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Home > Students > ACCAQualificationStudentJourney > Qualificationresources > ACCAQualification > P7AdvancedAuditandAssurance >
Technicalarticles

AUDIT QUALITY A PERPETUAL CURRENT

ISSUE
RELATED LINKS
Professionalscepticism
StudentAccountanthubpage
Theissueofauditqualityhasalwaysbeenakeyconsiderationforauditors.Performingahighquality
auditmeansthatauditriskisreducedandtheauditfirmislesslikelytoissueaninappropriateaudit
opinion.However,periodicreviewsbyregulatoryauthoritiesontheworkperformedbyauditfirmsoften
concludethatauditsperformedarenotalwaysofhighquality,despitethisbeinginthebestinterestofthe
auditfirm.Theobjectiveofthisarticleistoprovidesomeinsightintowhyauditfirmssometimes
compromiseauditquality,givingexamplesofhowthishappens,andtheimplicationsofcompromisingon
auditqualityfortheprofession.
ThisissueisrelevanttoP7inthattheSyllabusandStudyGuidecontainsaspecificsection,C1,which
containsanumberoflearningoutcomesinrelationtoqualitycontrolinthecontextofpractice
management.Inparticular,learningoutcomeC1(d)statesthefollowingcapability:Assesswhetheran
engagementhasbeenplannedandperformedinaccordancewithprofessionalstandardsandwhether
reportsissuedareappropriateinthecircumstances.Thisrequirescandidatestoapplytheirknowledgeof
qualitycontroltoagivenscenarioandarequirementofthisnaturehasappearedseveraltimesinpast
papers.

AREMINDEROFTHESOURCESOFREQUIREMENTSINRELATIONTOQUALITYCONTROL
TheInternationalAuditingandAssuranceStandardsBoard(IAASB)hasissuedtwodocumentsrelating
toqualitycontrol.ISQC1,QualityControlforFirmsthatPerformAuditsandReviewsofFinancial
Statements,andOtherAssuranceandRelatedServicesEngagementsappliestoallfirmsofprofessional
accountantsinrespectofauditsandreviewsoffinancialstatements,andotherassuranceandrelated
servicesengagements.Itshouldthereforealsobeappliedtononauditengagementssuchasreviewsof
prospectivefinancialinformationandengagementstoperformagreeduponprocedures.
ISA220,QualityControlforanAuditofFinancialStatementsisspecifictoauditengagementsand
containsspecificrequirementsthatshouldbeadheredtointheperformanceofanyaudit.ISA220
containsrequirementsinrelationto:
Leadershipresponsibilitiesforqualityonaudits
Relevantethicalrequirements,inparticularindependence
Acceptanceandcontinuanceofclientrelationshipsandauditengagements
Assignmentofengagementteams
Engagementperformance,meaningthedirection,supervisionandreviewofanaudit,includingconsultationand
engagementqualitycontrolreviews
Monitoringanddocumentation

Adetailedreviewofalloftherequirementsisoutsidethescopeofthisarticle,andcandidatesare
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encouragedtoensurethattheyarefamiliarwiththecontentsofISA220sothattheycanapplythis
knowledgetoagivenscenarioandcommentonwhetheranaudithasbeenperformedinaccordancewith
therequirementsoftheISA.

RECENTDEVELOPMENTSINRELATIONTOQUALITYCONTROL
TheIAASBmakesspecificreferencetotheissueofauditqualityinitslatestannualreportpublishedin
June2014.TheIAASBchairman,ArnoldSchlider,inhischairmansstatement,discussesauditqualityas
akeyissuethattheIAASBisfocussingon.HereferstotheIAASBpublicationentitledAFrameworkfor
AuditQuality,theobjectiveofwhichistoraiseawarenessofthekeyelementsofauditqualityencourage
stakeholderstoreflectonwaystoimproveauditqualityandfacilitategreaterdialogueamong
stakeholdersonthetopic.(TheConsultationPaperonwhichthisFrameworkdocumentisbasedislisted
asanexaminabledocumentforP7INTforJune2015).HealsomentionstheIAASBwebpage,Focuson
AuditQuality,whichwaslaunchedinearly2014toprovidesupplementalmaterialsupportingawareness
anduseoftheFramework.ItisclearthattheIAASBwanttoengagenotonlywithauditorsbutalsowith
usersandpreparersoffinancialstatementstoencouragedebateonauditquality.
TheIAASBWorkPlanfor201516isentitledEnhancingAuditQualityandPreparingfortheFuture,
emphasisingtheprominenceofauditqualityintheworkprogrammeoftheIAASB.Inaddition,theboard
hasrecentlycommencedasurveyonauditquality,focussingonhowauditfirmsapplyISQC1andthe
difficultiesfacedbysmallerauditfirmsinmeetingtherequirements.
ItisnotjusttheIAASBthatperceivesauditqualityasamatterofdebate.Otherregulatorybodiessuchas
theUKFinancialReportingCouncil(FRC)isinterestedinpromotingauditqualityanditsAnnualReports
onAuditQualityInspectionsfeaturedetailedcommentaryontheimprovementsthatauditfirmscanmake
toenhanceauditquality.

