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CAQ Plans to Pilot Test List of Audit Quality Indicators

Tammy Whitehouse | April 25, 2014

The audit profession is preparing to pilot test a preliminary framework for how to judge and measure the quality of audit work that is relied on by capital markets.

The Center for Audit Quality has unveiled the results of a two-year effort with its member firms, investors, audit committees, regulators, and academics to develop a list of audit quality indicators that would be used to come to some common agreement regarding audit quality. The CAQ approach zeroes in on four key elements of audit quality -- firm leadership and tone at the top; engagement team knowledge, experience, and workload; monitoring; and auditor reporting.

The CAQ model focuses on communication with the audit committee as a key element of managing audit quality. The list of audit quality indicators will be pilot tested through the 2014 audit cycle, working with engagement teams and their independent audit committees. “We tried to come up with a suite of indicators that could be helpful in starting to assess audit quality,” says Cindy Fornelli, executive director of the CAQ. “Ultimately we landed on a set of indicators taken as a whole -- not any one indicator.”

According to the CAQ model, firm leadership and tone at the top is a key indicator of whether an audit committee can expect a quality audit. As for the engagement team, audit committees would look for knowledge and experience of key engagement team members, the audit firm's training requirements, trends in engagement hours and related timing, allocation of resources by significant risk areas, specialists and national office staff involvement in higher risk areas, and the workloads of key engagement team members.

With respect to monitoring, audit committees should look for internal quality review findings and findings from inspections by the Public Company Accounting Oversight Board. The audit committee would also look at the firm's rate of reissuance restatements and withdrawn audit opinions as indicators of audit quality, the CAQ says.

The PCAOB is working on a project of its own to try to identify indicators of audit quality as a way of determining how best to measure and manage audit quality. Greg Jonas, director of the office of research and analysis, who is leading the PCAOB's project, says the CAQ's efforts are encouraging. “It is important that the profession make all attempts possible to pursue meaningful measures to improve audit quality,” he says. The International Auditing and Assurance Standards Board also has developed its own view of what constitutes audit quality.