IAASB, PCAOB, CAQ Seek Ways To Measure Audit Quality

As part of the Sarbanes Oxley Act (the Act), Congress made audit committees directly
responsible for the appointment, compensation, and oversight of the external auditor. A
subsequent GAO study, completed in November 2003, emphasized the importance of audit
committees in ensuring auditor independence and enhancing audit quality, particularly with
their increased responsibility under the Act.
As a result of the Act and subsequent rule making by the PCAOB(the Board), the US has
robust corporate governance and audit regulatory frameworks. This is evidenced by the audit
committees' important role overseeing the auditors, and the appropriate rigor with which the
Board regulates audit firms.
The search for ways to measure and enhance audit quality has continued. For example, in
2008 the Final Report of the Advisory Committee on the Auditing Profession to the US
Department of Treasury recommended that the PCAOB consider whether key indicators of
audit quality could be developed. And in 2013, the PCAOB determined that the development
of indicators relating to audit quality should be a priority project.
In 2014, the Center for Audit Quality(CAQ)created a task force, on which we participated, to
advance the thinking around audit quality indicators(AQIs).We
also voluntary participated in the CAQs pilot testing of a set of potential AQIs introduced in
the April 2014 paper, CAQ Approach to Audit Quality Indicators.
The pilot testing included all of the CAQs AQIs, as well as some of our own.
In July 2015, the PCAOB issued a Concept Release on Audit Quality Indicators. The project
is aimed at identifying a portfolio of quantitative measures,the use of which
may enhance the dialogue around audit quality.The indicators fall into three categories:
audit professionals, audit process, and audit results.The audit professionals category includes
measures dealing with the availability, competence, and focus of the audit professional. The
indicators in the audit process category address tone at the top, incentives, independence,
infrastructure, and monitoring and remediation.The audit results category includes measures
relating to audit reports related to financial statements and internal control over financial
reporting, going concern reporting, auditor communications,and enforcement and litigation.
In addition, there have been a number of research projects and global initiatives centered on
the topic of audit quality, but none have resulted in universal agreement on a definition of
audit quality, an audit quality framework, or relevant measures to assess audit quality.
IAASB, PCAOB, CAQ seek ways to

measure audit quality
Without concrete, objective ways to measure audit quality, it is difficult to assess whether
efforts to improve audits have been successful.
The International Auditing and Assurance Standards Board (IAASB), one of many
organizations attempting to tackle this challenge, has issued a consultation paper, A
Framework for Audit Quality, that it hopes will generate discussion and actions that will
improve audits.
Objectives of the framework include:
Raising awareness of the key elements of audit quality.
Encouraging exploration of ways to improve audit quality.
Facilitating more dialogue on the topic.
The goal of the project is to create a framework that will describe the input and output factors
that contribute to audit quality at the engagement, audit firm, and national levels.
As proposed, the framework describes inputs, outputs, interactions, and contextual factors
that the IAASB believes can increase the likelihood of quality audits being consistently
performed. A quality audit is likely to be achieved, according to the consultation paper, when
the auditors opinion on the financial statements was based on sufficient, appropriate
evidence obtained by an engagement team that:
Exhibited appropriate values, ethics, and attitudes.
Was knowledgeable and experienced and had enough time to perform the audit.
Applied a rigorous audit process and quality-control procedures.
Provided valuable and timely reports.
Interacted appropriately with a variety of stakeholders.
Many factors contribute to increasing the likelihood of quality audits being consistently
performed, IAASB Chairman Arnold Schilder said in the foreword to the consultation paper.
The IAASB believes there is value in describing these factors and thereby encouraging audit
firms and other stakeholders to challenge themselves about whether there is more that they
can do to increase audit quality in their particular environments.
The IAASB, which requests comments on the framework proposal by May 15, is not the only
organization attempting to define audit quality. The Department of the Treasurys Advisory
Committee on the Auditing Profession has recommended that the PCAOB study the
feasibility of developing key indicators of audit quality and effectiveness. One of the
PCAOBs priorities this year is to identify audit quality indicators, and the board has a longterm goal of tracking and reporting on those measures for domestic global network firms.
Due to the multidimensional nature of audit quality, a balanced scorecard approach with
various indicators and measures likely will be necessary, PCAOB member Jeanette Franzel
said in a speech last week.
The Center for Audit Quality (CAQ), which is affiliated with the AICPA, also has a project
under way to look at the definition, indicators, and measurements of audit quality. The first
phase of the multiyear effort is expected to finish at the end of this year. The CAQ expects the
first phase to seek to identify a handful of audit quality indicators that could be monitored and
reported on a profession wide level.
The CAQ plans to seek perspectives of many stakeholders and hopes to coordinate with the
IAASB and the PCAOB on their projects.
Franzel said the PCAOBs project will be a significant development in advancing the quality
and reliability of audits. Schilder hopes the IAASBs framework project will have similar
results.
Recent financial conditions have highlighted the crucial importance of credible, high-quality
financial reporting in all sectors of the world economy, including the capital markets, small
companies, not-for-profit and government organizations, Schilder said in the foreword to the
paper. They have also reinforced the need, in the public interest, for continual improvement
to audit quality.

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As part of the Sarbanes Oxley Act (the Act), Congress made audit committees directly

IAASB, PCAOB, CAQ seek ways to

Raising awareness of the key elements of audit quality.

Encouraging exploration of ways to improve audit quality.

Facilitating more dialogue on the topic.

Exhibited appropriate values, ethics, and attitudes.

Applied a rigorous audit process and quality-control procedures.

Provided valuable and timely reports.

Interacted appropriately with a variety of stakeholders.

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