What gets measured gets managed: An innovative approach to measuring audit quality

Various commentators use the term “audit quality indicators” (AQI) to describe a way to assess the quality of an audit, but so far there is no agreement on the most relevant AQI or how and to whom they should be communicated.

Various commentators use the term “audit quality indicators” (AQI) to describe a way to assess the quality of an audit, but so far there is no agreement on the most relevant AQI or how and to whom they should be communicated. The U.S. Centre for Audit Quality (CAQ) is proposing a new approach using engagement-specific AQI. The CAQ’s potential AQI are intended to provide additional perspective on the key elements of a firm’s system of quality control as it applies to a particular audit. The CAQ hopes that providing this additional transparency into the systems and processes that underlie audit performance will enhance audit quality. But could it have unintended consequences?

The CAQ sees its approach as appropriate for the following reasons:

  • Its focus is on communication of AQI with the audit committee – those responsible for overseeing the audit.
  • A robust dialogue between the auditor and the audit committee about AQI will provide additional context with respect to the various metrics, and their potential impact on the audit.
  • Such enhanced communication may drive actions that help maintain or increase audit quality on an engagement, and may also assist the audit committee in evaluating the effectiveness of the audit.

AQI focus on four thematic elements of audit quality:

  1. Firm leadership and tone at the top (for example, how the audit firm’s senior leadership influences and reinforces audit quality at the engagement level)
  2. Engagement team knowledge, experience and workload (for example, years of industry experience, attendance at training courses, audit hours by various levels)
  3. Monitoring (for example, deficiencies identified by audit inspection bodies or through internal inspections and how these have been resolved)
  4. Auditor reporting (for example, the level of reissuance restatements of previously issued financial statements).

The CAQ recognizes without robust discussion there is a risk that AQI, or changes in AQI over time, may not tell a complete story or could be misunderstood by the audit committee. For example, given that most of the potential AQI relate to inputs – what the auditor brings to the table when performing an audit – audit committees may struggle to see how they relate to audit quality. The CAQ developed a communication document to provide an approach for engagement teams to discuss the identified set of AQI to the audit committee. In my view, it is this communication that will be critical to the success of the use of AQI. Such communication will be no easy task given the many variables that affect audit quality.

However, the CAQ is just beginning its journey. Its potential AQI will be the subject of upcoming pilot-testing, validation and outreach efforts to confirm they meet their original objective. They will be reassessed and refined to meet the needs of the changing business environment. This cautious, evolutionary approach seems to make sense for such a complex topic and the potential unintended consequences of using metrics such as AQI. For example, will auditors become fixated on “meeting the numbers” – running the engagement in a particular way just to achieve a certain AQI score? Will AQI be used for unjust comparisons between engagement teams/partners/audit firms?

Keep the conversation going…. how would you feel about discussing AQI with your audit committee? Would they be a useful tool auditors can use to enhance an audit committee’s understanding of the audit? Let me know what you think.

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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