Teaming up to improve audit efficiency and quality
At times it may seem like audit efficiency and quality sit at opposite sides of a spectrum, with an inability to be efficient and do quality audit at the same time. However, as Julia Penny explains, adopting a right-first-time culture, with everyone committing to getting everything right the first time round, could make being efficient and doing good quality audit at the same time possible.
It might seem that audit efficiency and quality sit at opposite ends of a spectrum – you can be efficient, or you can do a quality audit, but not both at the same time. If, however, we stop to analyse the factors that produce both efficiency and quality we discover that they are largely the same things.
Doing an efficient audit means carrying out all the necessary procedures in the minimum time, with the minimum effort (whether that is by human or machine). Doing a quality audit also requires carrying out all the In essence, good quality audit work requires that each audit is in full compliance with the relevant ethical and auditing standards. At each stage of the process, from accepting the appointment through to the final review and signing of the audit report, all aspects set out in Financial Reporting Council (FRC) Revised Ethical Standard 2016 and in International Standards on Auditing (ISAs)(UK) – or equivalents in other jurisdictions - must be followed, together with any related requirements.
This calls for good planning, ensuring that risk areas are identified, then the gathering and documentation of sufficient, appropriate audit evidence. The final review ensures that the opinion being given is supported by the evidence and that this is all appropriately documented. Distilled into this short paragraph, it sounds simple. The question is though, how do we implement or strengthen our firm’s culture of quality to ensure that we reap the rewards of both quality and efficiency?
Right first time
One way to achieve this is to move to a right-first-time culture. This is something that has been adopted in many industries and has been shown to be effective. It means that everyone in the firm must commit to getting everything right the first time. There is no room for an attitude that says “someone will review this, so I don’t need to check that it’s right” or “it’s not me signing the audit opinion therefore it doesn’t matter if it’s wrong”.
Instead, a culture of right first time will include a number of features, including:
- Ensuring that we understand the work required of us, if necessary clarifying by looking up relevant requirements if necessary clarifying by looking up relevant requirements in underlying standards/guidance; asking another team member; or using a helpline, such as ICAEW’s Technical Advisory Service.
- A commitment by every member of staff, however junior or senior, to fully completing the work they are allocated within the timescale set out, or reporting as soon as it is apparent that this isn’t going to be possible;
- An understanding that completing audit work involves, for example:
- completing all relevant work programme sections;
- completing all audit tests set out in the work programme as dictated by the planning;
- completing all cross-referencing to the work programme or other parts of the audit documentation; and
- carrying out a self-review of the work to ensure that it is complete and hasn't got obvious errors within it (we all know that self-review is of limited value, but nonetheless we shouldn't hand a piece of work over to another for formal review without having considered whether we have correctly done our part of the job).
- Understanding that if you are working in a team it’s part of your job to help the rest of the team fulfil their responsibilities. This particularly applies to senior staff who should understand that part of their role is to explain what is needed for junior members of staff, and if they don’t understand to escalate this to someone who does. This can be challenging, as it means admitting that you don’t know something, but if the firm can encourage this approach it will result in more capable team members at all levels.
By developing a culture of right first time, your audit efficiency, as well as quality, should increase. You shouldn’t then end up with expensive managers or partners having to finish off work that could and should have been done by more junior staff. It should also mean that any tricky areas get highlighted early and can be escalated to more senior team members for resolution (for instance, provisions for legal claims, going concern issues and valuations of items, such as derivatives).
A quality culture
Quality control in the audit environment is an important area for audit practitioners, standard-setters and regulators (see page 8). So a number of firms have already focused on developing a so-called quality culture; but is this the same as a right-first-time culture? If you think that team members already operate on a right-first-time basis, you can check this by asking yourself the following questions.
Do you ever:
- get given work to review that doesn’t make sense, is incomplete or poorly documented (without having been told by the individual preparing the work that they are struggling with how to do it)?
- find that a team member is happy to leave things where they stand on a Friday, because they know they’re doing another job on Monday and you’ll sort it out?
- find yourself dealing with new or tricky technical or sector issues, without enough support from others, such as the partner?
- find that you (or other team members) ask for guidance but are told that there isn’t time to explain how to do it?