WHYISAUDITQUALITYACONCERN?
Theregulatorybodieshavearoletoplayinpromotingauditqualityasthiswillinturnincreasepublic
confidenceintheauditprocessandinfinancialreporting.Asmentionedintheintroduction,itisinthebest
interestsofauditfirmstoconductahighqualityaudit.So,itmaybesurprisingtofindthatwhen
inspectionsarecarriedoutontheconductofaudits,theregulatorybodiescomeacrossmanyinstances
whereauditqualityislacking.
Auditfirmsarefacedwithgreatpressureswhichmayleadtothemcompromisingauditquality.Pressures
canbeintheformoftightdeadlinesandrestrictionsonauditfees,issuesrelatingtocompetence,ethical
dilemmas,andtheextentofjudgmentthatisrequiredwhenauditingcertainbalancesandtransactions.
Someexamplesaregivenbelowtoillustratetheeffectofthesepressuresonauditquality.
TightdeadlinesandrestrictionsonauditfeestheFRCcommentsinits20112012AnnualReporton
AuditQualityInspectionsthatacompanysauditshouldrepresentvalueformoney.Nevertheless,
substantialfeereductionsmayleadtheauditortoreducevaluableauditworkandthereforecompromise
auditquality.Feepressuresareacommercialrealityandauditfirmswillreacttofeepressurebyseeking
efficienciesintheaudit.Thiscanmanifestinmanyways,forexample,reducingsamplesizes,and
increasingmaterialitylevelsespeciallyingroupsituations.Aparticularwaytomaketheauditmore
efficientistooffshorecertainauditproceduresinanarrangementwherebysomeoftheauditworkis
performedbyauditpersonnelwhoarenotfullmembersoftheauditteam,theymaybelocatedina
foreigncountrywherethelabourcostsarelower.Thispracticeraisesauditqualityissuesinthatthese
personnelmaynothaveagoodknowledgeoftheauditclientandthequalityoftheauditevidence
producedmaybequestionable.
Competenceifauditorsarenottechnicallycompetenttoperformauditworkthereisaclearimpacton
thequalityofworkperformed.Forexample,theIAASBcommentsinits201516WorkPlanthataudit
inspectionshavefoundinstanceswherethepersonselectedtoperformengagementqualitycontrol
reviewswasnotcompetenttodoso.Giventhatengagementqualityreviewsareconductedforhighrisk
auditengagementsusinginexperiencedauditorstoperformsuchreviewscancreateapotentiallyserious
hazardfortheauditfirminthatitismuchmorelikelythataninappropriateopinioncouldbeissued.
Ethicaldilemmasacommonexampleiswheretheauditfirmprovidesnonauditservicestotheaudited
entity.Auditfirmsshouldbefamiliarwiththeconceptthatprovidingnonauditservicescreatesathreatto
objectivity,inparticularaselfreviewthreat,andauditfirmsalsoshouldbeaccustomedtoassessingthe
significanceoftheriskandrespondingwiththeuseofappropriatesafeguardsorbynotprovidingthenon
auditservice.Howevertheremaybecircumstanceswherethethreatisoverlooked,socompromising
auditquality.Forexample,ifanauditedentitychangesstatusandbecomeslisted(apublicinterestentity)
thenwhileitmaypreviouslyhavebeenacceptabletoprovideanonauditservicewiththeappropriate
safeguards,theprovisionofthenonauditservicemaynotbeacceptablegiventhenewstatusofthe
auditedentity.ThisissuewaspickedupbytheFRCinits2014roundofauditqualityinspections.
Extensiveuseofjudgmentthisisverymuchlinkedtoprofessionalscepticism(seeRelatedlinksfor
furtherreading).Auditinspectorsoftencommentthattheauditofjudgmentalbalancessuchasfairvalues
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andimpairmentislackinginquality.TheFRCs2014AnnualReportonAuditQualityInspectionsstates
thatLimitedevidencethat[audit]firmshaverobustlychallengedmanagementparticularlyinrespectof
theappropriatenessofkeyassumptionsandotherjudgmentswasakeyconcern.Firms,withthe
assistanceofauditcommittees,shouldensuretheyappropriatelychallengemanagement.Thereport
commentsthatauditfirmsoftenfailtochallengethefeasibilityofbusinessplanspreparedby
management,aswellasassumptionsrelatingtofairvalue,impairmentandthevaluationoftangibleand
intangibleassets.
Thesearejustsomeexamplesofinstanceswhereauditqualityhasbeencompromised,asidentifiedby
auditinspections.Theobjectiveoftheinspectionsistohighlighttheweaknessesinauditqualityandto
recommendimprovements.Itisuptotheauditfirmwhetherornottheyrespondtotherecommendations,
butitisintheirinteresttodoso,andtherearecallsbytheIAASBtoformalisethemeansbywhichaudit
firmsdemonstratethattheyhavetakensuchrecommendationsonboard.

CONCLUSION
ByemphasisingtheissueofauditqualityinitscurrentWorkPlan,theIAASBismakingitclearthataudit
qualityissomethingtobetakenseriously.Higherqualityauditsandpublicconfidenceinauditreports
issuedshouldreducetheexpectationgap.Howeverwithauditfirmscomingunderpressuretocutfees,
producecompetitivetenderdocumentsandprovideaddedvaluetotheauditintheformofnonaudit
services,itiseasytoseewhyauditqualityisoftencompromised.Futurechangestomakethe
requirementsofISQC1andISA220morerobustcouldhelp,aswillpromotingtheuseofprofessional
scepticismintheconductofallaudits.
WrittenbyamemberofthePaperP7examiningteam
Note:SomeofthedocumentsreferredtointhisarticleareNOTexaminabledocuments,namelythe
IAASBWorkPlan201516andtheFRCAnnualReportsonAuditQualityInspections.Theyhavebeen
referredtointhisarticleastheycontainusefulillustrationsofwhyauditqualityisanimportantcurrent
issue.

Lastupdated:25Mar2015

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