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

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<ul><li><p>4/27/2015 Auditqualityaperpetualcurrentissue|P7AdvancedAuditandAssurance|ACCAQualification|Students|ACCAGlobal</p><p>http://www.accaglobal.com/gb/en/student/accaqualstudentjourney/qualresource/accaqualification/p7/technicalarticles/auditquailty.html 1/3</p><p>ACCA'suseofcookies.Weusecookiestopersonaliseyourexperience,andbyusingthesiteyouareconsentingtothis.Findmoreaboutcookiesandhowtomanageyoursettings</p><p>Acceptandclose</p><p>Home &gt; Students &gt; ACCAQualificationStudentJourney &gt; Qualificationresources &gt; ACCAQualification &gt; P7AdvancedAuditandAssurance &gt;Technicalarticles</p><p>AUDIT QUALITY A PERPETUAL CURRENTISSUE</p><p>MyACCASearch</p><p>RELATED LINKS</p><p>Professionalscepticism</p><p>StudentAccountanthubpage</p><p>Theissueofauditqualityhasalwaysbeenakeyconsiderationforauditors.Performingahighqualityauditmeansthatauditriskisreducedandtheauditfirmislesslikelytoissueaninappropriateauditopinion.However,periodicreviewsbyregulatoryauthoritiesontheworkperformedbyauditfirmsoftenconcludethatauditsperformedarenotalwaysofhighquality,despitethisbeinginthebestinterestoftheauditfirm.Theobjectiveofthisarticleistoprovidesomeinsightintowhyauditfirmssometimescompromiseauditquality,givingexamplesofhowthishappens,andtheimplicationsofcompromisingonauditqualityfortheprofession.</p><p>ThisissueisrelevanttoP7inthattheSyllabusandStudyGuidecontainsaspecificsection,C1,whichcontainsanumberoflearningoutcomesinrelationtoqualitycontrolinthecontextofpracticemanagement.Inparticular,learningoutcomeC1(d)statesthefollowingcapability:Assesswhetheranengagementhasbeenplannedandperformedinaccordancewithprofessionalstandardsandwhetherreportsissuedareappropriateinthecircumstances.Thisrequirescandidatestoapplytheirknowledgeofqualitycontroltoagivenscenarioandarequirementofthisnaturehasappearedseveraltimesinpastpapers.</p><p>AREMINDEROFTHESOURCESOFREQUIREMENTSINRELATIONTOQUALITYCONTROL</p><p>TheInternationalAuditingandAssuranceStandardsBoard(IAASB)hasissuedtwodocumentsrelatingtoqualitycontrol.ISQC1,QualityControlforFirmsthatPerformAuditsandReviewsofFinancialStatements,andOtherAssuranceandRelatedServicesEngagementsappliestoallfirmsofprofessionalaccountantsinrespectofauditsandreviewsoffinancialstatements,andotherassuranceandrelatedservicesengagements.Itshouldthereforealsobeappliedtononauditengagementssuchasreviewsofprospectivefinancialinformationandengagementstoperformagreeduponprocedures.</p><p>ISA220,QualityControlforanAuditofFinancialStatementsisspecifictoauditengagementsandcontainsspecificrequirementsthatshouldbeadheredtointheperformanceofanyaudit.ISA220containsrequirementsinrelationto:</p><p>LeadershipresponsibilitiesforqualityonauditsRelevantethicalrequirements,inparticularindependenceAcceptanceandcontinuanceofclientrelationshipsandauditengagementsAssignmentofengagementteamsEngagementperformance,meaningthedirection,supervisionandreviewofanaudit,includingconsultationandengagementqualitycontrolreviewsMonitoringanddocumentation</p><p>Adetailedreviewofalloftherequirementsisoutsidethescopeofthisarticle,andcandidatesare</p><p>Theglobalbodyforprofessionalaccountants Aboutus Contactus Workforus Technicalactivities Help&amp;support Global</p></li><li><p>4/27/2015 Auditqualityaperpetualcurrentissue|P7AdvancedAuditandAssurance|ACCAQualification|Students|ACCAGlobal</p><p>http://www.accaglobal.com/gb/en/student/accaqualstudentjourney/qualresource/accaqualification/p7/technicalarticles/auditquailty.html 2/3</p><p>encouragedtoensurethattheyarefamiliarwiththecontentsofISA220sothattheycanapplythisknowledgetoagivenscenarioandcommentonwhetheranaudithasbeenperformedinaccordancewiththerequirementsoftheISA.