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ANALYSIS: Audit quality: The global quest for the best indicators

‘Audit quality indicators’ are emerging as a means of evaluating audit quality and providing more transparency about audits and audit firms – to the benefit of the firms themselves and to support boards and audit committees in discharging their oversight responsibilities. By Constance Kawelenga and Willie Botha

The adoption of two separate International Standards, namely ISQC 1, Quality control for firms that perform audits and reviews of financial statements, and other assurance and related services engagements, and ISA 220, Quality control for an audit of financial statements dedicated to audit quality, emphasises the importance of the concept of audit quality within the auditing profession. The term ‘quality control’ is mentioned no fewer than 363 times in the Handbook of International Quality Control, Auditing, Review, Other Assurance, and Related Services Pronouncements of the International Auditing and Assurance Standards Board (IAASB).

Globally, regulatory and oversight bodies have a strong focus on the enhancement of audit quality – to ensure consistently high audit quality. These bodies 8– including the Independent Regulatory Board for Auditors (IRBA) in South Africa  have one common motivation, namely the protection of the financial interests of the public and investors, and the enhancement of investor confidence through improved audit quality.

Audit quality is essential to the fulfilment of the objectives on an independent external audit. At the same time, audit quality is a complex subject that is difficult to describe in terms of a single, universally accepted definition. The IAASB released its Framework for Audit Quality in February 2014 (IAASB 2014) in which audit quality is described as encompassing the key elements that create an environment which maximises the likelihood that quality audits are performed on a consistent basis. Auditors ultimately retain the responsibility for performing quality audits of financial statements; however audit quality is best achieved in an environment where there is support from, and appropriate interactions among, participants in the financial reporting supply chain. With the release of its Public Inspections Report for 2014/2015, entitled Striving for Consistent, Sustainable High Audit Quality, on 3 December 2015 (IRBA 2015a and 2015c), the IRBA also reaffirmed the positive role that boards and audit committees can play in audit quality oversight.

Audit quality is certainly receiving its fair share of attention; and rightly so. Among others, the notion of measuring audit quality in some or other way has been evolving – and is commonly referred to as audit quality indicators. Audit quality indicators (AQIs) in essence refer to a portfolio of quantitative measures that could be used to enhance dialogue about and understanding of audits and ways to evaluate their quality; for example, to better inform audit committees about key matters that may contribute to the quality of an audit (both at audit firm level and at audit engagement level). This could be to the benefit of the audit committee in discharging its oversight responsibilities regarding the external audit process, including the appointment or reappointment of the external auditor.

Two bodies in the United States of America have in particular undertaken considerable groundwork and research in the area of AQIs, namely the Center for Audit Quality (CAQ) (CAQ 2014 and 2016) and the Public Company Accounting Oversight Board (PCAOB) (PCAOB 2015).

The CAQ’s approach to AQIs recognises the roles and responsibilities of audit committees and reinforces the importance of the auditor’s communications with the audit committee. In April 2014 the CAQ proposed a set of potential AQIs that is structured as follows (CAQ 2014):

  • Firm leadership and tone at the top (for example measuring the effectiveness of messaging around quality by way of internal firm surveys)
  • Engagement team knowledge, experience and workload (such as number of years in the firm, at the specific client, within the industry)
  • Knowledge and experience of key engagement team members
  • Audit firm training requirements
  • Trends in engagement hours and related timing
  • Allocation of resources by significant risk areas
  • Specialists and national office personnel involvement by significant risk areas
  • Key engagement team members’ workloads
  • Monitoring
  • Internal quality review findings (that is, results of the firm’s own internal quality reviews)
  • External inspections findings
  • Auditor reporting, which could focus on reissuance restatements of financial statements and withdrawn auditor’s reports

The PCAOB issued a Concept Release for comment on 1 July 2015 in which it proposed no fewer than 28 potential AQIs, categorised as follows (PCAOB 2015):

  • Audit professionals
  • Availability of audit professionals
  • Competence of those performing the audit
  • Focus as indicated by audit hours, risk areas, etc.
  • Audit process
  • An audit firm’s tone at the top and leadership
  • Incentives (for example quality ratings, compensations, audit fees)
  • Compliance with independence requirements
  • Investment in infrastructure that support quality
  • Monitoring and remediation (including results on internal firm quality reviews and external inspection findings)
  • Audit results
  • Financial statements, including restatements, financial reporting misconduct and other measures of financial reporting quality
  • Reporting of internal control weaknesses
  • Reporting of going concern issues
  • Communications between the auditors and the audit committee
  • Enforcement and litigation trends

