How do you know if the audit firm is providing value with a quality audit?

How can we tell if the external auditors are doing a good job? Often we can’t. Lots of companies have had large accounting and fraud issues blow up shortly after the external auditors issued a clean audit opinion.

Yet the question remains for the audit committee: How do we know the audit firm is providing value with a quality audit? This is a question that the Center for Audit Quality (CAQ) has worked to shed light on for years.

Earlier this month, it issued a report on its latest insights on a potential set of audit quality indicators that it has been testing and refining. The report provides feedback from a series of roundtables the CAQ has conducted with audit committee members and others to discuss the quality indicators.

The AQI’s that the CAQ has been testing are various measures, such as audit hours by various levels and PCAOB inspection finding, that are both qualitative and quantitative. They generally fall into four categories:

1. Firm Leadership and Tone at the Top

The audit firm’s leadership, through its tone at the top, emphasizes the importance of audit quality, adherence to professional standards, independence and objectivity, and holds itself accountable for the effectiveness of the audit firm’s system of quality control.

2. Engagement Team Knowledge, Experience, and Workload

Professional staff are knowledgeable, experienced, and have sufficient time to perform quality audits.

3. Monitoring

Processes and controls are in place to assess audit engagement performance and the sufficiency of the audit firm’s system of quality control and make any necessary changes.

4. Auditor Reporting

Reports are reliable, useful, and timely; auditor communications are effective.

Key findings from the roundtables, according to the CAQ, include:

  • Participants expressed a desire for information that can assist audit committees in their assessment of the more qualitative aspects of the audit, such as the engagement team having the right mindset to bring forth professional skepticism and auditor judgment.

  • Audit committee members recognized that AQIs can help them oversee the quality of their external audit, even if external audit is just one aspect of quality financial reporting.

  • Most participants endorsed a flexible approach that allows an audit committee, working with the external auditor, to tailor or customize the selection and portfolio of AQIs that best suit its specific information needs.

  • While supporting the concept of AQIs, some roundtable participants said they already have the tools necessary for them to gauge the quality of their audit.

  • Audit committee members agreed that AQIs alone, without context, cannot adequately communicate factors relevant to any particular audit engagement or audit firm.

  • There was agreement that the process of identifying and evaluating AQIs needs to be audit committee-driven and iterative, and will require continuous assessment and refinement in order to meet the changing information needs of audit committees.

  • Audit committee members expressed strong concerns that public disclosure of engagement-level AQIs could lead to unintended consequences. A strong consensus emerged that any disclosures of engagement-level AQI information should be voluntary.

“We have learned a great deal on this journey, but much more remains to be done to strengthen our ability to determine and assess audit quality,” said Stephen Chipman, former CEO of Grant Thornton “The CAQ looks forward to continuing its work towards this vital goal.”