The International Auditing and Assurance Standards Board (IAASB) has developed a Framework for Audit Quality that describes the input-, process- and output factors that contribute to audit quality at the engagement, audit firm and national levels, for financial statement audits.
The Framework also demonstrates the importance of appropriate interactions among stakeholders and the importance of various contextual factors.
The IAASB acknowledges that term “audit quality” is frequently used in debates among stakeholders, in communications of regulators, standard setters, audit firms and others; however there is no definition or analysis of audit quality that has achieved universal recognition as it constitutes a complex subject.
The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements and that is achieved by auditors gathering sufficient appropriate audit evidence in order to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
Albeit the term ‘audit quality’ is difficult to define, for the IAASB it encompasses a number of key elements that create an environment which maximizes the likelihood that quality audits are performed on a consistent basis.
The key elements of audit quality identified by the Framework are:
(a) Inputs
(b) Process
(c) Outputs
(d) Key Interactions within the Financial Reporting Supply Chain
(e) Contextual Factors.
Inputs are grouped into the following input factors:
(a) The values, ethics and attitudes of auditors, which in turn, are influenced by the culture prevailing within the audit firm; and
(b) The knowledge, skills, and experience of auditors and the time allocated for them to perform the audit.
Within the above input factors, quality attributes are further organized between those that apply directly at:
(a) The audit engagement level;
(b) The level of an audit firm, and therefore indirectly to all audits undertaken by that audit firm; and
(c) The national (or jurisdictional) level and therefore indirectly to all audit firms operating in that country and the audits they undertake.
The rigor of the audit process and quality control procedures impact audit quality.
Outputs include reports and information that are formally prepared and presented by one party to another, as well as outputs that arise from the auditing process that are generally not visible to those outside the audited organization. For example, these may include improvements to the entity’s financial reporting practices and internal control over financial reporting, that may result from auditor findings.
The outputs from the audit are often determined by the context, including legislative requirements. While some stakeholders can influence the nature of the outputs, others have less influence. Indeed, for some stakeholders, such as investors in listed companies, the auditor’s report is the primary output.
The stakeholders in the financial reporting supply chain include users, management, those charged with governance and regulators.
While each separate stakeholder in the chain plays an important role in supporting high-quality financial reporting, the way in which the stakeholders interact can have a particular impact on audit quality. These interactions, including both formal and informal communications, will be influenced by the context in which the audit is performed and allow a dynamic relationship to exist between inputs and outputs. For example, discussions between the auditor and the audit committee of a listed company at the planning stage can influence the use of specialist skills (input) and the form and content of the auditor’s report to those charged with governance (output). In contrast, for privately owned businesses, there may be close proximity to the owners during the course of the audit. In these circumstances, there may be frequent informal communications, which contribute to audit quality.
There are a number of environmental – or contextual – factors, such as laws and regulations and corporate governance, which have the potential to impact the nature and quality of financial reporting and, directly or indirectly, audit quality. Where appropriate, auditors respond to these factors when determining how best to obtain sufficient appropriate audit evidence.
The IAASB states that while the quality of an individual audit will be influenced by the inputs, processes, outputs and interactions described in this Framework, the Framework for Audit Quality, by itself, is not sufficient for the purpose of evaluating the quality of an individual audit. This is because detailed consideration will need to be given to matters such as the nature, timing and extent of audit evidence obtained in response to the risks of material misstatement in a particular entity, the appropriateness of the relevant audit judgments made, and compliance with relevant standards. Access A Framework for Audit Quality: Key Elements that Create an Environment for Audit Quality for more information.