Enhancing Audit Quality in the Public Interest: A Focus on Professional Skepticism, Quality Control, and Group Audits
Megan Zietsman | May 2, 2016 |
Audit quality is at the heart of the International Auditing and Assurance Standards Board (IAASB)’s work as the global auditing standard setter. High-quality audits benefit many stakeholders in the financial reporting chain, in particular, investors, who use the financial statements and the auditor’s report as the basis for their investing decisions.
As part of its efforts to enhance audit quality, the IAASB is seeking input on matters relating to the topics of professional skepticism, quality control and group audits. The IAASB’s Invitation to Comment (ITC), Enhancing Audit Quality in the Public Interest: A Focus on Professional Skepticism, Quality Control and Group Audits, sets out the IAASB’s discussions on a variety of issues and concerns relating to the three topics, and flags possible standard-setting actions that may be undertaken.
With a view to addressing the needs of a broad range of stakeholders, the IAASB has committed to keeping the International Standard on Auditing (ISA) “fit for purpose” and able to help auditors appropriately react to the challenges of an environment that is evolving and becoming ever more complex. The IAASB believes that it is essential to strike the right balance in the standards by promoting both a ‘thinking’ audit, as well as retaining a principles-based approach such that the standards continue to be suitable for use across a wide range of circumstances.
The IAASB has identified the following important public interest issues to drive its efforts:
- Fostering an appropriately independent and challenging skeptical mindset of the auditor.
- Enhancing documentation of the auditor’s judgments.
- Keeping the ISAs fit for purpose.
- Encouraging proactive quality management at the firm and engagement level.
- Exploring transparency and its role in audit quality.
- Focusing more on firms (including networks) and their internal and external monitoring and remediation activities.
- Reinforcing the need for robust communications and interactions during the audit.
Professional skepticism is core to a quality audit and is essential in all aspects of the audit—from planning and risk assessment, to the critical assessment of audit evidence in forming the auditor’s conclusions. The IAASB is exploring what can be done to re-emphasize the important role of professional skepticism in audits of financial statements. The IAASB is also working together with the International Accounting Education Standards Board and the International Ethics Standards Board for Accountants to pursue a more holistic approach to encouraging a more challenging mindset for auditors, as their international standards also contain concepts that influence the appropriate exercise of professional skepticism.
Strengthening the Standards Addressing Quality Control
The IAASB’s quality control standard, International Standard on Quality Control (ISQC) 1, Quality Control for Firms that Perform Audits and Reviews of Financial Statements and Other Assurance and Related Services Engagements, provides the foundation for the approach to quality control for firms of all sizes. An effective system of quality control supports consistent quality in all services a firm provides, and is an essential component of audit quality. ISQC 1 is complemented by ISA 220, Quality Control for an Audit of Financial Statements, which addresses quality control at the engagement level for audits of financial statements. In addition to considering an approach to quality control that emphases the responsibility of a firm’s leaders for a more proactive, scalable, and robust response to managing quality risk, the IAASB is considering how to address a variety of issues relating to quality control, both at the firm and engagement level, including:
- At the firm level, increasing the focus on the importance and need for effective firm leadership, and the importance of the firm’s culture and strategy.
- At the firm and engagement level:
- Clearly setting out the roles and responsibilities of firm leadership and the engagement partner.
- Considering trends in transparency reporting at the firm and engagement level and considering whether and how the standards should or could require such reporting.
- Considering whether the standards need to more specifically address evolving firm and engagement team structures (e.g., shared service centers and outsourcing arrangements).
- Considering the basis for any reliance on a firm’s system of quality control, as well as reliance by a firm on network-level policies and procedures.
- Whether requirements addressing policies and procedures relating to monitoring and remediation need to be strengthened, in particular to address investigation and responses to findings from external inspections.
- Whether the scope of engagements for which engagement quality control reviews are required should be expanded, and whether the role and responsibilities of the engagement quality control reviewer need to be strengthened.
Strengthening the Standards Addressing Group Audits
Group audits have become more complex as the environment evolves and entities become more challenging to audit. Although all the ISAs apply in a group audit engagement, the IAASB is considering whether changes need to be made to its standard focusing on group audits, ISA 600, Special Considerations—Audits of Group Financial Statements (Including the Work of the component Auditor). Concerns about the ability to effectively apply the standard to the wide variety of group structures that exist currently and that will continue to evolve may result in the IAASB considering how the standard could be more flexible and whether a more ‘top-down’ approach to designing a group audit would be more appropriate and enhance the quality of group audits.
- Specific concerns relating to challenges in group audit situations have also been identified and include considering what can be done to address:
- Acceptance and continuance of group audits, in particular where there may be issues relating to the ability to access management or information necessary to perform the audit.
- Evolving group structures, including the increasing use of shared service centers and sophisticated information technology systems.
- Situations where engagement partners are not located where the majority of the audit work is performed, and how they can demonstrate appropriate direction, supervision, performance and review of the work.
- Sufficient involvement of a group engagement team in the group audit, including in the work performed by component auditors.
- Appropriate and effective communication between the group engagement team and the component auditor.
- How the concept of component materiality is being applied in group audits.
- The necessary work effort of the component auditor, including considering whether more targeted requirements or guidance for the component auditor are needed.
Consulting on These Matters
The IAASB would like to hear from all stakeholders. In addition to the ITC, the IAASB has released a companion document, Overview of the ITC, which summarizes the key areas the IAASB is exploring and the direction it may take. Respondents may comment on either document; however the Overview is targeted at financial statement users, preparers, audit committees and organizations representing these groups.
The IAASB is seeking input from stakeholders on a series of questions including views about:
- Whether the right issues have been identified, or whether there are other issues that need to be considered.
- The possible causes of the issues identified.
- Necessary changes to the standards, including views on the possible IAASB actions described in the ITC.
The IAASB therefore encourages all stakeholders to provide their input, as this will help the IAASB in identifying the most appropriate standard-setting, or other relevant, actions. The due date for responses to the ITC or Overview is May 16, 2016. Please see Focus on Audit Quality to access other information about Audit Quality and the consultation, including a template that may be used to accumulate responses to the questions in the ITC, as well as a video which reviews the key elements of the ITC.