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July 25, 2011

AIU calls for an increase in auditor scepticism

The annual inspection of the six largest accounting firms in the UK has indicated a concern over the level of auditor scepticism in financial reports.

The individual inspection reports, which include the Big Four, Grant Thornton and BDO, issued by the Financial Reporting Council’s Audit Inspection Unit (AIU) found most firms need to step up professional scepticism when assessing the assumptions and other bases used particularly for fair value measurement of assets and liabilities.

PwC was told to pay more attention to the assessment of goodwill impairment, in particular the appropriateness of key assumptions and the adequacy of related disclosures while Ernst & Young (E&Y) was advised to ensure there was substantial evidence for growth rates and other assumptions.

This year eight audits, an increase of 3 compared with the previous year, have been indentified as requiring significant improvements in relation to the sufficiency of audit evidence for several key aspects of the audit this year.

Other issues identified were a lack of auditor independence and E&Y was told to ensure the content assessment of the quality of component members’ work on group audits. According to the report, in one case an E&Y group audit partner did not visit the main overseas location, despite it being a requirement of the Big Four firms audit methodology.

Professional Oversight Board interim chairman John Kellas said in a recent statement that further improvements are still necessary where audit quality is concerned, despite detecting year on year improvement.

“The current difficult economic climate will throw up challenges for auditors, who will need to perform consistently at their best to meet them,” he said.

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