Audit Quality – a Perpetual Current Issue _ P7 Advanced Audit and Assurance _ ACCA Qualification _ Students _ ACCA Global

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4/27/2015 Auditqualityaperpetualcurrentissue|P7AdvancedAuditandAssurance|ACCAQualification|Students|ACCAGlobalhttp://www.accaglobal.com/gb/en/student/accaqualstudentjourney/qualresource/accaqualification/p7/technicalarticles/auditquailty.html 1/3ACCA'suseofcookies.Weusecookiestopersonaliseyourexperience,andbyusingthesiteyouareconsentingtothis.FindmoreaboutcookiesandhowtomanageyoursettingsAcceptandcloseHome > Students > ACCAQualificationStudentJourney > Qualificationresources > ACCAQualification > P7AdvancedAuditandAssurance >TechnicalarticlesAUDIT QUALITY A PERPETUAL CURRENTISSUEMyACCASearchRELATED LINKSProfessionalscepticismStudentAccountanthubpageTheissueofauditqualityhasalwaysbeenakeyconsiderationforauditors.Performingahighqualityauditmeansthatauditriskisreducedandtheauditfirmislesslikelytoissueaninappropriateauditopinion.However,periodicreviewsbyregulatoryauthoritiesontheworkperformedbyauditfirmsoftenconcludethatauditsperformedarenotalwaysofhighquality,despitethisbeinginthebestinterestoftheauditfirm.Theobjectiveofthisarticleistoprovidesomeinsightintowhyauditfirmssometimescompromiseauditquality,givingexamplesofhowthishappens,andtheimplicationsofcompromisingonauditqualityfortheprofession.ThisissueisrelevanttoP7inthattheSyllabusandStudyGuidecontainsaspecificsection,C1,whichcontainsanumberoflearningoutcomesinrelationtoqualitycontrolinthecontextofpracticemanagement.Inparticular,learningoutcomeC1(d)statesthefollowingcapability:Assesswhetheranengagementhasbeenplannedandperformedinaccordancewithprofessionalstandardsandwhetherreportsissuedareappropriateinthecircumstances.Thisrequirescandidatestoapplytheirknowledgeofqualitycontroltoagivenscenarioandarequirementofthisnaturehasappearedseveraltimesinpastpapers.AREMINDEROFTHESOURCESOFREQUIREMENTSINRELATIONTOQUALITYCONTROLTheInternationalAuditingandAssuranceStandardsBoard(IAASB)hasissuedtwodocumentsrelatingtoqualitycontrol.ISQC1,QualityControlforFirmsthatPerformAuditsandReviewsofFinancialStatements,andOtherAssuranceandRelatedServicesEngagementsappliestoallfirmsofprofessionalaccountantsinrespectofauditsandreviewsoffinancialstatements,andotherassuranceandrelatedservicesengagements.Itshouldthereforealsobeappliedtononauditengagementssuchasreviewsofprospectivefinancialinformationandengagementstoperformagreeduponprocedures.ISA220,QualityControlforanAuditofFinancialStatementsisspecifictoauditengagementsandcontainsspecificrequirementsthatshouldbeadheredtointheperformanceofanyaudit.ISA220containsrequirementsinrelationto:LeadershipresponsibilitiesforqualityonauditsRelevantethicalrequirements,inparticularindependenceAcceptanceandcontinuanceofclientrelationshipsandauditengagementsAssignmentofengagementteamsEngagementperformance,meaningthedirection,supervisionandreviewofanaudit,includingconsultationandengagementqualitycontrolreviewsMonitoringanddocumentationAdetailedreviewofalloftherequirementsisoutsidethescopeofthisarticle,andcandidatesareTheglobalbodyforprofessionalaccountants Aboutus Contactus Workforus Technicalactivities Help&support Global4/27/2015 Auditqualityaperpetualcurrentissue|P7AdvancedAuditandAssurance|ACCAQualification|Students|ACCAGlobalhttp://www.accaglobal.com/gb/en/student/accaqualstudentjourney/qualresource/accaqualification/p7/technicalarticles/auditquailty.html 