Audit quality indicators show importance of tone at the top

By Ken Tysiac

Tone at the top and appropriate deployment of personnel are among the most important indicators of a quality audit, according to a survey of CPA firms performed by the AICPA.

The Practice Monitoring of the Future Task Force polled the firms to determine which factors they believe are most critical to a high-quality audit. By analyzing these audit quality indicators and sharing them across the profession, the task force is working to continue to improve the quality of audits as firms implement these best practices and procedures.

"Developing [audit quality indicators] and then measuring your firm's performance against them allows firm leadership to identify the risks to audit quality, then take whatever steps that are necessary to correct any issues that might be identified," said Greg Jenkins, CPA, Ph.D., a professor of accounting at Auburn University and member of the Practice Monitoring of the Future Task Force and the AICPA Auditing Standards Board, who assisted with the research. "I think in many respects, developing these AQIs is one of a number of proactive steps that the AICPA is taking to enhance audit quality. These AQIs can be used for managing and building audit quality in a manner that dovetails very nicely with the quality management standards."

The 1,021 qualified survey respondents cited elements of leadership related to the system of quality management as the most critical factor in audit quality. The No. 1 indicator of quality, according to respondents was that the firm has assigned:

  • Ultimate responsibility and accountability for the system of quality management to the firm's managing partner/CEO;
  • Operational responsibility of the system of quality management to individuals who are competent to serve in those roles; and
  • Operational responsibility for specific aspects of the system of quality management to individuals who are competent to serve in those roles.

"The survey indicates that firms of all sizes recognize the crucial nature and the importance of tone at the top," Jenkins said. "I think it's a recognition that, whether it's the firm's managing partner or CEO, what the firm's leaders say and do and reward in relation to quality really does matter to the firm's ability to provide consistently high-quality financial statement audits."

Eighty percent of the qualified respondents cited those leadership elements as one of the top 10 indicators of audit quality. The next-most-popular AQI, having the engagement partner or other senior members of the engagement team review significant working papers in accordance with professional standards and firm policy, received top-10 selections from 72% of the qualified respondents.

Aside from leadership, many of the top indicators of audit quality related to either performance/proper deployment of personnel, or to engagement acceptance and continuance.

Top indicators related to proper deployment of personnel included:

  • The engagement partner or other senior members of the engagement team review significant working papers in accordance with professional standards and firm policy.
  • The engagement team performs risk assessment procedures to gain an understanding of the entity, including its internal control.
  • Senior members of the engagement team with a strong understanding of the client, including the engagement partner, determine the overall audit strategy.
  • An experienced member of the engagement team performs a majority of the planning.
  • The engagement partner and other senior members of the engagement team spend adequate time during the various stages of the engagement performance.
  • For engagements in which an engagement quality review is required, the firm has assigned a qualified reviewer, who is not part of the engagement team, during the planning stages.

Jenkins said these quality indicators demonstrate the importance of appropriately identifying, assessing, and responding to risks.

"It is the very foundation on which the newly issued [risk assessment] standards are based," he said. "A firm absolutely has to ensure that the professionals that are assigned to an engagement possess the experience and the expertise needed to complete the engagement. But I would also say that it's equally critical that the auditors who are in a supervisory or reviewing role, their competence has to be unquestioned as well."

The importance of risk assessment in the audit has grown over the past several years as leaders of the profession have increasingly emphasized the importance of devoting the appropriate amount of time and the right personnel to the greatest areas of risk.

To improve risk assessment and audit quality, the AICPA Auditing Standards Board last year issued Statement on Auditing Standards No. 145, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement. The standard takes effect for audits of financial statements for periods ending on or after Dec. 15, 2023.

The ASB also is developing new standards that are designed to help audit firms tailor their quality management processes to address their own firm-specific risks.

That focus on risk assessment was obvious in the answers to the survey, said Jonathan Stanley, CPA, Ph.D., an Auburn University accounting professor who analyzed the findings along with Jenkins.

"We saw [respondents] recognize the importance of risk assessment throughout the engagement, starting with, 'Do we want to accept this new client or continue with an ongoing client?'" he said. "It starts there and then moves into understanding the risks in order to design the audit and make sure that we're being responsive to the risks. We saw it unfold throughout the audit process from start to finish, as far as what [respondents] were highlighting."

The engagement acceptance and continuance process also was seen as important by many respondents. One of the top indicators highlights the importance of performing a risk assessment on all engagements during the acceptance and continuance process.

Another indicator illustrates that prior to accepting a new engagement, it's essential for a firm to consider several factors, especially if the client is in an industry in which the engagement team or firm has little or no experience.

The indicator says it's important to determine whether the engagement team has or will acquire the necessary knowledge and resources to perform the audit; whether more staff or resources are needed; and whether appropriate discussions with the predecessor auditor have taken place.

Another indicator states that with continuing clients, it's important for the firm to determine whether the engagement team has the expertise to continue the engagement. Other indicators state the importance of:

  • Having the firm monitor CPE for all professional staff;
  • Using current and industry-specific quality control materials; and
  • Establishing reasonable deadlines that will allow engagements to be completed in accordance with professional standards, and getting the client to agree with those deadlines.

Taken as a whole, Stanley said, AQIs can be an important tool for firms.

"They have a lot of tools in their toolbox," he said. "I think this is a great monitoring tool that they have access to."

— Ken Tysiac is senior writer for the Reputation team for the Association of International Certified Professional Accountants, representing AICPA & CIMA. To comment on this article or to suggest an idea for another article, contact Neil Amato at Neil.Amato@aicpa-cima.com.

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