Made to measure? Using indicators to enhance audit quality

With the emphasis over the last couple of years on audit quality, stakeholders have time and again raised the question – is there a way to measure audit quality?

With the emphasis over the last couple of years on audit quality, stakeholders have time and again raised the question – is there a way to measure audit quality?

Imagine if the factors that influence audit quality could be measured the way the gauge in your car measures how much gas is left in the gas tank. Auditors would be able to differentiate themselves from their competition on the quality of their audits; audit committees would be able to better focus their oversight of the auditor; audit inspectors could zero in on audit deficiencies; and identifying the root cause of audit quality problems would be so much easier. For investors, the audit might be perceived as less of a commodity and provide more insights into the credibility of financial reporting.

But while the potential benefits of audit quality indicators (AQI) seem compelling, actually developing robust AQI is going to be extremely challenging. An effective indicator must demonstrate several key characteristics:

  • relevance – the indicator must fit the purpose for measuring; but there are no direct measurements of audit quality
  • understandability – indicators must be easily understood, even in areas where there already exist expectation gaps
  • reliability – indicators must measure audit quality reliably in a variety of circumstances, and be scalable to audit firms of all sizes
  • be obtained from accessible data – indicators must be based on data that is available or can be gathered without undue effort in a timely way. There may be limited value in AQI produced a year or two after the event.

It is important to also note there are different levels where AQI could apply, for example at the individual audit level, at the firm level and, potentially, at the network or global firm level. For an audit committee, AQI at the individual audit level may be the most relevant, whereas for an audit inspector AQI at the firm level may be most relevant. Further, in its simplest terms, one can consider an audit as involving inputs (the people), the process (systems, policies and procedures) and outputs (reports and other communications). One can see that there could be AQI for each of these elements of an audit and some may be more easily quantifiable than others.

These are just a few of the considerations that make identifying AQI complex. Nevertheless, with the emphasis on audit quality continuing, some are responding to the challenge, including the U.S. Public Company Accounting Oversight Board (PCAOB) and the U.S. Centre for Audit Quality (CAQ). When will Canada get involved?

Keep the conversation going… do you see this as an area where Canada should be involved? Where would we start? Are there existing learnings from other fields that we could use to kick start the process?

Post a comment below; or email me directly.


Conversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.

About the Author

Eric Turner, CPA, CA

Director, Auditing and Assurance Standards, CPA Canada