</p><p>RECENTDEVELOPMENTSINRELATIONTOQUALITYCONTROL</p><p>TheIAASBmakesspecificreferencetotheissueofauditqualityinitslatestannualreportpublishedinJune2014.TheIAASBchairman,ArnoldSchlider,inhischairmansstatement,discussesauditqualityasakeyissuethattheIAASBisfocussingon.HereferstotheIAASBpublicationentitledAFrameworkforAuditQuality,theobjectiveofwhichistoraiseawarenessofthekeyelementsofauditqualityencouragestakeholderstoreflectonwaystoimproveauditqualityandfacilitategreaterdialogueamongstakeholdersonthetopic.(TheConsultationPaperonwhichthisFrameworkdocumentisbasedislistedasanexaminabledocumentforP7INTforJune2015).HealsomentionstheIAASBwebpage,FocusonAuditQuality,whichwaslaunchedinearly2014toprovidesupplementalmaterialsupportingawarenessanduseoftheFramework.ItisclearthattheIAASBwanttoengagenotonlywithauditorsbutalsowithusersandpreparersoffinancialstatementstoencouragedebateonauditquality.</p><p>TheIAASBWorkPlanfor201516isentitledEnhancingAuditQualityandPreparingfortheFuture,emphasisingtheprominenceofauditqualityintheworkprogrammeoftheIAASB.Inaddition,theboardhasrecentlycommencedasurveyonauditquality,focussingonhowauditfirmsapplyISQC1andthedifficultiesfacedbysmallerauditfirmsinmeetingtherequirements.</p><p>ItisnotjusttheIAASBthatperceivesauditqualityasamatterofdebate.OtherregulatorybodiessuchastheUKFinancialReportingCouncil(FRC)isinterestedinpromotingauditqualityanditsAnnualReportsonAuditQualityInspectionsfeaturedetailedcommentaryontheimprovementsthatauditfirmscanmaketoenhanceauditquality.</p><p>WHYISAUDITQUALITYACONCERN?</p><p>Theregulatorybodieshavearoletoplayinpromotingauditqualityasthiswillinturnincreasepublicconfidenceintheauditprocessandinfinancialreporting.Asmentionedintheintroduction,itisinthebestinterestsofauditfirmstoconductahighqualityaudit.So,itmaybesurprisingtofindthatwheninspectionsarecarriedoutontheconductofaudits,theregulatorybodiescomeacrossmanyinstanceswhereauditqualityislacking.</p><p>Auditfirmsarefacedwithgreatpressureswhichmayleadtothemcompromisingauditquality.Pressurescanbeintheformoftightdeadlinesandrestrictionsonauditfees,issuesrelatingtocompetence,ethicaldilemmas,andtheextentofjudgmentthatisrequiredwhenauditingcertainbalancesandtransactions.Someexamplesaregivenbelowtoillustratetheeffectofthesepressuresonauditquality.</p><p>TightdeadlinesandrestrictionsonauditfeestheFRCcommentsinits20112012AnnualReportonAuditQualityInspectionsthatacompanysauditshouldrepresentvalueformoney.Nevertheless,substantialfeereductionsmayleadtheauditortoreducevaluableauditworkandthereforecompromiseauditquality.Feepressuresareacommercialrealityandauditfirmswillreacttofeepressurebyseekingefficienciesintheaudit.Thiscanmanifestinmanyways,forexample,reducingsamplesizes,andincreasingmaterialitylevelsespeciallyingroupsituations.Aparticularwaytomaketheauditmoreefficientistooffshorecertainauditproceduresinanarrangementwherebysomeoftheauditworkisperformedbyauditpersonnelwhoarenotfullmembersoftheauditteam,theymaybelocatedinaforeigncountrywherethelabourcostsarelower.Thispracticeraisesauditqualityissuesinthatthesepersonnelmaynothaveagoodknowledgeoftheauditclientandthequalityoftheauditevidenceproducedmaybequestionable.