Following extensive self-examination in May 2014, the American Institute of Certified Public Accountants (AICPA) launched its Enhancing Audit Quality (EAQ) initiative. A new discussion paper details the two-phased approach the AICPA hopes will address audit quality issues related to financial statement audits of private entities. Maybe the AICPA’s proposals are also relevant for Canadian private entity audits.\nThe AICPA’s EAQ initiative should not be confused with the Canadian initiative of the same name launched in 2012 which focused on gaining stakeholder input on global issues emerging with respect to enhancing audit quality and their impact on Canada. The AICPA initiative focuses on how the U.S. profession can improve the quality of private entity financial statement audits using components the AICPA considers are the foundation of a quality audit:\n\n competence and due care of audit professionals\n professional standards for audits, including quality control\n guidance, tools, learning and resources\n monitoring and enforcement of engagement performance\n\nPhase 1 of the AICPA’s approach focuses on the near-term and the discussion paper seeks input on potential changes relating to each of the components. Phase 2 centres around the transformation of the U.S. current peer review program into a practice monitoring process that marries technology with human oversight and makes a closer, more real-time connection among a firm’s accounting and auditing engagements, the AICPA and individuals performing practice monitoring.\nThe AICPA discussion paper contains some interesting proposals such as:\n\n Identify and better understand where and how audit deficiencies occur and their root causes so revisions can be made to appropriate standards and/or guidance.\n Use latest technology to provide firms with near real-time feedback about peer reviews of their accounting and auditing practices, enabling firms to quickly leverage and implement prescriptive measures.\n For certain audit engagements defined as “must-select”, meaning that the peer reviewer must select some of these engagements because they are considered to be of higher risk, enhance processes for peer reviews when an audit firm performs a low volume of these engagements or is a new entrant into a higher-risk industry.\n Pinpoint industries and risk areas that require prompt attention from peer reviewers (prior to the next peer review) and audit firms.\n Create a national group of industry specialists to:\n \n perform surprise evaluations of must-select engagements after the peer review has been performed, but before it has been finalized;\n evaluate such engagements performed after the peer review to assess the effectiveness of the corrective actions taken; and\n identify root causes of non-compliance with professional standards.\n \n \n\nThe U.S. private entity audit environment is somewhat different from Canada’s environment. A key difference is that in the U.S. audit firm performance is monitored through a system of peer reviews performed by reviewers engaged by the reviewed firms, whereas in Canada practice inspections are performed by provincial professional bodies using standardized inspection practices. Adopting the AICPA proposals in Canada may therefore not always be practical or cost effective. Nevertheless, the AICPA initiative provides a useful conceptual framework, and a number of areas we might consider, when examining how to enhance audit quality.\nWhile Canada has been appropriately focusing on the impact of global developments on audit quality here, perhaps now is the time to consider what further steps can be taken within the profession as it continually strives to provide high-quality financial statement audits to the public.\nKeep the conversation going…..what do you think of the AICPA initiative? Do any of the AICPA proposals have application here? What are the low hanging fruit?\nPost a comment below; or email me directly.\nEric\nConversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.