Your practical guide to behaviours that improve audit quality
A new guide aims to address shortcomings in audit quality from within audit firms.
Mark Phillips | November 2019
Early in 2018, the Australian Securities and Investments Commission (ASIC) released an information sheet, which, in part, emphasised: “The quality of financial reports is key to confident and informed markets and investors. The purpose of the independent audit is to provide confidence in the quality of financial reports. Improving audit quality and the consistency of audit execution is essential to maintaining confidence in the independent assurance they provide.”
However, what is audit quality and how do stakeholders know if a quality audit has been delivered?
The International Auditing and Assurance Standards Board (IAASB) describes the term “audit quality” as encompassing the key elements that create an environment that maximises the likelihood that quality audits are performed on a consistent basis. Of course, the type of mechanisms that will be effective will vary between firms and change over time.
A new guide developed by CPA Australia on behalf of the Australian Auditing and Accounting Public Policy Committee (APPC), which comprises representatives of BDO, Deloitte, EY, Grant Thornton, KPMG, PwC, Chartered Accountants Australia and New Zealand, and the Institute of Public Accountants (IPA), adds new insights into this important issue. Firms can use this tool as a catalyst for developing a recognition and accountability framework or for reviewing their current framework and related processes.
Of particular note for smaller accounting practices is that the guide, titled An external auditor’s guide to improving audit quality using an individual recognition and accountability framework, is not designed to create new rules or a one-size-fits-all framework for every entity to follow, but is, rather, a resource that is also scalable for small and mid-tier firms.
As its title suggests, a key finding is that one of the fundamental drivers of improvement in audit quality is the use of recognition and accountability mechanisms that focus on individuals with audit-related leadership positions. Both mechanisms contribute to audit quality: Recognition emphasises incentives or rewards for good audit quality, while accountability focuses on the consequences of poor audit quality.
The framework explained
Clearly, to deliver quality audits of financial reports, the individuals responsible need to be motivated to strive for high-quality outcomes and be aware that they must take responsibility when the standard falls short of expectations. It is also imperative that those working on audit engagements understand the level of quality required to deliver audit outcomes in which users can have confidence. Consistency is essential, and a firm’s system of quality control is the foundation for enabling individuals to achieve quality audit outcomes.
It should be a given that all members of an audit engagement team play a part in achieving audit quality, but the guide predominantly focuses on those directly responsible for audit quality at the engagement level – the audit engagement leader and audit engagement quality control reviewer, as well as those responsible for setting the “tone at the top” when it comes to audit quality at a practice level.
Far from being a box-ticking exercise, audit leaders are obligated to meet the quality control requirements of audit engagements under ISA 220, as well as ensure the framework is effective in motivating the behaviours sought at a grassroots level.
This necessitates putting in place a transparent process, which encompasses:
- setting expectations about audit quality, who will be accountable, for what they will be accountable and when they will be assessments on the outcomes
- establishing accountability and recognition mechanisms, by identifying audit quality measures, capturing relevant data and monitor those measures
- ensuring that audit leaders are consistently rewarded for high quality audit outcomes and behaviours and conversely receive consequences proportionate to poor audit quality outcomes and behaviours.
The findings of internal reviews and external inspections of audit engagements – along with the audit leaders’ responses to those findings – are key inputs when assessing audit quality. These will reflect the audit team’s past quality outcomes, while the responses should also provide an indication as to whether any shortcomings will be addressed in the current engagement or potential future engagements.
In addition to responding to review and inspection findings, accountability and recognition mechanisms need to give appropriate emphasis to quality and compliance processes, such as independence clearance, file management, and attending mandatory training, as well as identifying quality behaviours, such as mentoring, coaching and setting the tone at the top.
The bottom line is that in order to drive up audit quality audit leaders need to be consistently recognised for exceptional audit quality, but should that not prove to be the case, be held accountable for poor quality.