</p><p>Competenceifauditorsarenottechnicallycompetenttoperformauditworkthereisaclearimpactonthequalityofworkperformed.Forexample,theIAASBcommentsinits201516WorkPlanthatauditinspectionshavefoundinstanceswherethepersonselectedtoperformengagementqualitycontrolreviewswasnotcompetenttodoso.Giventhatengagementqualityreviewsareconductedforhighriskauditengagementsusinginexperiencedauditorstoperformsuchreviewscancreateapotentiallyserioushazardfortheauditfirminthatitismuchmorelikelythataninappropriateopinioncouldbeissued.</p><p>Ethicaldilemmasacommonexampleiswheretheauditfirmprovidesnonauditservicestotheauditedentity.Auditfirmsshouldbefamiliarwiththeconceptthatprovidingnonauditservicescreatesathreattoobjectivity,inparticularaselfreviewthreat,andauditfirmsalsoshouldbeaccustomedtoassessingthesignificanceoftheriskandrespondingwiththeuseofappropriatesafeguardsorbynotprovidingthenonauditservice.Howevertheremaybecircumstanceswherethethreatisoverlooked,socompromisingauditquality.Forexample,ifanauditedentitychangesstatusandbecomeslisted(apublicinterestentity)thenwhileitmaypreviouslyhavebeenacceptabletoprovideanonauditservicewiththeappropriatesafeguards,theprovisionofthenonauditservicemaynotbeacceptablegiventhenewstatusoftheauditedentity.ThisissuewaspickedupbytheFRCinits2014roundofauditqualityinspections.</p><p>Extensiveuseofjudgmentthisisverymuchlinkedtoprofessionalscepticism(seeRelatedlinksforfurtherreading).Auditinspectorsoftencommentthattheauditofjudgmentalbalancessuchasfairvalues</p></li><li><p>4/27/2015 Auditqualityaperpetualcurrentissue|P7AdvancedAuditandAssurance|ACCAQualification|Students|ACCAGlobal</p><p>http://www.accaglobal.com/gb/en/student/accaqualstudentjourney/qualresource/accaqualification/p7/technicalarticles/auditquailty.html 3/3</p><p>Lastupdated:25Mar2015</p><p>andimpairmentislackinginquality.TheFRCs2014AnnualReportonAuditQualityInspectionsstatesthatLimitedevidencethat[audit]firmshaverobustlychallengedmanagementparticularlyinrespectoftheappropriatenessofkeyassumptionsandotherjudgmentswasakeyconcern.Firms,withtheassistanceofauditcommittees,shouldensuretheyappropriatelychallengemanagement.Thereportcommentsthatauditfirmsoftenfailtochallengethefeasibilityofbusinessplanspreparedbymanagement,aswellasassumptionsrelatingtofairvalue,impairmentandthevaluationoftangibleandintangibleassets.</p><p>Thesearejustsomeexamplesofinstanceswhereauditqualityhasbeencompromised,asidentifiedbyauditinspections.Theobjectiveoftheinspectionsistohighlighttheweaknessesinauditqualityandtorecommendimprovements.Itisuptotheauditfirmwhetherornottheyrespondtotherecommendations,butitisintheirinteresttodoso,andtherearecallsbytheIAASBtoformalisethemeansbywhichauditfirmsdemonstratethattheyhavetakensuchrecommendationsonboard.</p><p>CONCLUSION</p><p>ByemphasisingtheissueofauditqualityinitscurrentWorkPlan,theIAASBismakingitclearthatauditqualityissomethingtobetakenseriously.Higherqualityauditsandpublicconfidenceinauditreportsissuedshouldreducetheexpectationgap.Howeverwithauditfirmscomingunderpressuretocutfees,producecompetitivetenderdocumentsandprovideaddedvaluetotheauditintheformofnonauditservices,itiseasytoseewhyauditqualityisoftencompromised.FuturechangestomaketherequirementsofISQC1andISA220morerobustcouldhelp,aswillpromotingtheuseofprofessionalscepticismintheconductofallaudits.</p><p>WrittenbyamemberofthePaperP7examiningteam</p><p>Note:SomeofthedocumentsreferredtointhisarticleareNOTexaminabledocuments,namelytheIAASBWorkPlan201516andtheFRCAnnualReportsonAuditQualityInspections.Theyhavebeenreferredtointhisarticleastheycontainusefulillustrationsofwhyauditqualityisanimportantcurrentissue.</p></li></ul>