With external audits under unprecedented levels of scrutiny, root cause analysis (RCA) can be a useful tool for those tasked with improving audit quality. Following feedback that there is little support for external auditors on how to carry out RCA, the Audit and Assurance Faculty has published this practical paper for its members outlining what RCA is and what auditors need to consider to make the most of this useful tool. It covers the five essential questions of: what, why, how, who and when?
Root cause analysis (RCA) is a technique for identifying the underlying key causes behind review findings. Understanding the causes means that audit firms can then take action to prevent recurrence of negative outcomes and to promote recurrence of positive ones.
RCA does not have to be complicated and it can be very powerful if done well. In simple terms, it is a matter of asking ‘why?’, possibly several times.
RCA as applied to audit has been the subject of extensive comment by regulators and standard-setters in recent years.
In its paper, A Framework for Audit Quality: Key Elements that Create an Environment for Audit Quality, IAASB states: ‘Audit regulators expect firms to investigate and understand the root causes of inspection findings, and to use them as the basis for determining remediation activities and assessing the effectiveness of those actions.’
The FRC in the UK has now issued a thematic review on RCA carried out by the six largest UK audit firms.
And it is likely that the regulatory spotlight, and the call for effective RCA, will soon fall on a greater range of firms given new challenges that are forthcoming, such as changing financial reporting requirements.
This paper draws on the experiences of practitioners already performing regularly RCA and provides pointers on key things to consider based on what they have found works in practice.
The Audit and Assurance Faculty is not seeking to impose specific ways of performing RCA, but providing advice on key questions to ask to ensure that your firm is undertaking RCA in the most effective way, including:
Flexibility and judgement are key, taking account of your firm’s specific circumstances.
It is not mandatory to follow the suggestions in this paper, however, all audit firms should already review their performance and the faculty believes that, if they do it well, RCA is a way to help them do this more effectively and efficiently.
On 24 March the faculty held a webinar which covered the key matters included in the faculty’s practical paper on root cause analysis (RCA).
On 1 December, Chris Cantwell, Technical Manager at the AAF, hosted a live video event with Gill Spaul, Technical Director, Moore Stephens Europe Limited, and Geoff Swales, Director at PwC, to discuss this paper and provide pointers on what to consider when conducting RCA based on their experiences.
The live video session also covered how use of RCA might evolve over the coming years, including possible new requirements and regulator expectations.
The paper was produced by a working group of the faculty’s Audit Quality Panel. This panel develops guidance and support for members and the global auditor community on audit quality topics. Members of the working group for this paper were:
If you are interested in getting involved in this activity please contact Chris Cantwell.