How Management Contributes to Audit Quality
Taryn Abate, CPA, CA, CPA | April 9, 2018 |
What role can management play in improving audit quality? It is a question that has been largely ignored since the financial crisis of 2008. Instead, initiatives aimed at improving audit quality have focused almost singularly (and understandably) on what auditors could and should be doing.
The reality is that the auditor can only audit the information provided by management. A more robust and inclusive approach is needed to improve audit quality. Audit quality is most strengthened when the auditor, the audit committee and management (the “three-legged stool”) work together.
CPA Canada and FEI Canada conducted a study to assess management’s understanding of the importance of their role as a contributor to the quality of the annual financial statement audit. “How Management Contributes to Audit Quality” explores what audit quality means to management, how much time they spend in different areas of the audit, where they believe time should be spent, and the value they do and could provide to auditors.
The study provides suggestions on how management can contribute to audit quality, including its role in supporting the use of data analytics in the audit.
What Does Audit Quality Mean to Management?
What makes a quality audit? The answer depends on the stakeholder and how involved they are in the audit process. For example, management is likely to link quality to efficiency, while regulators focus largely on evidence of compliance with auditing standards. Perceptions of audit quality varies with the stakeholder’s level of direct involvement in the audit and the lens through which they assess audit quality.
According to the study, management reported they derived the most value from the following aspects of audit:
- Improved insights into complex issues/estimates (73%)
- Improved accuracy of financial statements (55%)
- Improved internal controls (49%)
- Greater identification and awareness of risk (48%)
Being engaged in the audit process increases management’s view of the value of the audit. Managers who are not involved in the audit process are most likely to report that the audit itself has limited value.
How Can Management Contribute to Audit Quality?
The majority of respondents (84%) report that as management’s involvement in the audit increases, so too does the quality of the audit. Further research was conducted to understand successful practices to strengthen the audit process. The good practices identified fell into three key areas:
- Optimize management’s processes to support the audit. The better management establishes and executes its own internal processes for planning, managing and supporting the audit, the smoother the audit is likely to run. These processes may include:
○ Clearly defining and communicating team roles
○ Delegating responsibilities to all members involved in supporting the audit
○ Having a schedule to support timely responses to auditor requests
○ Holding internal planning meetings to prepare for the audit
○ Holding meetings during and after the audit to seek feedback and improve the audit process in the future.
- Deepen planning between auditor and management. Valuable information can be provided to the auditor during the planning phase of the audit to help set the audit up for success. Management has an intimate understanding of its entity and the environment in which it operates and can provide insights with respect to risks and any significant changes that have occurred during the year. Holding a planning meeting with the auditors before the audit begins allows for information sharing and provides an opportunity to discuss agreed-upon timelines.
Even though the overwhelming majority of respondents agreed their auditors had a solid understanding of the entity’s financial reporting risks, some respondents felt their auditors’ priorities did not always align with the risk areas identified by management. A few respondents indicated they did not know how much time their external auditor spent on any one given aspect of the audit or why certain tasks were being undertaken. More than half the respondents thought auditors would better understand the entity if they spent more time asking questions of management.
These findings highlight an opportunity for both the auditor and management to improve communication and thus increase engagement in the audit process. Some management expressed a desire for more detailed post-audit feedback, which can be preempted by planning in advance and may enhance the value of the current audit and lead to greater efficiencies in future audits.
- Enhance communication between auditor and management. Establishing a transparent relationship with two-way, ongoing communication throughout the audit builds greater engagement on the part of management and may further support an effective, efficient and higher quality audit, benefiting both management and the auditor.
How Can Data Analytics Enhance Audit Quality?
The amount of data produced annually is multiplying exponentially. By 2025, it’s estimated the amount of data created annually around the world will grow to 180 Zettabytes (or 180 trillion gigabytes), up from less than 10 Zettabytes in 2015.
When asked about the use of data analytics in the future, more than half the respondents expected the use of data analytics to increase somewhat in the next three years, with about 22% anticipating a significant increase. The majority of respondents (52%) expect the use of data analytics by their auditors to increase in the next three years, with 10% expecting a significant increase. More than half of total respondents (57%) agree there is value in the use of data analytics by their auditor.
Data analytics presents an opportunity to further enhance audit quality by providing deeper insights into an organization’s systems and controls, more robust performance information for management, and more effective and efficient interactions between auditors and management.
Management can assist with the auditor’s use of data analytics by:
- Providing access to quality and complete data. This will likely require the IT department to be included in audit planning discussions to determine what information is required and who is responsible for preparing the data for the auditors.
- Discussing with the auditor what audit data analytics may be performed and making sure the data is available to perform those analytics.
- Discussing the results of audit data analytics openly and honestly to both enhance the quality of the audit evidence for the auditor and to provide insights into the business.
With the increase in data, the use of data analytics is increasingly important for the auditor to understand how all the transactions of an entity fit together, as well as to understand normal transactions as compared to outliers. The use of data analytics in the audit can provide significant input into the risk assessment – especially when combined with candid management commentary.
For additional guidance on audit data analytics for management, the audit committee and the auditor, see www.cpacanada.ca/DataAnalyticsInAudit
The audit process involves a relationship between management, the audit committee and the auditor. As in any relationship, it is most effective when all parties are engaged. Planning, collaboration and open communication from all parties will result in a more streamlined, efficient, and higher-quality audit.