The value of Audit Quality Indicators
In recent years there has been increasing emphasis by stakeholders and regulators on the quality of an audit. As a result, questions about what audit quality means, how it is defined, and how it can be measured have emerged. In this article, we will discuss how audit quality may be measured.
Although there is currently no universal approach to measuring audit quality, several initiatives and proposed Audit Quality Indicators (AQIs), which might be used to measure audit quality, have been published.
AQIs may form the basis for comparison across different audits and audit firms. AQIs improve the transparency of audit firms and their audit process; in turn, they assist users in assessing audit quality, and may be used to differentiate between audit firms. Furthermore, audit firms could use AQIs to demonstrate their commitment to audit quality and foster competition.
In its May 2020 Thematic Review on Audit Quality Indicators, the FRC observed a correlation between audit quality and the number of AQIs used as well as the maturity of each firms’ system of AQIs monitoring. The FRC commented that:
- As the firms’ systems for monitoring AQIs develop, the number of metrics monitored increases initially.
- The number then reduces as firms gain more experience over time.
- The correlation of the AQIs to audit quality dilutes initially as the number of AQIs expands but becomes more robust as firms gain more experience using AQIs.
- The degree to which firms can take actions based on AQIs progressively strengthens as firms become more experienced in designing and using AQIs and can control how they use AQIs to improve their effectiveness.
The FRC further identifies the following three distinct stages of maturity of the firm’s AQIs monitoring systems and the relative number of AQIs that they would monitor at each level:
A firm identifies and monitors a relatively small number of AQIs. The FRC notes that these were predominately lagging or historical AQIs and were mainly at the firm-wide level.
A firm expands its monitoring program to include a broader suite of AQIs. At this stage, the firms consider a more comprehensive range of metrics and are keen to explore whether these provide useful insight into the quality of individual audits. The further AQIs introduced tend to include those capable of being analysed at a more granular level to enable the firm to make more direct and focused interventions. The mix of AQIs at this stage would also begin to include a blend of leading, in-flight and historical indicators.
Embedding and Monitoring AQIs
A firm capitalises on the learning experience from the embedding stage and refines its population of AQIs to focus on those that have a strong correlation to audit quality. The resultant AQIs are distilled to an enriched set of metrics, including:
- More AQIs that are capable of drilling down to a granular level;
- A more robust mix of leading or inflight indicators; and
- Performing a periodical review every three to four years of the performance of AQIs and the set of AQIs.
The FRC notes that firms are increasingly able to improve audit quality in response to AQIs as their AQI monitoring systems mature.
It is important, therefore, that audit firms consider the development and implementation of AQIs to allow for this transition through the stages identified by the FRC.
In a future article, we will consider how audit committees may assess the quality of their audit.
Find out more
If you would like further guidance or to discuss in more detail these new audit requirements, please contact your local MHA member firm.