The PWC partner who conducted the audit, Steve Denison, is also facing a fine of £325,000 and has been barred from audit work for 15 years.
The fines were reduced by 35 per cent, from £10m and £500,000, respectively, due to early settlement.
In June 2016, the Financial Reporting Council (FRC) launched an official investigation into the accounting firm's audit of BHS for the 2013 to 2014 tax year, after a preliminary inquiry found grounds for suspicion of misconduct.
BHS went into administration in April 2016, putting workers' retirement nest eggs at risk and The Pensions Regulator has conducted an investigation of the case.
In the end, a £363m settlement with Sir Philip Green was reached to fund a new independent pension scheme for 19,000 former BHS workers.
This gives future pensioners the option of the same starting pension as they were originally promised by BHS, and higher benefits than they would get from the Pension Protection Fund (PPF).
PWC's audit, presented two months earlier than previous years, endorsed the company directors' assessment and signed off BHS as a 'going concern'.
PWC has recognised and accepted that "there were serious shortcomings with this audit work".
A spokesperson at the accounting firm said: "We are sorry that our work fell well below the professional standards expected of us and that we demand of ourselves.
"We have agreed this settlement, recognising that it is important to learn the necessary lessons. At its core this is not a failure in our audit methodology, the methodology simply was not followed.
"As a result of our internal reviews we took swift action to enhance our monitoring procedures. We have agreed with the FRC to extend these further for an additional period."
The Work & Pensions select committee, which produced a report on the sale of BHS in 2016, is questioning the rationale behind the fines now announced.
Frank Field, chairman of the committee, has today (13 June) written to the accountancy watchdog with "questions on the nature of the offence that garnered such an unprecedented financial penalty – for which there is no explanation - and whether, given that, they will now proceed to wider investigation of PWC's audits of the Taveta group accounts".
BHS was owned by Taveta Investments, the holding company which also owns Arcadia Group, led by Sir Phillip.
Mr Field said: "This is undoubtedly a good first move. It reopens the key question of whether BHS was in fact a 'going concern' when it was jettisoned for £1.