- find other team members keep making the same mistakes or aren’t following guidance given?
If your response to any of these questions is yes, this suggests that not everyone is taking their responsibility for quality seriously or that they don’t understand their role in the process. And note here the use of the word ‘everyone’. For this to work it must apply to all members of the audit team – from the partner to the newest team member.
How to do it
To implement a right-first-time culture you first must ensure that you explicitly state to each member of the audit team what their responsibilities are and the deadline for the work. This must be done in a detailed way if it is to be effective. For example, if a junior is to do cash and bank, prepayments and accruals, tell them what your expectations are:
- all areas on the audit programme must be completed for each of these (the programme should already have been tailored by the manager or partner);
that it is their responsibility to document the work properly (and you might need to explain or show what you mean by this, for example each test should have an objective, method, results and conclusion);
- how long each section should take;
- when you will be reviewing the work;
- who they can ask for guidance if they have any questions or difficulties, such as the work taking longer than expected;
- that they must let you know as soon as possible if they aren’t going to meet deadlines; and
- that if work is not completed without a good reason they will be asked to finish it off even if they have moved onto another audit.
For this to work though, senior members of the team who are responsible for the direction, supervision and review of work must fulfill their side of the bargain. For example:
- you must explain clearly the nature of the work required, including the tailoring for this client (the level of detail will vary depending on the work and the individual);
- someone must be available to answer questions, for instance what to do if a test doesn’t work;
- review should be scheduled at stages throughout the audit, for instance on Wednesday and Friday each week, leaving time for corrective work to be done at the client; and
- when you’ve reviewed work, it must go back to the person who did it for correction, so that they learn what is needed and take responsibility for finishing their work.
As you can see from this, it is assumed in a right-first-time approach that all team members will receive the on-the-job training necessary to complete the work properly. If this sounds inefficient, because it will clearly take more time from senior staff members to do this, consider the chain of events that may otherwise ensue – and their potential impact:
- A team member guesses how to do something, makes a mistake and must re-do the work.
- A mistake is made that is not picked up until review and must then be corrected by a more senior, more expensive, member of staff.
- A mistake is made and not picked up on review. Cold reviews or regulatory reviews perhaps pick it up later, but by then the damage is done.
- A team member goes onto the next audit and makes the same mistake, so repeating the points above.
- A team member who supervises someone else passes on their incorrect way of doing the work.
- Eventually the team member’s work is discussed and they are surprised to find that they have been making mistakes. They feel disgruntled, disappointed that this was not dealt with earlier and maybe will even leave; new staff will need to be recruited – and trained.
This whole loop of continued mistakes can be avoided by ensuring you allocate enough time for on-the-job training and that you constantly reinforce a right-first-time culture.
In perfect balance
By building a right-first-time culture, your firm can reap benefits in both the quality and the efficiency of its audits. It takes effort and care to implement, but it is well worth it in the end. Just remember though, to concentrate on highlighting what has gone well and just educate (rather than castigate) on what needs improvement.
Quality control in firms and the audit environment are important areas of focus for audit practitioners, standard-setters and regulators. As well as compliance with Auditing Standards, Ethical Standards, Quality Control Standards and ICAEW Audit Regulations, audit quality is influenced by the culture within a firm, its firm-wide procedures and the attitudes and behaviour of every person on an audit team.
ICAEW offers various technical and practical resources to assist auditors in their pursuit of quality at the firm and the engagement level. In the section of the website on ‘Quality control in the audit environment’ members will find things such as:
- guidance on getting the most from root cause analysis;
- support with implementation of the existing international and UK standard on quality control (see below for information on coming changes in this area);
- relevant webinars and videos; and
- guidance and support tools from the International Auditing and Assurance Standards Board (IAASB).
The future of Audit Quality management
The IAASB is consulting on its proposals to supersede the International Standard on Quality Control (ISQC) 1 with an International Standard on Quality Management (ISQM) 1 Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements and ISQM 2 Engagement Quality Reviews.
ISQM1 and 2 will replace and extend ISQC 1 and ISA 220 will also be updated. The aim is to ensure that firms’ systems continue to be robust and effectively support high-quality audits and other engagements.
A faculty webinar recording is available to help members learn more about coming changes.