Baker Tilly's audit quality. 

The AQR team wrote that while the firm had taken steps to improve its audit quality, its rate of progress had been slower than expected.

Two out of the six audits the FRC reviewed were performed to a "good standard with limited improvements required".

But one further audit needed improvements and three needed significant improvements relating to one or more of the following: the performance of substantive analytical review procedures, audit of impairments, reporting of audit differences arising on the audit of the valuation of interest rate derivatives, the audit of IT general controls and the consideration of the level of overall financial statement risk.

Some of the issues with audit quality identified by the FRC included: 

  • Inappropriate expectations were set (certain aspects of all four audits)

  • A lack of corroboration of explanations for significant variances (aspects of two audits)

  • A lack of disaggregation of the balances being tested (aspects of two audits)

  • Insufficient or no audit procedures performed over the reliability of the data produced by the entity and used in the substantive analytical review to both develop expectations and corroborate explanations for variances (aspects of three audits)

  • In one audit the results of an analytical review performed in respect of a particular revenue stream, which relied heavily on data produced by the entity’s systems, were considered by the audit team to be “exceptional”, and as a consequence no further audit procedures were performed. The audit team had not obtained sufficient evidence of the reliability of the entity-produced data used in the analytical review and had not recorded why it reached the conclusion that it was ‘exceptional’

Baker Tilly responded in a statement: "We are committed to achieving the highest standards of audit quality and we continue to take whatever actions are necessary to do this. 

"We welcome the AQR team’s report and we are already addressing all of the findings that will contribute to an improvement in audit quality." 

AccountingWEB's financial reporting editor Steve Collings said the report suggests Baker Tilly has set "inappropriate expectations and shown a lack of corroboration where explanations/variances have been evidenced, shown a lack of disaggregation of balances and has performed insufficient or no audit procedures over the reliability of the data.

"Clearly the firm’s audit methodology does need to be revised to ensure appropriate use of analytical procedures in gathering audit evidence and the adoption of other substantive procedures where needed as their current procedures in the use of analytical procedures are clearly resulting in serious criticisms from the regulator," he said. 

Collings reminded all registered firms of the need to ensure their audit methodologies compy wtih the UK and Ireland ISAs. 

"As well as ensuring you are familiar with the requirements of the ethical standards and ensure your audit work can not only stand up to scrutiny, but also support the audit opinion." 

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