The Quality of Your Audit Matters

By Mary Laidman

Audit work papers, and conclusions reached, are central to audit quality in Chicago.

As described by PCAOB, the Public Company Accounting Oversight Board, Auditing Standard 3, “audit documentation is the written record of the basis for the auditor’s conclusions” and “also facilitates the planning, performance, and supervision of the engagement and is the basis for the review of the quality of the work.” Indeed, the pervasive view from all our governing bodies, is “not documented; not done.”

So, as long as audit procedures are performed and documented, that makes for a quality audit, right?  Not necessarily! As important as audit documentation is to the quality of an audit, it’s not the whole picture.

The well-publicized audit failures of Enron and World-Com, the subsequent creation of the PCAOB, and the increasing oversight of employee benefit audits and single audits by their respective regulatory bodies, gave birth to the audit quality movement, along with the creation of the Audit Quality Center, which is affiliated with the AICPA.

The Audit Quality Center has identified four major elements to audit quality:

  1. Firm leadership and “tone at the top”
  2. Engagement team knowledge, experience & workload
  3. Monitoring
  4. Audit reporting

Here is what to look for in the four areas:

Firm leadership

  • Does firm leadership emphasize audit quality and hold itself accountable for the firm’s system of quality control?
  • Are partners sufficiently involved in the planning process, or is partner involvement in planning taking place at the end of the engagement while the partner is completing his/her “sign-offs”?
  • Is there an attitude of “our firm is a “tax” firm – audits are a commodity we offer only so we can be considered a full-service firm?

Engagement team knowledge, experience, & workload

  • Is there a consideration of key engagement team members years on the engagement, years of industry experience relevant to the audit engagement, years with the firm and at present level?
  • Are the training requirements of the engagement team considered and are they relevant to the engagement industry?
  • Are senior members of the engagement team guiding the junior staff while on the job (i.e., creating workpaper templates, providing comments challenging higher-order cognitive skills, etc.)?
  • Are trends in engagement hours and timing monitored and is there use of a specialist or head office, if warranted?
  • Is the the firm taking on an engagement in any industry – resulting in an engagement team with inadequate experience and engagement acceptance going against firm policy?
  • Is there one “popular” manager overseeing an unwieldly number of total engagements; is there an “in-demand” senior with an unreasonable and unmanageable number of total hours?

Monitoring

  • Is importance given to the firm-wide internal quality review program (annual inspection)?
  • Are the findings timely communicated to engagement team members?

Auditor reporting

  • Are audit reports being reissued?
  • Are audit reports being restated?
  • Are audit reports being withdrawn?

 

Expanded Guidance from the AICPA

In 2014, the AICPA launched its own Enhancing Audit Quality (EAQ) initiative – a 6-point plan that focuses on audit quality indicators on a “holistic, ongoing basis.”[1]  This 6-point plan includes:

  1. Pre-licensure – encouraging and maintaining the pipeline of new CPAs, while pushing a more focused skill set. Evidenced by the recently revamped CPA exam, which emphasizes higher-order cognitive skills, critical thinking and analytical ability.
  2. Standards and Ethics – updates to Statements on Quality Control Standards and seen in the reorganization of the Code of Professional Conduct as it relates to independence and non-attest services performed for attest clients.
  3. CPA Learning and Support – developing targeting training and resources, already seen in the development of the EBP and Single Audit certificate programs and the different audit quality centers for specialized areas.
  4. Peer Review – enhancing quality of peer reviewers and enhanced oversight by subject matter experts (SME’s) for must select (EPB, single audit, audits performed under governmental auditing standards and SOC report engagements). View DHJJ’s Peer Review.
  5. Practice Monitoring of the Future – moving the peer review program toward on-going, near real-time monitoring process.
  6. Ethics Enforcement – AICPA members found to be in violation of the Code of Professional Conduct to be subject to disciple; collaboration with NASBA for cooperative enforcement with state societies.

As can be seen with these evolving and differing perceptions on what constitutes audit quality, audit quality is a complex subject. With auditing so identified with the CPA profession, CPAs cannot take the position “I don’t do audits, this doesn’t apply to me.” When choosing which CPA firm to run your audit, make sure to think about the four elements of audit quality.

How DHJJ Can Help

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Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service.  If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

[1] In 2017, the AICPA released a highlights and progress report on its EAQ initiation.  http://www.aicpa.org/InterestAreas/PeerReview/DownloadableDocuments/EAQ-Hlt-Rpt.pdf