2/3encouragedtoensurethattheyarefamiliarwiththecontentsofISA220sothattheycanapplythisknowledgetoagivenscenarioandcommentonwhetheranaudithasbeenperformedinaccordancewiththerequirementsoftheISA.RECENTDEVELOPMENTSINRELATIONTOQUALITYCONTROLTheIAASBmakesspecificreferencetotheissueofauditqualityinitslatestannualreportpublishedinJune2014.TheIAASBchairman,ArnoldSchlider,inhischairmansstatement,discussesauditqualityasakeyissuethattheIAASBisfocussingon.HereferstotheIAASBpublicationentitledAFrameworkforAuditQuality,theobjectiveofwhichistoraiseawarenessofthekeyelementsofauditqualityencouragestakeholderstoreflectonwaystoimproveauditqualityandfacilitategreaterdialogueamongstakeholdersonthetopic.(TheConsultationPaperonwhichthisFrameworkdocumentisbasedislistedasanexaminabledocumentforP7INTforJune2015).HealsomentionstheIAASBwebpage,FocusonAuditQuality,whichwaslaunchedinearly2014toprovidesupplementalmaterialsupportingawarenessanduseoftheFramework.ItisclearthattheIAASBwanttoengagenotonlywithauditorsbutalsowithusersandpreparersoffinancialstatementstoencouragedebateonauditquality.TheIAASBWorkPlanfor201516isentitledEnhancingAuditQualityandPreparingfortheFuture,emphasisingtheprominenceofauditqualityintheworkprogrammeoftheIAASB.Inaddition,theboardhasrecentlycommencedasurveyonauditquality,focussingonhowauditfirmsapplyISQC1andthedifficultiesfacedbysmallerauditfirmsinmeetingtherequirements.ItisnotjusttheIAASBthatperceivesauditqualityasamatterofdebate.OtherregulatorybodiessuchastheUKFinancialReportingCouncil(FRC)isinterestedinpromotingauditqualityanditsAnnualReportsonAuditQualityInspectionsfeaturedetailedcommentaryontheimprovementsthatauditfirmscanmaketoenhanceauditquality.WHYISAUDITQUALITYACONCERN?Theregulatorybodieshavearoletoplayinpromotingauditqualityasthiswillinturnincreasepublicconfidenceintheauditprocessandinfinancialreporting.Asmentionedintheintroduction,itisinthebestinterestsofauditfirmstoconductahighqualityaudit.So,itmaybesurprisingtofindthatwheninspectionsarecarriedoutontheconductofaudits,theregulatorybodiescomeacrossmanyinstanceswhereauditqualityislacking.Auditfirmsarefacedwithgreatpressureswhichmayleadtothemcompromisingauditquality.Pressurescanbeintheformoftightdeadlinesandrestrictionsonauditfees,issuesrelatingtocompetence,ethicaldilemmas,andtheextentofjudgmentthatisrequiredwhenauditingcertainbalancesandtransactions.Someexamplesaregivenbelowtoillustratetheeffectofthesepressuresonauditquality.TightdeadlinesandrestrictionsonauditfeestheFRCcommentsinits20112012AnnualReportonAuditQualityInspectionsthatacompanysauditshouldrepresentvalueformoney.Nevertheless,substantialfeereductionsmayleadtheauditortoreducevaluableauditworkandthereforecompromiseauditquality.Feepressuresareacommercialrealityandauditfirmswillreacttofeepressurebyseekingefficienciesintheaudit.Thiscanmanifestinmanyways,forexample,reducingsamplesizes,andincreasingmaterialitylevelsespeciallyingroupsituations.Aparticularwaytomaketheauditmoreefficientistooffshorecertainauditproceduresinanarrangementwherebysomeoftheauditworkisperformedbyauditpersonnelwhoarenotfullmembersoftheauditteam,theymaybelocatedinaforeigncountrywherethelabourcostsarelower.Thispracticeraisesauditqualityissuesinthatthesepersonnelmaynothaveagoodknowledgeoftheauditclientandthequalityoftheauditevidenceproducedmaybequestionable.Competenceifauditorsarenottechnicallycompetenttoperformauditworkthereisaclearimpactonthequalityofworkperformed.Forexample,theIAASBcommentsinits201516WorkPlanthatauditinspectionshavefoundinstanceswherethepersonselectedtoperformengagementqualitycontrolreviewswasnotcompetenttodoso.Giventhatengagementqualityreviewsareconductedforhighriskauditengagementsusinginexperiencedauditorstoperformsuchreviewscancreateapotentiallyserioushazardfortheauditfirminthatitismuchmorelikelythataninappropriateopinioncouldbeissued.Ethicaldilemmasacommonexampleiswheretheauditfirmprovidesnonauditservicestotheauditedentity.Auditfirmsshouldbefamiliarwiththeconceptthatprovidingnonauditservicescreatesathreattoobjectivity,inparticularaselfreviewthreat,andauditfirmsalsoshouldbeaccustomedtoassessingthesignificanceoftheriskandrespondingwiththeuseofappropriatesafeguardsorbynotprovidingthenonauditservice.Howevertheremaybecircumstanceswherethethreatisoverlooked,socompromisingauditquality.Forexample,ifanauditedentitychangesstatusandbecomeslisted(apublicinterestentity)thenwhileitmaypreviouslyhavebeenacceptabletoprovideanonauditservicewiththeappropriatesafeguards,theprovisionofthenonauditservicemaynotbeacceptablegiventhenewstatusoftheauditedentity.ThisissuewaspickedupbytheFRCinits2014roundofauditqualityinspections.Extensiveuseofjudgmentthisisverymuchlinkedtoprofessionalscepticism(seeRelatedlinksforfurtherreading).Auditinspectorsoftencommentthattheauditofjudgmentalbalancessuchasfairvalues4/27/2015 Auditqualityaperpetualcurrentissue|P7AdvancedAuditandAssurance|ACCAQualification|Students|ACCAGlobalhttp://www.accaglobal.com/gb/en/student/accaqualstudentjourney/qualresource/accaqualification/p7/technicalarticles/auditquailty.html 3/3Lastupdated:25Mar2015andimpairmentislackinginquality.TheFRCs2014AnnualReportonAuditQualityInspectionsstatesthatLimitedevidencethat[audit]firmshaverobustlychallengedmanagementparticularlyinrespectoftheappropriatenessofkeyassumptionsandotherjudgmentswasakeyconcern.Firms,withtheassistanceofauditcommittees,shouldensuretheyappropriatelychallengemanagement.Thereportcommentsthatauditfirmsoftenfailtochallengethefeasibilityofbusinessplanspreparedbymanagement,aswellasassumptionsrelatingtofairvalue,impairmentandthevaluationoftangibleandintangibleassets.Thesearejustsomeexamplesofinstanceswhereauditqualityhasbeencompromised,asidentifiedbyauditinspections.Theobjectiveoftheinspectionsistohighlighttheweaknessesinauditqualityandtorecommendimprovements.Itisuptotheauditfirmwhetherornottheyrespondtotherecommendations,butitisintheirinteresttodoso,andtherearecallsbytheIAASBtoformalisethemeansbywhichauditfirmsdemonstratethattheyhavetakensuchrecommendationsonboard.CONCLUSIONByemphasisingtheissueofauditqualityinitscurrentWorkPlan,theIAASBismakingitclearthatauditqualityissomethingtobetakenseriously.Higherqualityauditsandpublicconfidenceinauditreportsissuedshouldreducetheexpectationgap.Howeverwithauditfirmscomingunderpressuretocutfees,producecompetitivetenderdocumentsandprovideaddedvaluetotheauditintheformofnonauditservices,itiseasytoseewhyauditqualityisoftencompromised.FuturechangestomaketherequirementsofISQC1andISA220morerobustcouldhelp,aswillpromotingtheuseofprofessionalscepticismintheconductofallaudits.WrittenbyamemberofthePaperP7examiningteamNote:SomeofthedocumentsreferredtointhisarticleareNOTexaminabledocuments,namelytheIAASBWorkPlan201516andtheFRCAnnualReportsonAuditQualityInspections.Theyhavebeenreferredtointhisarticleastheycontainusefulillustrationsofwhyauditqualityisanimportantcurrentissue.

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