Regulators and standard setters, such as the Public Company Accounting Oversight Board (“PCAOB”) and the International Auditing and Assurance Standards Board (“IAASB”) have been working to develop and standardize a framework for evaluating and encouraging audit quality. After a two year effort, the Center for Audit Quality (“CAQ”), an autonomous public policy organization dedicated to enhancing investor confidence and public trust in the global capital markets and affiliated with the AICPA, has issued a proposal for objective measurements for audit work through a definition of audit quality, an audit quality framework, identification of the most relevant indicators of audit quality (“AQI”) and how and to whom they should be communicated. The CAQ hopes its work will influence the PCAOB and IAASB’s actions in this regard.
This current report is a result of its collaboration with member firms, investors, audit committees, regulators, issuers, academics, and standard setters. The CAQ explained that the objective behind this effort is assisting audit committees in understanding matters that may contribute to the performance of a quality audit and ensuing audit objectives are met:
“Audit firms are required to establish a system of quality control that complies with regulatory and legal requirements and that ensures audit reports issued by the firm are appropriate. An audit firm’s system of quality control is intended to address certain key elements, such as independence, integrity, objectivity, personnel management (which includes sufficiency of resources, technical knowledge and experience), engagement performance, communication and reporting, and monitoring.
The CAQ believes a set of potential AQIs could provide additional perspective on the key elements of a firm’s system of quality control as it applies to a particular audit, and could be useful to further an audit committee’s understanding of matters that may contribute to the performance of a quality audit”
Proposed audit quality indicators for annual discussions with engagement teams are divided into four general categories, with suggested measurements for each:
1. Firm leadership and tone. This could include an overview for the audit committee as to how firm leadership influences engagement level performance and emphasizes quality
2. Engagement team knowledge, experience, and workload. Such factors could include:
- Experience levels of key engagement team members, such as years on the engagement, in the industry, or with the firm
- Training requirements
- Audit hours spent by various experience levels and on which phase of the audit cycle, including how this changed from year to year and in comparison with a standard workload
- Allocation of resources associated with significant risk areas, including the expected use of specialists or national-office personnel for significant risk areas
3. Monitoring, such as internal quality review findings or results from outside inspectors such as the PCAOB, regarding both the entire firm and the specific engagement.
4. Auditor reporting, such as overall statistics requiring restatements or withdrawals of financial statements or reports on internal control over financial reporting (ICFR) and the basis thereof.
Such frameworks and suggestions, while helpful, cannot be adopted in a rote manner. Like any internal control or other quality control effort, the regular assessment must be robust rather than simple reporting of metrics without an understanding of their meaning or implications. The audit committee performs a vital role in ensuring the integrity of financial reporting through its oversight of management and the external auditors. The audit committee must ask the tough questions of both management and the outside auditor in a communication environment that is open and direct. Audit quality ultimately requires cooperation and transparency between these respective groups, maintained in balance with sufficient professional separation to ensure appropriate levels of checks and balances occur.
Fulcrum Inquiry performs internal control assessments and forensic accounting services.