The European perspective is that AQIs should be tackled as a global initiative, with the outcome being a universally accepted set of AQIs. This view was enunciated by the Federation of European Accountants (FEE) in its November 2015 information paper ‘Overview of Audit Quality Indicators Initiatives’ (FEE 2015). The Federation represents 50 professional institutes from 37 European countries. A research exercise undertaken by the FEE involving nine separate bodies worldwide identified the following as the most popular suggestions for AQIs (FEE 2015):

  • Training hours per audit personnel
  • Internal engagement quality reviews
  • Number of audit staff per audit partner
  • Years of experience
  • External inspections
  • Partner workload
  • Industry expertise of audit personnel
  • Staff workload
  • Investment in development of new audit methodology and tools
  • Staff turnover
  • Independence
  • Staff satisfaction survey
  • External investigations
  • Technical resources support
  • Tone at the top

In South Africa, the IRBA is also interested in the topic. In the press release to its 2014/2015 Public Inspections Report, the IRBA indicated that ‘boards and audit committees should look at applying certain audit quality indicators to effectively evaluate an existing or new auditor. These indicators could include requesting from an audit firm (and engagement partner) the most recent IRBA inspection result or internal quality control results; evaluating its financial stability and reputation as well as evaluating the engagement team’s independence, competency, capacity, risk-focus etc’ (IRBA 2015b).

There are a lot of commonalities between the indicators suggested by the different bodies that have been referred to in this article. In order for AQIs to be useful, they would have to satisfy certain basic principles, such as:

  • Measurability – the more the indicators are measurable, the more objective and useful they are
  • Comparability – within different industries, firms, sizes of entity, etc

It is also worth noting that the CAQ, in a follow-up publication after the publication of its approach to AQIs in 2014, has highlighted some key findings and additional perspectives regarding the use of AQIs from the roundtable discussions it has hosted, including the following (CAQ 2016):

  • The need to also focus on the more qualitative aspects of the audit, such as the engagement team having the right mind-set to bring forth professional skepticism and auditor judgement, which cannot be adequately captured in a quantitative AQI, and is best achieved through dialogue
  • Recognition that AQIs alone, without context, cannot adequately communicate factors relevant to any particular audit engagement or audit firm
  • Allowing for a flexible approach in terms of which an audit committee, working with the external auditor, can tailor or customise the selection and portfolio of AQIs that best suit its specific information needs
  • Caution regarding the public disclosure of engagement-level AQIs, since this could have unintended consequences

Audit firms themselves are well placed and should be at the forefront of the initiatives to establish a framework of AQIs, for the following reasons:

  • Most firms already have some form of in-house quality indicators, which assists them with regards to planning, remuneration, performance review, etc. By embracing these initiatives, firms would serve to strengthen their own already-existing structures.
  • Organisations that are perceived to consistently strive for transparency are more likely to be viewed in a positive light by the public and of course by boards and audit committees. In leading from the front, firms may well enhance their competitive edge.
  • By willingly sharing information, firms can mutually benefit through the enhanced ability to benchmark themselves.
  • The topic of AQIs is indeed an emerging area that should be monitored closely and researched further, including pursuing information-sharing opportunities.


CAQ 2014. Available at http://thecaq.org/docs/reports-and-publications/caq-approach-to-audit-quality-indicators-april-2014.pdf?sfvrsn=2 (accessed 10 March 2016).

CAQ 2016. Available at http://www.thecaq.org/reports-and-publications/audit-quality-indicators-journey-and-path-ahead (accessed 10 March 2016).

FEE 2015. Available at http://www.fee.be/images/publications/auditing/1511_Overview_of_Audit_Quality_Indicators_Initiatives.pdf (accessed 11 March 2016).

IAASB 2014. Available at https://www.ifac.org/publications-resources/framework-audit-quality-key-elements-create-environment-audit-quality (accessed 10 March 2016).

IRBA 2015a. Available at http://www.irba.co.za/guidance-to-ras/inspections/reports (accessed 10 March 2016). IRBA 2015b.  Available at http://www.irba.co.za/news-headlines/press-releases/calling-boards-and-audit-committees-to-action-in-strengthening-audit-quality-in-south-africa (accessed 10 March 2016).

IRBA 2015c. Available at http://www.irba.co.za/index.php/media-releases-news-44/917-3-december-2015 (accessed 10 March 2016).

PCAOB 2015. Available at http://pcaobus.org/Rules/Rulemaking/Docket%20041/Release_2015_005.pdf (accessed 10 March 2016).

AUTHORS |Constance Kawelenga CA(SA) is owner and director of Zuva Financial Services and Willie Botha CA(SA), RA is Senior Executive: Assurance and Practice at SAICA