Nov 22, 2017

Where Are We on Audit Quality?

By Allison M. Henry, CPA, CGMA, vice president – professional and technical standards

It’s hard to believe that it’s been three years since the AICPA started its Enhancing Audit Quality (EAQ) initiative. To refresh your memory, this effort takes a holistic approach to improving audit quality, including making changes to the CPA Exam, transforming the approach to training, considering enhancements to audit and quality control standards, evaluating third-party practice aids, improving the peer reviewer pool by enhancing the required qualifications and training, and proactively pursuing ethics investigations and regulatory referrals for egregious work.

Audit Quality VideoThe scope of the EAQ initiative is considerable, and the AICPA’s accomplishments to date have been far-reaching, demonstrating its commitment to enhancing audit quality. The AICPA recently released a progress report, Enhancing Audit Quality – 2017 Highlights and Progress, that summarizes progress on their key initiatives. Many of the accomplishments and projects in progress relate to CPA competency, tools, and related professional standards. Here are some of the highlights:

  • The new CPA Exam was released April 2017.
  • The AICPA’s new Audit Data Analytics Guide, which will help improve audit efficiencies and provide new insights, is expected to be released soon.
  • The AICPA’s Audit Standards Board (ASB) is working on a project with the International Audit and Assurance Standards Board to improve quality control standards.
  • The ASB is considering revisions to the standard audit report (as well as the audit report for limited-scope employee benefit plans) to enhance its value to users.
  • New educational research grants and projects are under way.
  • The AICPA’s valuation credential is filling a need for competency.
  • The AICPA is promoting the value of providing assurance services on subject matters other than the financial statements.

The most significant work to date has been in peer review and professional ethics, including revisions to peer reviewer training and more rigorous qualifications, a new peer review system, in-depth root cause analysis, new training resources for firms, and proactive ethics activities and state board outreach. Here are a few specifics:

  • Enhancements to the peer reviewer pool – New peer reviewer qualifications and training are improving the detection of nonconforming engagements, resulting in more firms receiving remediation.
  • Peer Review Integrated Management Application (PRIMA) – The AICPA launched a new IT platform, PRIMA, that will “allow the AICPA to identify firms that take on their first engagement in a new industry or area and provide them with targeted resources.” This data-based approach to peer review is one step closer to realizing “practice monitoring of the future” that was envisioned in the AICPA’s Future of Practice Monitoring concept paper released in December 2014.
  • Root-cause analysis – The AICPA Peer Review Board initiated an enhanced oversight program that uses subject matter experts to oversee the peer review of selected employee benefit plan and single audits. While the results have been disappointing – nonconformity rates of 44 percent in 2015 (pilot program) and 55 percent in 2016 – the oversights have enabled the AICPA to gain a better understanding of the specific issues causing the nonconformity. The AICPA has used this information to educate peer reviewers and provide numerous free resources that are designed to help practitioners comply with professional standards.
  • State board referrals – The AICPA Peer Review Program and Ethics Division are more proactively pursuing remediation; when that is insufficient, they refer egregious cases to the state boards of accountancy.

So, what’s next? Firms that perform audits should review the results of recent audit quality studies, consider the lessons learned from the AICPA’s enhanced oversights, and evaluate their practice composition and quality control systems for risk areas. For example, firms that perform relatively few high-risk engagements have high nonconformity rates; partners with many years of experience performing single audits have a higher rate of conformity; and AICPA audit quality center members have a higher rate of conformity. It may be time to join the quality center, take additional training, or stop performing certain types of audits.

To achieve high quality, the AICPA has many free resources that can help you ensure that you are ready for any regulatory or peer review oversight. These free resources include documentation resources, quality control resources (including an audit and accounting practice aid titled Establishing and Maintaining a System of Quality Control for a CPA Firm’s Accounting and Auditing Practice), as well as resources designed for single audits and employee benefit plans (tool for evaluating SOC 1 reports, more EBP resources are in progress). They also created new competency frameworks, certificate programs, free checklists (e.g., Yellow Book independence compliance checklist, etc.), training materials, blogs, and articles. The AICPA is committed to ensuring progress on the audit quality front.

The PICPA is eager to help firms avoid peer review problems. In response to the AICPA’s audit documentation findings, we recently held a CPE program for peer reviewers, Enhancing Audit Quality – A Focus on Peer Review, to communicate the AICPA’s oversight results, to encourage peer reviewers to adhere more closely to the documentation standards, and to point out the AICPA's new documentation resources. This will be made available to firms as a webinar in our On-Demand library. Additionally, firms can call to consult with the PICPA Professional & Technical Standards team on technical issues. We will either provide guidance or direct them to someone in the peer-to-peer network, a quality control consultant, or a member of a technical committee who can be of assistance.

Ultimately, firms have access to plenty of resources to assist in achieving high audit quality, and more are coming. Feel free to reach out to me with your suggestions. I can be reached at ahenry@picpa.org, or (215) 972-6187.

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.