The Independent Regulatory Board for Auditors (IRBA) issued its Feedback Report on Audit Quality Indicators on 2 December 2019. This article gives an overview of the repor.
The IRBA’s project to develop guidance on audit quality indicators (AQIs) is in line with the strategic objectives of the IRBA to be more proactive and assist in restoring confidence in the auditing profession. The development of guidance on AQIs is ultimately intended to enhance and sustain audit quality in South Africa.
In gathering AQI-related information, the IRBA requested some audit firms that are accredited with the Johannesburg Stock Exchange (JSE) to perform audits of listed entities to provide AQI-related information on the public interest entities (PIEs) that these firms audit to the IRBA.
The report provides an analysis of seven broad categories of AQIs highlighted under the headings below. This analysis includes a description of each AQI, guidance on how to interpret the AQI, key observations made in analysing the information received and, where applicable, the considerations in terms of the IRBA Code of Professional Conduct for Registered Auditors (Revised November 2018), the King IV Report on Corporate Governance for South Africa 2016, and the Companies Act 71 of 2008. This article focuses on the description of each AQI and its interpretation only.
Independence
Two AQIs classified under independence include:
Non-audit fees (%)
This analyses non-audit fees billed (rands invoiced) to the audit client as a percentage of the total audit fees billed (rands invoiced) to the audit client for completed engagements.
In interpreting this AQI, the report states that a higher percentage indicates that the firm receives more fees for non-audit services than what it receives for audit services which may create the impression of diminished independence.
The non-audit fee percentage included in the report ranged between 1% and 14%, with the average percentage being 9%.
Fee recovery (%)
This analyses total audit fees billed (rands invoiced) to the audit client as a percentage of the total audit fees (rands) internally charged to the audit client for completed engagements.
In interpreting this AQI, the report states that a low percentage may indicate inefficiencies in supervision and project management, or lowballing. A high percentage may indicate better efficiencies in supervision and project management.
The fee recovery percentage included in the report ranged between 49% and 97%, with the average percentage being 67%.
Tenure
Two AQIs classified under tenure include:
Firm (years)
This is the average number of completed years as the audit firm for the audit client and is an indicator of independence.
In interpreting this AQI, the report states that the longer the tenure, the greater the familiarity threat to independence, whereas the shorter the tenure, the greater the risk of lack of experience and knowledge of the business. Ratios or percentages are average across the firm or audit engagement.
The number of years reported was between 3 and 19 years, with the average being 9 years.
Partner experience (years)
This is the average tenure as an engagement partner (in years) and is also an indicator of years of experience as an engagement partner.
In understanding this AQI, considerations could be given to whether the engagement partner has kept up to date with continuing professional development (CPD) requirements and the type of experience gained as an engagement partner.
The number of years reported was between 4 and 13 years, with the average being 10 years. Even though the report makes reference to CPD requirements in interpreting this information, no additional information in relation to the CPD compliance of engagement partners was presented. Perhaps this information will be gathered and published in the next round of reporting so that a more holistic view of the engagement partner’s experience and competence is presented.
Review
Four AQIs classified under review include:
EQ review partner hours (%)
This analyses the engagement quality (EQ) review partner hours charged to the audit client by the EQ review partner as a percentage of total audit hours charged to the audit client for completed engagements.
This AQI provides a measure of the depth of pre-issuance EQ reviews measured by time spent.
The percentage of EQ review partner hours included in the report ranged between 0,2% and 1,9%, with the average percentage being 0,7%.
Firm review processes
This analyses the description of and conclusions on engagement related reviews performed by the firm (by personnel outside the engagement team), including the nature of reviews, how many partners were covered and the frequency of reviews.
This measure can be used to assess the firm’s internal quality management processes as well as the quality of engagement performance.
Internal review results (%)
This analyses the average percentage of all results ratings of engagement partners subject to internal reviews during the calendar year.
