The UK accounting watchdog has fined PwC £4.55m for failing to challenge management at IT services company Redcentric where a £20m hole was later found in the books.
The Financial Reporting Council (FRC) said it had also required PwC, one of the world's "Big Four" accounting firms, to supplement the monitoring and support of its audit practice in Leeds.
The watchdog said breaches were numerous and in certain cases basic or fundamental in nature.
Two partners, Jaskamal Sarai and Arif Ahmad, were fined £140,000 each. Both, along with PwC, were given a severe reprimand.
PwC also had to publicly declare that its audit reports did not satisfy the relevant requirements.
All fines were discounted to reflect an early settlement of the case that covered audits for the financial years ending March 2015 and March 2016.
In a statement, PwC apologised that its work fell below the professional standards expected of the company. "Since the work in question was completed we have taken numerous steps to strengthen processes," it said.
PwC said this month it was investing an extra £30m to focus more quality in audits.
Redcentric's 2016 statements were extensively restated, with net assets written down by £15.8m and a profit after tax of £5.3m was restated to a loss of £4.2m.
The FRC said Sarai and Ahmad had undertaken training in relation to applying professional scepticism to what a client tells them.
"Professional scepticism was lacking in this audit. Had it been applied, it is likely that certain material misstatements would have been detected," said Claudia Mortimore, the FRC's deputy executive counsel.
"As this is the second final decision notice involving PwC Leeds office in recent years, we have mandated that the firm supplements its ongoing monitoring and support for that office, to further improve the quality of audit work in the future," Mortimore said.
The audit sector, and the FRC itself, face sweeping reforms in a bid to improve standards in auditing after the high-profile collapse of construction company Carillion and retailer BHS, which PwC audited.