Useful guidance for audit firms of all sizes
The Center for Audit Quality (CAQ), an AICPA affiliate, describes itself as an autonomous public policy organization dedicated to enhancing investor confidence and public trust in global capital markets by fostering, among other things, high-quality performance by public company auditors. Time and time again, polls have given high marks for the public trust of accountants in various regards. For example, a January 2019 survey taken by three international accounting bodies found a much higher trust level in accountants than in governmental tax systems. Maintaining the high confidence of the public is critical for public accountants who hold the exclusive franchise for audit reports on financial statements.
Even though the resources generated by the CAQ are specifically directed toward public company auditors, they provide beneficial insights and tools that can be helpful to private company auditors as well. A point in case is the recently published Audit Quality Disclosure Framework (AQDF).
Cynthia Fornelli, CAQ Executive Director, notes in the AQDF Foreword that while many public company auditors issue annual audit quality reports, not all do, and there is no standard format. AQDF offers a framework for consistency and comparability. Private company auditors do not typically issue reports of this nature, but the principles discussed in the AQDF are a good refresher and a yardstick with which to critique a firm’s quality control system.
The AQDF is organized around six key elements of audit quality:
- Leadership, Culture, and Firm Governance
- Ethics and Independence
- Acceptance and Continuance of Clients and Engagements
- Engagement Team Management
- Audit Engagement Performance
These elements are taken from PCAOB and International Auditing and Assurance Board professional standards on audit quality control. The AQDF considers each element from a standpoint of why the element is important to quality control and how to describe implementation of the element in a practical manner.
Points of Focus are used to show how processes, policies and procedures can be applied to each element. A list of criteria assists in determining how and whether a Point of Focus relates to an element. A number of suggested Points of Focus, though not intended to be all-inclusive, are provided.
A user-friendly exhibit presents a matrix with columns displaying for each element the Points of Focus, as well as examples of firm level audit quality indicators (AQIs). A list of criteria is also provided for assessing the relevance of proposed AQIs. While some AQIs are qualitative in nature, others can be measured quantitatively.
For instance, on the matrix under the element, Engagement Team Management, one of the five Points of Focus listed is: procedures to monitor appropriate workload of partners and staff. Examples of the related AQIs are: 1) leverage ratios of audit-related hours for audit team members expressed in percentages (e.g., partner to staff, manager to staff), or percentage by staff level compared with total audit hours, and 2) average hours worked in excess of standard workweek by staff level.
While public company auditors use annual audit quality reports to show transparency to the public, private company auditors may find benefit in the reports for internal communication purposes in addition to their use for evaluating the firm’s audit quality control system.
The AQDF is one of a number of resources available from the CAQ.