As regulators try to pin down a workable definition for the concept of “audit quality,” the audit profession is working on how to create a yardstick of its own as well.
The Center for Audit Quality, which represents auditors, has issued a new report on its effort to pilot test its approach to defining audit quality indicators and its suggested path forward on how to identify the most effective way to define and then measure audit quality. The CAQ says it has learned through its roundtable discussions and pilot testing that the determination is “more art than science,” and audit committees are looking for guidance on how to grasp the more qualitative aspects of external audit.
“It is the conversation that is important,” writes the CAQ in its report. “Having a dialogue to explore the context and relevance of certain indicators is critical to obtaining a deeper understanding of the quality of a particular audit.” While audit committees might be open to assistance, they also want flexibility to tailor discussions around their own facts and circumstances, the CAQ says.
The CAQ published a paper in 2014 suggesting a framework for how to measure audit quality, focusing on four key areas: firm leadership and tone at the top; the knowledge, experience and work load of the engagement team; engagement monitoring; and auditor reporting. In pilot testing the approach, the CAQ received varied feedback from audit committee members, says the CAQ. They generally supported the concept of audit quality indicators but some believed they already has the necessary insights and tools to do the job effectively.
In 2015, the Public Company Accounting Oversight Board issued its own concept release listing 28 separate potential indicators of audit quality. The board was tasked with defining audit quality indicators by the 2008 Treasury committee report that suggested it as one of many measures to bolster the audit profession by producing more measurable criteria for performance. The PCAOB's first pass focuses on the availability, competence, and focus of audit professionals; incentives, independence, and other factors around the audit process; and various indicators of audit results. The board accepted comments on the release through late September 2015.
The CAQ says in its latest report that audit committee members are open to more qualitative information and potentially even tools that will drive consistent dialogue with audit firms around assessing and responding to audit quality. However, they also made clear they don’t want regulatory mandates. “Allowing audit committees to continue to explore AQIs in an audit committee-driven, voluntary environment could facilitate the development of a common principles-based framework that could promote consistency in application of AQI use and reporting while maintaining the flexibility audit committees need to tailor approaches to their specific information needs,” the CAQ concludes.