A holistic approach to audit quality

In one of the first steps of the new Enhancing Audit Quality (EAQ) initiative, a major effort to improve auditing of private entities, the AICPA has released a discussion paper seeking stakeholder perspectives.

Through the two-phased initiative, the AICPA is coordinating resources to improve performance in audits of private entities, defined as non-SEC registrants, including not-for-profits, employee benefit plans, and governmental entities.

“EAQ is a holistic effort to consider auditing of private entities through multiple touch points, especially where quality issues have emerged,” AICPA President and CEO Barry Melancon, CPA, CGMA, said in a news release. “Many AICPA committees, boards, and staff contributed to the EAQ. The goal is to align the objectives of all audit-related AICPA efforts and collectively improve the quality of audit services delivered by the profession.”

The EAQ initiative’s first phase will involve planned and proposed efforts that will immediately drive quality. The second phase will transform the current Peer Review Program, combining technology and human oversight in practice monitoring.

In a discussion paper released Aug. 7, the AICPA described its plans and proposals to address quality issues related to financial statement audits of private entities. To read the paper and provide comments, which are due Nov. 7, visit aicpa.org/EAQpaper. Some efforts that already are underway are included in the discussion paper.

The AICPA Peer Review Board is considering significant steps to improve the quality of reviewers. These include initial and annual competency tests, expediting the process of expelling a reviewer, and enhancing qualification requirements for reviewers of certain specialized industry engagements, such as employee benefit plan (EBP) audits. The AICPA also has established a team of experts to perform oversight of peer reviewers, focusing on audits of certain specialized industry engagements.

In May 2015, peer reviewers will begin performing more extensive reviews of audits in certain high-risk industries and specialized areas. To address the risks posed by low-volume auditors of high-risk and complex engagements, the AICPA Peer Review Board is considering requiring the firm, in all cases where material nonconformity with applicable professional standards is noted, to engage a third party to perform pre- or post-issuance reviews of those engagements in the future.

The Peer Review Board is also considering:

• Evaluating firms’ engagements in “new” industries promptly, rather than waiting for their next peer review. 
• Increasing communication to peer reviewers and firms while leveraging sources of engagement and firm data. Firms that fail to properly report their engagements may be subject to termination from the program and referral to their state boards.

In the long term, the AICPA plans to evolve peer review so it provides firms with nearly real-time feedback.

Other EAQ initiatives include:

• An examination of how audit deficiencies most often occur so standards and guidance can be amended to drive quality performance. This effort will consider whether more specificity is needed in audit or quality-control standards.
• Use of publicly available information by the AICPA Professional Ethics Division to identify deficient audits. Sanctions may be applied when a firm has failed to provide the AICPA Peer Review Program with a complete list of engagements that should be subject to review.
• Work by the AICPA CPA Examinations team to make sure the exam continues to be aligned with real-world practice for newly licensed CPAs. The Member Learning & Competency team is developing courses and resources based upon areas of concern revealed through peer reviews. And the initiative aims to develop and release a rigorous, professionwide competency framework validated by experts and regulators from around the world.

Ken Tysiac is a JofA editorial director. To comment on this article or to suggest an idea for another article, contact him at ktysiac@aicpa.org or 919-402-2112.