CAQ proposes an approach to communicating audit quality indicators

The set of potential audit quality indicators proposed by the Center for Audit Quality (CAQ) on Thursday is the result of a focused effort to find objective measurements for audit work.

The CAQ paper is the culmination of a two-year effort with the CAQ’s member firms to develop perspectives regarding which indicators may be most relevant, and how and to whom they should be communicated. Investors, audit committees, regulators, issuers, academics, and former standard setters also were consulted by the CAQ, which is affiliated with the AICPA.

CAQ member firms will pilot-test the proposed set of indicators with select audit committees.

The pursuit of excellence in auditing has led the profession on a search for measures to help determine the quality of audit work.

Regulators and standard setters, including the PCAOB, also are working to develop audit quality indicators. The International Auditing and Assurance Standards Board in February released its framework for audit quality, which lists key elements that create an environment for audit quality.

The CAQ developed its proposal to help inform the discussion. The CAQ proposes that audit quality indicators should be communicated to the audit committee to assist its oversight of the audit process.

“At the highest level, our approach flows from the common-sense notion that information collection and communication must be tailored to be useful and to avoid excessive cost and overload,” CAQ Executive Director Cindy Fornelli said in a news release.

Proposed audit quality indicators for engagement teams are divided into four categories:

1. Indicators of firm leadership and tone at the top could include:

• An overview for the audit committee of the audit firm’s audit quality and transparency reports on how it emphasizes audit quality through tone at the top.
• Communication of how the audit firm’s tone at the top influences and reinforces audit quality at the engagement level.

2. Indicators of engagement team knowledge, experience, and workload could include:

• Metrics focusing on experience levels of key engagement team members.
• Measures of experience relevant to the specific engagement, including years on the engagement, years of relevant industry experience, and years with the audit firm.
• Descriptions of audit firm training requirements, particularly focusing on the relevant training of key engagement team members.
• Audit hours spent by various levels, including partners, managers, and staff.
• Changes in audit hours between years (e.g., comparing current-year plans to prior-year actual hours).
• A breakdown of audit hours incurred by phase of the audit cycle.
• The planned allocation of resources associated with significant risk areas.
• The number of hours or percentage of audit hours expected to be incurred by specialists or national-office personnel by significant risk area.
• When an outside specialist assists on the audit, the amount of fees paid to the specialist, possibly in relation to total audit fees.
• Metrics indicating the average number of hours worked for each key member of the engagement team, provided in relation to a standard workload.

3. Indicators associated with monitoring could include:

• Internal quality review findings.
• Trends in PCAOB inspection results for the entire audit firm and for the issuer’s audit engagement, if applicable.

4. Indicators associated with auditor reporting could include:

• Firm-level trends of reissuance restatements of financial statements and withdrawal of previously issued reports on internal control over financial reporting (ICFR).
• Common themes or issues in restatements and withdrawn reports on ICFR.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.