Is it time to innovate audit and turn the equation around?

In this post, Eric Turner, principal, Auditing and Assurance Standards, CPA Canada, asks if it’s time to take a more progressive approach to audit to increase its relevance and value.

Corporate reporting is rapidly evolving in response to user calls for more forward-looking, integrated and subjective information — beyond current models. So, how do we innovate audit to support this evolution?

A PwC thought piece identifies the problem. The focus of business and reporting is changing, but today’s assurance model doesn’t easily support change. This is because assurance concepts have their roots in the audit of financial statements, a mature, financially-based reporting model. PwC looked for a way to “turn the equation around” and to build trust in an organization’s reporting as it innovates and experiments with more a progressive approach.

PwC proposes the focus shift to insights into various dimensions of an organization’s reporting, rather than its compliance against set criteria. Dimensions might include the degree of inherent measurement uncertainty, the stage of development of the reporting frameworks, and the extent of external validation. Providing such insight would let people make their own decisions on the level of trust they place in the information, and how they use it. And auditors would be applying their expertise and professional judgment in areas where it isn’t yet possible to provide assurance, as we know it.

The key to the PwC equation is transparency. Could this be applied today, albeit on a simplified basis? Consider, for example, a company’s MD&A. Readers often struggle to understand how robust the information is and what involvement the auditor has had with the MD&A, if any.

The International Auditing and Assurance Standards Board (IAASB) is developing a new standard that would require the auditor to communicate in the auditor’s report his or her responsibility and a conclusion with respect to information other than the financial statements, such as the MD&A. But imagine if the MD&A was colour-coded to improve transparency:

  • green could indicate information that the auditor reconciled to the financial statements, or considered  to have the same meaning as disclosures in the financial statements
  • orange could indicate information on which the auditor has performed some specific procedures, for example, comparing a management assumption about industry sales trends with a public report, and
  • red could indicate information that the auditor has only read

An accompanying report could explain the auditor’s degree of involvement with green, orange and red information. Readers could then determine how much trust to attach to the information.

Stepping towards this type of assurance model may not be a great leap — assuming stakeholders find this sort of transparency useful. Moving PwC’s ideas forward, however, is still a work in progress. What is needed? Interested parties who are willing to develop this further and are inspired to innovate!

KEEP THE CONVERSATION GOING

Is it time to innovate audit? Do you think the PwC proposal has potential? Are there some relatively quick and easy ways for the audit profession to enhance its relevance and value?

Post a comment below; or email me directly.

CPA Canada’s Audit Quality Blog is designed to create an exchange of ideas on developments and issues in global audit quality, as well as their impact in Canada.

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About the Author

Eric Turner, CPA, CA

Director, Auditing and Assurance Standards, CPA Canada

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