Audit quality reporting coming into the light

Recent developments suggest reporting by audit firms is evolving to meet a need for more transparency about audit quality controls.

How committed is your audit firm to audit quality? Recent developments suggest reporting by audit firms is evolving to meet a need for more transparency about audit quality controls. But what does an audit quality report look like?

For several years, audit firms have been mandated in some jurisdictions to produce transparency reports containing information about audit firm governance (e.g., since 2008 under the European Union’s 8th Company Law Directive 2006/43/EC), and some firms in other jurisdictions have issued such reports voluntarily.

While transparency reporting is primarily a European phenomenon, it is beginning to take hold in North America. But because transparency reports do not necessarily contain all the elements that explain a firm’s commitment to audit quality, some firms are expanding their transparency reports or developing “audit quality reports” as separate communications. Audit quality reports are becoming a more frequent occurrence in Canada.

In the United States (U.S.), the Center for Audit Quality (CAQ) is encouraging firms to develop audit quality reports. The CAQ believes that audit quality reporting can foster greater confidence in the public company audit process “by assisting financial statement users, audit committee members, and other stakeholders in understanding how an audit firm’s management and operations support the performance of high quality audits.” To assist firms prepare their reports, the CAQ issued a resource in August 2013 providing examples of possible firm-specific information that could be reported. The resource suggests that reporting could address six thematic areas, as follows:

  • Firm leadership and tone at the top
  • Independence, objectivity and skepticism
  • Audit process, methodology and performance
  • Professional development and competency
  • Monitoring
  • Firm organization and structure.

These themes are reflective of the key elements of a system of quality control that Canadian audit firms are required to establish and maintain under Canadian Auditing Standards. Audit quality reports can provide insights on how firms comply with these requirements.

This is a useful starting point for audit committees, regulators and others in learning how quality control systems work and a firm’s commitment to audit quality; for example, when audit committees are reviewing the performance of the audit firm.

However, due to their length and level of detail, audit quality reports may be a tough read for other stakeholders who are less informed about audit matters. For them, they probably want answers to questions such as:

  • How effective is your firm’s system of quality control at maintaining audit quality?
  • How does your system compare to best practices?
  • And how has audit quality changed since your last report and why?

You are not likely to find answers to these questions in audit quality reports today. There are a number of reasons for this, not least of which is the lack of a definition of “audit quality” or performance indicators for measuring audit quality. Several bodies around the world, including the International Auditing and Assurance Standards Board (IAASB) and the U.S. Public Company Accounting Oversight Board (PCAOB), have active projects to progress thinking in this area.

Audit quality reporting is an emerging area and one that will help the public better understand the important role of auditors in financial reporting. Expect it to become more established in Canada in the near future.

Keep the conversation going… Do you think audit quality reports can foster public confidence in the audit process? What is the key information you would look for in an audit quality report? Do you think audit quality reports would be useful beyond audits of public companies?

Post a comment below; or email me directly.

Eric

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

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