Transparency reporting: Bridging comprehensive reviews and tendering

Some audit committees may put the audit out to tender rather than perform a comprehensive review, citing the benefits of testing the market for audit services. But is there another option?

Perhaps there is a way to bring a form of market assessment into the comprehensive review process.

A comprehensive review involves the audit committee examining such things as:

  • safeguards and threats rising from long audit-firm tenure
  • the quality of audit firm communications
  • the exercise of professional skepticism
  • the quality of the engagement team
  • inspection findings relating to the audit of the entity
  • experiences during the five-year period encompassed by the review

A key feature of the comprehensive review is that it focuses on the incumbent auditor only and results in the audit committee retaining the audit firm or putting the audit out to tender. Its focus is audit quality not audit fees.

Audit tendering, on the other hand, likely requires more effort than a comprehensive review and is a more costly process involving more than one firm, which may or may not include the incumbent auditor. A tendering process allows the audit committee to compare and contrast the strengths and capabilities of different firms. Its focus may be on reducing audit fees, which may have adverse consequences for the quality of the audit.

So, is there a way to enhance the comprehensive review so that the audit committee can not only assess the incumbent auditor’s performance on the audit of the entity, but gain some insights into the incumbent’s position as compared to the marketplace? The answer, today, is no. But, advances in transparency reporting by firms may start to bridge the gap.

Take, for example, Our Focus on Audit Quality, issued by PwC in the United States. This 34-page report provides a comprehensive look into what audit quality means to PwC, including a number of “transparency data points,” which are similar to audit quality indicators. Even though indicators may not currently be standardized across firms, such reports and the related indicators may be useful to an audit committee. For example, they may provide a starting point for the audit committee to begin a discussion with the incumbent to assess the audit quality commitment of the audit firm and whether the engagement team will meet the audit committee’s needs and expectations.

Global transparency reporting is evolving. In fact, the International Auditing and Assurance Standards Board is exploring whether it could establish requirements for auditors to address elements of transparency reporting.

It is my hope that audit committees will continue to value the comprehensive review as the best means of enhancing audit quality. As audit committees gain experience with such reviews — by exploring information firms have available about audit quality — I believe there may be less need to go to the full tendering process.

KEEP THE CONVERSATION GOING

Have you read an audit firm’s transparency report? Did you find it useful in evaluating audit quality? Do you see opportunities to enhance the comprehensive review process?

Post a comment below; or email me directly.

Audit Quality Blog 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