* Tesco scandal spills over into broader audit checks
* Mazars, EY first to be fined in annual audit checks
By Huw Jones
LONDON, May 29 (Reuters) - Tesco's book-keeping scandal has prompted Britain's accounting policeman to turn a spotlight on annual reports in the retail sector to check for similar irregularities.
The Financial Reporting Council (FRC) has already opened a probe into Tesco's accounts, and it said on Friday that scrutiny of sample audits in the coming year will focus in particular on the food, drinks and retail sector.
Tesco, Britain's biggest supermarket, said in September it had overstated its first-half profits by 250 million pounds due to incorrectly booking payments from suppliers, a figure it later raised to 263 million pounds.
"We will pay particular attention to the extent to which the audit team has challenged and checked the appropriateness of how these arrangements are accounted for," said Paul George, executive director at the FRC.
Routine supervision also uncovered complex arrangements between suppliers and customers entered into financial reporting and audit risks, he said.
This work will be part of the FRC's annual inspection of audits from a sample of blue chip companies.
The watchdog will also inspect a number of first-year audits to assess the extent to which changes in a company's accountants have an impact on the quality of auditing.
Reforms in Britain and the European Union are forcing companies to switch their accountant every few years after some firms kept the same auditor for decades, raising questions about independence.
George said some companies have expressed concerns that switching auditors brings risks and the FRC will examine if there is any evidence to back such views.
"My personal view is that a change in auditor presents an opportunity for improvements in audit quality," George said.
"We might be able to provide more confidence to the market that actually these audits have been, by and large, conducted to a higher standard following the change."
The FRC on Friday published its latest annual report on checks of 109 company audits, saying quality had risen to record levels but a third still needed improvements.
The watchdog used new powers for the first time in its annual checks to fine two accounting firms for deficiencies in auditing.
EY, one of the world's "Big Four" accountants, was fined 52,500 pounds, and French accountant Mazars hit with a 10,400 pound penalty.
"More importantly than the fines, we are imposing conditions as well around methodology and training. In some ways writing a cheque is straightforward, but the actual conditions attached to the fine require clear action on the accounting firms to up their game," George said. (Reporting by Huw Jones; Editing by Hugh Lawson)