Concerns about emerging market issuers examined through an audit quality lens

Could an audit quality framework be used to enhance audit quality in practice? Here is one view in the context of emerging markets issuers (EMIs).

Could an audit quality framework be used to enhance audit quality in practice? Here is one view in the context of emerging markets issuers (EMIs).

In a recent post Audit Quality: In the Eye of the Beholder?, reference was made to efforts by the International Auditing and Assurance Standards Board (IAASB) to develop an international audit quality framework. A recent regulatory review of EMIs by the Ontario Securities Commission (OSC), Staff Notice 51-719: Emerging Markets Issuer Review, can be used to demonstrate the merits of such a framework.

The IAASB states that there are three fundamental aspects to audit quality: inputs, outputs, and contextual factors. Inputs include such things as auditing standards, audit firm processes, and the attributes and performance of the auditor. Outputs from the audit, for example auditor’s reports to the audit committee and external users, enhance audit quality if they clearly convey the results of the audit. Contextual factors such as corporate governance processes, law and regulation, the financial reporting framework and regulatory oversight are important influences on audit quality too. The IAASB sees these aspects as interrelated, each affecting how other aspects bear on audit quality.

The purpose of the OSC’s review was to assess the quality and adequacy of selected EMI disclosure and corporate governance practices, as well as the adequacy of the roles played by auditors, underwriters and the exchanges, to identify any broad policy issues and entity-specific concerns. The OSC defined an EMI as one where mind and management, and principal operations, of an entity are largely outside of Canada, in regions such as Asia, Africa, South America and Eastern Europe.

In performing its review, the OSC examined the performance of senior management, the board of directors, audit committees, auditors and others in providing credible public disclosures about an EMI. It resulted in recommendations for performance improvements by all concerned.

Many of the EMI recommendations made by the OSC can be re-formulated in the context of the IAASB’s three aspects of audit quality. For example, the OSC recommended improvements to audit performance (inputs) and governance processes (contextual factors). The OSC did not make specific recommendations for improving auditor communications (outputs), however it is quite possible that one of the results of the OSC review will be that management, the audit committee and the auditor enhance their communications about emerging market issues. The IAASB framework could therefore be a useful tool in identifying how audit quality could be enhanced for EMI audits. Using such a tool has the benefit of ensuring the analysis is complete and in understanding how different recommendations interrelate to enhance audit quality.

This is just one circumstance that suggests an audit quality framework may well have practical application and that the IAASB is on the right track.

Keep the conversation going…do you think an audit quality framework could have practical application in other situations? I'd welcome some examples.  Email me directly.


About the Author

Eric Turner, CPA, CA

Director, Auditing and Assurance Standards, CPA Canada