International Auditing and Assurance
Standards Board
Audit Quality – Issues and Challenges
Prof. Arnold Schilder, Chair, IAASB
Audit Quality Forum Meeting
London
19 October 2009
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The views I express in this presentation
are my own.
They do not necessarily reflect those of the
IAASB, its members, or staff.
Continuing challenge for the IAASB –
Where should the IAASB best place its efforts
in relation to enhancing and promoting audit quality?
In the IAASB’s deliberations on this topic, dialogue
with a broad range of stakeholders is an essential step
as a precursor to meaningful consultation.
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Audit Quality and Challenges
Addressing The Challenges
• A lot has been done already …
– Research
– Thought-leadership and policy analysis work
• A number of broad issues have been identified requiring
further attention and study
• Developing a deeper understanding of specifics of the
broader issues is an important next step to
– Uncover important facets
– Identify solutions that are meaningful and operational
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Audit Quality and Challenges
Addressing The Challenges
• 2008 IFAC Report on the Financial Reporting Supply Chain
• Basel Committee on Banking Supervision: 2008 Paper on
External Audit Quality and Banking Supervision
• IOSCO Audit Quality Roundtable (2007); Consultation on
Auditor Communications (2009)
• The FRC’s “Audit Quality Framework” (2008)
• ICAEW Audit Quality Forum Thought Leadership (2002 –
present)
• U.S. Dept. of the Treasury: Final Report of the Advisory
Committee on the Auditing Profession; related PCAOB
initiatives (2008)
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Audit Quality and Challenges
Questions to Explore ….
(1) If auditing is fundamentally an idiosyncratic process, how
should the interaction between applying standards and
applying professional judgment be appreciated?
(2) What is the extent of users’ appetite for more information to
be communicated about the “black box” of the audit process?
(3) Is there a need for a different auditor reporting model – and if
so, what are the key issues?
(4) What is the impact of litigation risk on the possibilities for
developing alternative auditor communications?
How do participants view these issues?
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Audit Quality and Challenges
Focus On Two Particular Areas….
The Audit Process and Effectiveness
• Why? The way audits are carried out to achieve the overall audit
objective is central to the concept of audit quality
Inputs to performance of audits encompass a number of complex
areas: professional expertise & judgment; cultural influences;
clarity of auditing standards and guidance, most especially when
auditing in challenging situations; application of quality control
Auditor Communications and Reporting
• Why? Auditors’ reports = the key output, represents the value of
the audit in the eyes of users. Their usefulness is critical to
continued relevance of audits. User needs and expectations
continue to develop and change
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Focus – Audit Process and Effectiveness
The Audit Process – Some Propositions
Dr W. Robert Knechel, Professor of Auditing -- Inaugural Lecture
delivered at Maastricht University, on 11 September 2009:
“Rethinking Audit Quality: Eight Propositions for Auditors to
Think About”
•The quality of the audit process determines the quality of the
audit
•The irony of audit quality is: whereas the quality of audit
processes determines the quality of the audit, systematic efforts to
make audit processes more standardized may have the effect of
actually reducing the quality of audit outcomes
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Focus – Audit Process and Effectiveness
The Audit Process – Some Propositions
• Professional efforts to regulate and improve the audit process
through auditing standards , education and training and peer
review or inspections that focus on the audit process are
beneficial to audit quality to some extent
• However audits are essentially idiosyncratic, so that audit quality
is a client-specific characteristic. Audit quality is ‘infused’ in an
auditor’s ability, for each audit, to:
– Appropriately internalize the reasonable expectations of the
market, and
– Diagnose and treat risky conditions within a client through
specific audit procedures. The quality of auditing is inherent
in the nature and execution of the activities in this area
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Focus – Audit Process and Effectiveness
The Audit Process – Some Propositions
• Audits are characterized by inherent uncertainty about the actual
level of assurance achieved in any particular audit. The level of
assurance achieved is unobservable; not able to be precisely
known. Under auditing standards it is required to be a high
(though not absolute) level. Some over- and under-auditing does
occur
• In auditing “one size does not fit all”. If standards, education &
training and peer review or inspections are primarily aimed at
increasing the standardization of audits they may not lead to
improvement in audit quality
• Ultimately, professional judgment and flexibility are likely to
be more important for achieving high quality audits
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Focus – Audit Process and Effectiveness
IAASB Initiatives
• ISA Implementation Monitoring
– Process for looking at how and whether ISAs are being applied
and understood consistently
• Liaison with the International Accounting Standards Board
– A process developed to proactively identify and resolve
auditability issues in proposed new or revised IFRSs
• Ongoing dialogue with regulators (e.g. IFIAR), firms and key
user groups
• Call for relevant research
• Further consideration of corporate governance?
