Audit quality: the role of standard-setting

Auditing standards are rarely top of the agenda when it comes to audit reform. Auditor behaviour is particularly sensitive to the demands of audit inspection teams and audit regulators, and structural approaches to auditor performance are believed to be more effective than tinkering with auditing standards or the standard-setting process. Nevertheless, audit methodologies are underpinned by auditing standards, and audit methodologies affect behaviour. Audit quality is therefore affected, directly or indirectly, by auditing standards and the standard-setting process, particularly if standard-setters fail to address the right issues or approach them in the wrong way.

Audit quality is hard to describe, still less define or measure. Furthermore, there are two divergent approaches to it that are not easy to reconcile.  The first approach confines audit quality to compliance with auditing standards. In simple terms, complying with the requirements is all that is needed. This approach to auditing is prevalent in many developed jurisdictions, but not in the UK. If this approach is right, and compliance with auditing standards is the sole determinant of audit quality, it is critical that those standards are fit for purpose and that changes to them demonstrably impact auditor behaviour. 

The second approach requires auditors to do more than just comply with auditing standards in order to achieve audit quality. To an extent, this approach is already embedded in auditing standards, which require auditors to stand back at various stages of the audit and consider whether further work is needed. However, in practice, this requirement is applied in different jurisdictions with varying degrees of rigour. If this approach is right, it is critical that auditors, audit regulators, auditing standard-setters and other stakeholders are all clear, at least in general terms, about what more is needed and when.

These approaches represent genuine differences of opinion and a clear indication that the relationship between auditing standards and audit quality – and indeed the nature and scope of audit – warrant further attention. Both approaches, but particularly the first, suggest that auditing standards, far from simply being technical documents, are highly relevant to the debate on the future of audit.

In addition to IAASB’s work on LCE audits and audit evidence, as a mature standard-setter it should now consider developing:

• a paperwork reduction policy, to which resources should be devoted, to systematically eliminate unnecessary duplication, redundancy and overlap;
• tools facilitating the high-quality and systematic evaluation of major proposals, including cost-benefit analyses; and
• more effective techniques facilitating the development of auditing standards on a holistic basis, preventing the proliferation of excessive detail. 

IAASB has no need for excessive caution with regard to data analytics and other new technologies. To help ensure that opportunities afforded by these tools and techniques to enhance audit quality are exploited fully, it should actively reconsider some of the basic assumptions on which the extant suite of auditing standards are based, and take a more robust approach to referencing the use of new technologies in ISAs. For their part, where auditors are confident in the integrity and value of new technologies, they should not be discouraged by audit regulators from using them in meeting the requirements of auditing standards, simply on the basis that auditing standards do not explicitly permit them.

IAASB should consider more active engagement with audit regulators and auditors to develop an understanding of how application material within the ISAs and non-authoritative material could be developed in a more agile and innovative manner to improve audit quality and enable faster reactions to developments. It could review its range of non-authoritative pronouncements and re-define the nature and purpose of staff publications to facilitate better quality and more useful guidance material, especially examples, and not limit the pronouncements to statements made in the ISAs. It could reinforce and clarify the status of guidance material to encourage a more consistent approach by audit regulators and auditors.

IAASB should consider now how it might operate more efficiently on a day-to-day basis, to enhance the quality of standard-setting, and with a view to ensuring that the Monitoring Group’s proposals, as and when they are implemented, are effective in the public interest. This might include requiring that better developed proposals are brought to the board, and that the board engages in less-detailed drafting.

IAASB should consider:

• the benefits and risks associated with continuing to promulgate a single set of auditing standards;
• whether the necessary compromises required at both ends of the scale are still justified by the benefits; and
• the possibility of developing a more workable set of requirements and application material for the audit of non-PIE entities, within a single set of standards, with incremental requirements dealing with the audit of more complex entities.