The report indicates that all firms have a rating process, generally from 1 to 3 (with some variations). A rating of 1 is for satisfactory results, 2 for some low-risk findings and 3 for unsatisfactory results. The correlation of firm internal review results with the same firm’s IRBA (external) inspection results (obtainable from the firm) may indicate the effectiveness of the firm’s internal monitoring process.
The report indicated the highest percentage of the level 1, 2 and 3 ratings achieved by the 10 audit firms that were analysed. The highest percentage of the satisfactory result achieved by an audit firm included in the analysis was 93%. Level 2 (being some low-risk findings identified in the performance of the internal review) and level 3 (being an unsatisfactory result) both achieved 100%, meaning that all the engagement partners reviewed in at least one firm out of the 10 analysed had low-risk findings and in another firm, all engagement partners received an unsatisfactory rating.
Partner coverage (%)
This analyses the percentage of engagement partners subject to internal reviews during the calendar year. This is internal monitoring coverage.
The report states that the higher the percentage, the greater the proportion of engagement partners subjected to a firm’s internal reviews during the period. Therefore, the likelihood of detecting shortcomings in audit quality may be higher. It should be noted that this AQI is not indicative of the quality of audit engagement or the effectiveness of the internal review process.
The partner coverage percentage included in the report ranged between 18% and 75%, with the average percentage being 43%.
Workload
Two AQIs classified under workload include:
Engagement partner role (%)
This analyses the engagement partner hours charged to the audit client as a percentage of total audit hours charged to the audit client for completed engagements. This provides a measure of the level of involvement by the engagement partner.
In interpreting this AQI, the report states higher ratios indicate a greater involvement of the engagement partner. Conversely, high ratios may indicate an understaffed or inexperienced engagement team, or other audit execution issues.
The percentage for the engagement partner role included in the report ranged between 2,4% and 10%, with the average percentage being 5,4%.
Manager supervision (%)
This analyses the total audit manager hours charged to the audit client as a percentage of total audit hours charged to the audit client for completed engagements.
The report states that high ratios may indicate a lack of review and involvement by the engagement partner and/or an understaffed or inexperienced engagement team. In understanding this AQI, the firm’s model and nature of engagements would need to be considered.
The percentage for manager supervision included in the report ranged between 9,2% and 26%, with the average percentage being 17,3%.
Span of control: professional staff
This AQI analyses the audit professional staff headcount (accounting, audit and risk staff) as a ratio to partners in the audit firm. This indicates the capacity of partners to supervise junior audit team members in the audit firm and the level of professional support for audit partners.
This ratio gives an indication of the level of partner responsibility, the time pressure that the engagement partner is under, and the availability of professional staff to support the partner in the engagement.
The ratio for the span of control included in the report ranged between 5:1 and 15:1, with the average ratio being 9:1.
Technical resources: partner
This AQI analyses the engagement partner to technical partner ratio. The higher the ratio, the more engagement partners a technical partner is required to serve.
The ratio for the technical resource role included in the report ranged between 5:1 and 28:1, with the average ratio being 12:1.
Training
This AQI analyses the total hours of structured training delivered for audit professional staff for the previous calendar year as a ratio to average (monthly) audit professional staff for the previous calendar year.
The report states that the level of investment in formal training is an indication of the firm’s investment in improving audit quality and in maintaining professional knowledge.
The training hours per person included in the report ranged between 36 hours and 162 hours, with the percentage being 78 hours.
To conclude
This report provides information, statistics and observations and therefore is an important source for audit committees appointing auditors as it provides insight into the basis for the fees charged for auditors for the services provided. It also provides insight into audit firms and provides a basis for other audit firms to use in assessing where they are in terms of audit quality.
The intention of the report is to evoke conversations among all relevant parties and encourage them to not only consider the fee proposed by the auditor but rather consider a holistic view of the audit firm and the quality of the services provided.
AUTHOR | Hayley Barker Hoogwerf CA(SA), Project Director: Assurance and Duma Mkololo CA(SA), Project Manager: Assurance at SAICA