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Auditor Communications and Reporting
• Quality of audits is judged as much by outputs achieved as it
is by inputs applied in the audit process
• The content and context of auditor communications, both
internal and external, are the subject of continuing
examination and debate
• Desire to continue to narrow expectations gaps, and more
particularly ‘information gaps’, arising with changing user
needs
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Focus – Auditor Communications and Reporting
Auditor Communications and Reporting
• Questions arise about the extent to which the current
auditor’s report continues to meet user needs. For example in
relation to information about:
– The audited subject matter information
(e.g. financial statements)
– Results of the audit of that subject matter
– The audit process applied to the subject matter
• Is there need for a different auditor reporting model? What
does an analysis of user needs indicate that effective auditor
communications should look like, or comprise?
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Focus – Auditor Communications and Reporting
IAASB Initiative
• IAASB Auditor Reporting Research Project:
– Joint project with the U.S. Auditing Standards Board to
examine user perceptions about the standard unqualified
auditor’s report
– Joint Working Group with representatives from
countries/jurisdictions with different auditor reporting
environments (UK; France; Japan; US)
– Key findings to be considered by IAASB in December
• Complements recent initiatives that address issues concerning
auditor communications/auditor reporting: Audit Quality
Forum (2006); APB (2007); FRC (2008); IFAC (2008);
IOSCO (2009)
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Audit Quality: Process
Questions to Explore …. (1)
• There is tension in auditing between:
– The need for a certain level of codification of requirements
in standards, and
– The need for auditors to follow a principles-based approach
that recognizes the fundamentally idiosyncratic nature of
auditing and allows auditors to exercise professional
judgment. In auditing “one size does not fit all”.
• How do advocates for audit quality appreciate the interaction
between applying standards and applying professional
judgment?
– What are appropriate priorities or balances?
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Audit Quality: Communications re Process
Questions to Explore …. (2)
• Some groups of users of audits appear to want more information
about the way audits are performed, and about auditors’
findings in particular audits.
• How do participants view this issue?
– To what extent are users and others interested in delving into
the “black box” of the audit?
– How would expanded disclosures or communications about
the auditor’s performance of an audit enhance the quality of
audits?
– How would users use such information? Why is it viewed by
users as useful or desirable to know?
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Audit Quality: Communications and Reporting
Questions to Explore …. (3)
• Is there are need for a different auditor reporting model?
• How do participants view this issue?
– A one-sentence report or narrative company-specific audit
information? (IOSCO Consultation, Sept 09)
– Should materiality, fraud risk and internal controls be part of
the report? (Mock et al., June 09)
– Relevance above reliability: dealing with more uncertainty?
Users of F/S as arbiters (ICAEW, May 09)
– Improved disclosures: cooperation between standard setters,
preparers, auditors and regulators (CEBS, Oct 09)
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Audit Quality: Reporting and Litigation
Questions to Explore …. (4)
•
The environment of auditing is litigious and auditors
proactively manage litigation risk. Against this background,
expanding auditors communications beyond the scope
currently provided for in auditing standards is problematic.
•
How do participants view this issue?
– Is it feasible to create an environment where auditors can
expand the scope of communications with users without
significantly exposing themselves to litigation?
– If there is an expectation that auditors should communicate
more about their audits, is that expectation realistic?
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International Auditing and Assurance
Standards Board
Audit Quality – Issues and Challenges
Prof. Arnold Schilder, Chair, IAASB
Audit Quality Forum Meeting
London
19 October 2009
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