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Audit quality: how to raise the bar

Thought leadership report

Published: 10 Mar 2021 Update History

Contents

What steps can and should audit committees, audit regulators, investors and auditors in the UK take to improve audit quality? This essay from the Audit and Assurance Faculty examines audit quality in terms of ownership, behavioural aspects, and structural drivers.

Expectations of audit quality are high, and the debate about audit quality is a complex and evolving one. This essay is a contribution to some key aspects of the global debate.

We demonstrate that audit quality is not just about auditors. Company boards, audit committees, investors, audit regulators and auditing standard-setters have not just a role to play, but a responsibility for audit quality.

Audit quality is an issue that transcends national boundaries and is of global interest. In the UK the pace of reform seems likely to pick up with publication of a long-awaited consultation paper on changes to the corporate governance and audit system, building on the earlier reports of Sir Donald Brydon on the quality and effectiveness of audit, Sir John Kingman on the Financial Reporting Council, and the Competition and Markets Authority on the audit sector. These reports are all relevant, directly or indirectly, to audit quality. Changes to legislation, regulation and auditing standards arising from current proposals will take time, and there are steps that all concerned can and should take now, voluntarily, to improve audit quality, regardless of the extent and timing of those changes.

In this essay, we highlight the role and responsibilities of all of those involved in the audit quality supply chain and the steps we can all take to improve audit quality.

We look at:

  • Owning audit quality, including the audit quality supply chain, the characteristics of audit quality, and correlating Audit Quality Indicators with audit quality.
  • Behavioural aspects of audit quality, including stand-backs, scepticism, suspicion and skillsets, the use of specialists and the characteristics of a strong audit team, and the implementation of root cause analysis.
  • Structural drivers, including oversight and reward, transparency reports and the role of investors, and the role of standards and audit technology.

This essay recommends seven steps forward.

  1. Boards should do more to ensure that audit committees are properly equipped to provide a robust level of challenge to management and auditors. Audit regulators should do more to align the behaviours of audit inspectors with their aims and objectives.
  2. Audit regulators, audit committees, investors and auditors need to work together to develop a framework and methodology for the calculation and reporting of Audit Quality Indicators.
  3. Audit firms should continue to develop tools and techniques for flagging and managing manipulative and deceptive behaviour. Auditing standard-setters and policy makers should consider the additional tools auditors need to deal with such behaviour effectively. Audit committees should consider how they can improve audit quality by providing a more robust challenge to management assumptions.
  4. Entities and audit firms should evaluate the costs and benefits associated with enhanced engagement with experts and specialists.
  5. Firms of all sizes should consider adopting at least simple forms of root cause analysis at the engagement level.
  6. Auditors and audit committees need to work to raise the profile of transparency reports. Audit regulators and investors need to use the information now available to further the debate on their role in promoting audit quality.
  7. Standard-setters should take the opportunity to consider alternatives to the existing assumptions and models underlying auditing standards with a view to ensuring that high quality audit remains a relevant and valued service.

We invite individuals and organisations to share with us in the coming months not only their comments on the analysis and suggestions in this essay but on their own experiences and ideas in relation to the challenges of audit quality. These will help us to develop our contribution to the coming period of intense consultation and reflection that will determine the future of audit and reporting in the UK, and beyond.

Audit quality: how to raise the bar

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