CAQ Explores the Art of Determining Audit Qualityby
Barely two paragraphs into the Center for Audit Quality's (CAQ) new report, Audit Quality Indicators: The Journey and the Path Ahead, the organization acknowledges a new understanding about how to determine audit quality: âIt's more art than science.â
The report is the result of several roundtable discussions held last year in New York, London, Singapore, and Chicago to evaluate the CAQ's proposed audit quality indicators, which are quantitative in nature. A key element to emerge from those discussions centers on the need for audit committees to use a âmultidimensional resource that can assist them in gauging the performance of the audit using qualitative and quantitative factors,â the report states.
Therein lies the art to augment the science, and melding the two begins with dialogue.
âIt is the conversation that is important; having a dialogue to explore the context and relevance of certain indicators is critical to obtaining a deeper understanding of the quality of a particular audit,â the report states. âWe heard that audit committee members desire assistance with their efforts to grasp the more qualitative aspects of the audit, such as the engagement team having the right mindset to bring forth professional skepticism, which is difficult to measure and is best achieved through dialogue.â
The CAQ also acknowledges that its proposed audit quality indicators can be used to support or start conversations about auditor performance, but they âcannot lead to a holistic understanding of audit quality,â the report states.
âParticipants emphasized the importance of the external auditor's mindset in terms of the engagement team's capacity and propensity to exercise professional skepticism and question and critically assess audit evidence,â the report states. âTo participants, the importance of this mindset went hand-in-hand with those skills associated with a person's emotional intelligence quotient.â
So, there's work ahead. According to the report, the CAQ's potential path forward is the creation of a tool for audit committees to guide how they assess quantitative and qualitative information.
âOur [audit quality indicator] pilot testing and roundtable discussions have provided enormously helpful inputs to the profession's work in this area, and we are grateful to all of the participants,â CAQ Executive Director Cindy Fornelli said in a prepared statement. âWhile validating many aspects of our approach, these efforts also have showed us where more work needs to be done.â
Other key findings from the roundtables include the following points:
- Although audit quality indicators help audit committees oversee external audit quality, the external audit is just one aspect of quality financial reporting.
- A flexible approach is needed that allows the audit committee and external auditor to tailor the indicators to specific information needs.
- There's general support for the concept of audit quality indicators and their potential value to auditor oversight, but some participants said they already have the necessary tools to gauge audit quality.
- Indicators alone can't adequately communicate factors relevant to a particular audit engagement or audit firm.
- Identifying and evaluating indicators should be audit committee-driven and iterative, requiring continuous assessment and refinement to meet the changing needs of audit committees.
- Mandated public disclosure of engagement-level indicators could lead to unintended consequences. Any disclosures of that level of indicator information should be voluntary.
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.