Using the right audit quality indicators can make all the difference
In recent years, the Canadian Public Accountability Board (CPAB), the Public Company Accounting Oversight Board (PCAOB) in the US and the Financial Reporting Council (FRC) in the UK have begun focusing on audit quality indicators (AQIs)—quantitative measures for evaluating audit quality. CPAB, in fact, undertook a 2016 AQI pilot project to determine how helpful AQIs are to audit committees in fulfilling their audit oversight responsibilities.
While comprehensive quality assessment must also include qualitative reviews, it’s becoming clear that AQI data—when considered in context with a company’s particular regulatory environment, accounting framework and market realities—can provide audit committees with additional insight into the effectiveness of the audit process.
The key is to determine which AQIs make the most sense for your organization in two areas: audit planning and monitoring, and external auditor evaluation. To that end, audit committees should bear the following in mind as AQIs are selected:
Relevance — The focus of your AQIs should be on the indicators most relevant to your audit team and process rather than broader measures. Similarly sized organizations don’t necessarily require a similar staffing profile or equivalent technical expertise. Rather, much depends on your industry, global footprint, accounting complexities and other company-specific elements. (One exception to this might be tone-at-the-top measures as determined by broad-based surveys.)
Operational context — Rather than adopting boilerplate measures, try to select specific and balanced indicators. For instance, in measuring the availability, competence and focus of your organization’s internal audit professionals, you may want to assess comparability to industry norms—a process with which your external auditors may be able to help with if they audit other companies in a similar space. In turn, when reviewing your external auditor’s internal quality review results or board inspection results from either CPAB or PCAOB, consider applying multi-year averages to gain a more realistic result.
Predictive value — Adopt indicators that are predictive in nature, rather than those that can only be measured after the fact. Examples might include looking at the number of planned hours of senior level involvement; the team’s experience in your sector; the audit team’s access to technical accounting and auditing resources; training hours per audit professional; or partner and manager workload.
Indicators that many organizations consider include:
Experience of senior team members
Number of years:
Percentage of hours:
Areas of audit focus
Quality of processes
For all of these indicators, it’s important that everyone involved understand what constitutes a good or bad result; that is, will future audit quality be improved by increasing or by decreasing a particular AQI.
AQIs should play an important part in the discussions between the auditor, the audit committee and management at the audit planning stage to help identify which matters should be addressed (for example, is the audit team involving a sufficient level of experts/specialists on a particular matter). Audit committees are not all initiating these discussions, but those that want key AQIs reflected in reporting should do so sooner rather than later.
Due to the ongoing importance of audit quality, most audit firms are publishing reports focused on AQIs. For more information, download KPMG’s report.