Audited financial statements should be reliable. This simple statement reflects the fact that reliability matters to users of audited financial statements and provides a context for thinking about the role and responsibility of auditors. Reliability is has five aspects of reliability: faithful representation, fitness for purpose, robustness, organisational reliability, and audit firm reliability. This paper explores these aspects and the challenges they pose for auditors.
The AQF and its body of work
Over the last 15 years, the AQF has published a significant volume of work.
These publications were grouped into themes: reliability, global challenges, evolution, audit fundamentals, and shareholder involvement.
The objective of this paper is to raise international awareness of the challenges posed by differences in national environments for initiatives to promote international consistency in audit quality. It considers how national differences affect the application of standards, key risk to consider in promoting international consistency, and identifies potential practical solutions to these challenges.
The paper addresses the many and varied impacts of changes in financial reporting on audit practice. It considers the nature of audit evidence in the light of challenges such as fair value accounting, the reporting of estimates and sensitivities, complex disclosures and the interrelationship of financial statements with accompanying narrative information. The paper explores how these challenges impact auditor judgement, uncertainty, and how auditors obtain sufficient, appropriate audit evidence.
Audits have a number of stakeholders, chief of which are shareholders, directors and auditors. This paper explores issues with other audit stakeholders outside this primary group, discussing whether the audit might be able to accommodate additional expectations without weakening its clear statutory purpose. Key topics discussed include agency model, expectation gaps, and limitations of statutory audit.
Given the overall positive change in audit practice brought about by audit committees, this report considers whether: all entities subject to audit should have audit committees; auditors‘ interaction with audit committees should be an explicit part of the audit process of assessing and responding to risks as set out in auditing standards; and auditors should evaluate whether audit committees are effective in supporting the quality of audited financial statements.
This paper considers the implications of disclosure of third-party information and advice on the work of auditors, audit quality and transparency. It explores issues arising where advice is given to boards or management by third-party experts as well as information held by third-party advisers, which although relevant to the content or reliability of financial statements, may not be made available to auditors. The paper also considers the complex issue of legal professional privilege claimed over information which is material to the financial statements.
This paper considers whether the wording of the audit report satisfies shareholders' expectations. It considers the information that auditors communicate and how this reflects audit purpose, the expectations of shareholders and the need for further enhancement of confidence in the independent audit. The paper sets out the working group's key recommendations for improving the audit report.
This paper considers how international auditing standards can deal with local challenges by exploring the qualities of auditing standards necessary to facilitate high-quality audits in the UK. This paper draws on the UK experience of the adoption and implementation of ISAs and considers what practitioners, standard-setters, governments and regulators can learn from this.
This overarching paper seeks to articulate the purpose of an audit, in the context of the interests of shareholders who appoint and monitor boards and, ultimately control the companies they own. Attention has been given to responsibilities, relationships and the benefits of audits of both quoted and unquoted companies. It explores shareholder expectation gap issues, from fraud, internal control, and going concern, and to what is meant by reasonable assurance.
This paper explores 'principles-based' or 'objectives-oriented' auditing standards and how they differ in practice from 'rules-based' standards. Implementation issues are also explored including the capacity of such standards to deliver real improvements in audit quality and the need to balance the promotion of professional judgement with the need for auditor accountability.
Audits serve a fundamental purpose in promoting confidence and reinforcing trust in financial information. The principal-agent relationship, as depicted in agency theory, is important in understanding how the audit has developed. This paper explores agency relationships, audit models, and complicating factors, such as regulatory purposes, corporate reporting models, public interest, and the interests of agents and unconscious bias.
This paper investigates concerns relating to auditor competition and choice, as well as means of encouraging competition and choice in the audit market for large listed companies. Competition and choice is necessary to ensure that audit quality is maintained and enhanced. The paper explores stakeholder issues, potential barriers to entry, and the relationship between competition and audit quality.
This paper sets out a policy proposal to consider the practical, technical and legal issues around making audit engagement letters publicly available through, for example, publication on company websites, as well as considering the appropriate content of such letters. The paper considers the current requirements relating to audit engagement letters, the typical contents thereof, potential legal and practical issues and perceived concerns by shareholders around audit engagement letters.
This paper sets out a policy proposal to consider the issues surrounding the proposition that audit reports should be signed by responsible individuals on behalf of their firm. It develops proposals to be taken forward with stakeholders. It explores the legislation, auditing standards and regulation, international experience, benefits, and concerns.
This paper sets out a policy proposal to consider the empowerment of shareholders to put questions to auditors of listed companies on relevant matters at AGMs. It considers the technical, practical and legal issues around the proposal to adopt reforms similar to the Australian Corporations Act 2001. This includes the needs of shareholders, the status of the AGM, permissible questions, and the auditor's duty of care.
This paper sets out a policy proposal to improve transparency by disclosing more information in auditor resignation letters. Shareholders have expressed concerns that auditor resignation statements do not provide information of actual value to shareholders. This paper explores the legal requirements on auditors, potential useful information to include, and the benefits and impact.
ICAEW's Audit Quality Report
Prior to the creation of the AQF, in November 2002, the Audit and Assurance Faculty published a leading report on audit quality. It covered the role and nature of the quality audit and the major factors driving audit quality. This report helped inform the audit quality dialogue that would result in the AQF. The report is available in two forms: