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Discover ways to maintain high standards of audit quality to enhance your firm's credibility and reputation
Audit Quality: A Changing Landscape
Why Audit Quality Matters
High-profile audit failings in recent years, such as those surrounding Carillion, Patisserie Valerie and BHS, served to shine a spotlight on audit quality and led to calls for significant reform of the audit industry.
With potential financial and reputational penalties being so high and with so many developments to keep up-to-date with, audit quality needs to be considered by all auditors, regardless of the size of the firm or its clients.
The introduction of ISQMs 1 & 2 and the issuing of revised ISAs such as ISA 220, 240, 315, 540 and 570 all have audit quality in mind. Improving audit quality is at forefront of the profession, a key focus for monitoring bodies and therefore needs to be taken seriously by firms of all shapes and sizes.
Significant moves towards the use of technology in the audit process has happened since the Pandemic, leading to a strong relationship between technology and audit quality, although many firms have not yet fully considered how this correlation could benefit them.
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The revised standard requires all audit teams to understanding their client’s use of IT in their system of internal control. Audit teams must also understand a client’s general IT controls (sometimes abbreviated to GITC or ITGC (IT general controls)) and evaluate these for design and implementation, as with any other relevant control.
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The International Standard on Quality Management (ISQMs) are a set of standards developed by the International Auditing and Assurance Standards Board (IAASB) to provide guidance to auditors on how to plan, perform, and report on their work to ensure that it meets the required quality standards.
The purpose of ISQM is to help auditors maintain the necessary level of competence, objectivity, and professional scepticism to provide high-quality audit services.
What is the scope of ISQM?
ISQM applies to all audit engagements, regardless of their size or complexity. It is intended to provide guidance to auditors on how to plan, perform, and report on their work to ensure that it meets the required quality standards.
What are the key requirements of ISQM?
ISQM requires auditors to establish and maintain a system of quality management that includes policies, procedures, and processes to ensure that their audit engagements are conducted in accordance with the required quality standards. This includes requirements related to leadership, ethics, human resources, engagement performance, and monitoring.
How does ISQM differ from other quality management standards?
ISQM is specific to the audit profession and is designed to provide guidance on how to apply quality management principles to the audit process. It differs from other quality management standards, such as ISO 9001, which are more general in nature and can be applied to any type of organisation.
How does ISQM affect auditors and audit firms?
ISQM requires auditors and audit firms to establish and maintain systems of quality management that include policies, procedures, and processes to ensure that their audit engagements are conducted in accordance with the required quality standards.
This means that auditors and audit firms may need to invest in training, technology, and other resources to meet these requirements.
How is compliance with ISQM monitored and enforced?
Compliance with ISQM is monitored by the audit regulator in each jurisdiction. The regulator may review audit firms' quality management systems and audit engagements to ensure that they meet the required quality standards. Non-compliance with ISQM can result in penalties or other disciplinary action.
ISA 240, titled "The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements" is a standard issued by the International Auditing and Assurance Standards Board (IAASB).
The standard provides guidance to auditors on how to plan and perform their audit procedures to address the risk of material misstatement due to fraud in financial statements.
What is the objective of ISA 240?
The objective of ISA 240 is to provide guidance to auditors on how to plan and perform their audit procedures to address the risk of material misstatement due to fraud in financial statements. The standard aims to ensure that auditors maintain a sceptical mindset and exercise professional judgement throughout the audit engagement to identify and respond appropriately to the risk of fraud.
What is the scope of ISA 240?
ISA 240 applies to all audits of financial statements, regardless of the size or complexity of the entity being audited. The standard requires auditors to consider the risk of fraud throughout the audit engagement, from planning to reporting.
What are the key requirements of ISA 240?
The key requirements of ISA 240 include obtaining an understanding of the entity's system of internal control, assessing the risk of fraud, obtaining audit evidence to support management's assertions regarding the absence of fraud, considering the risk of fraud in the design and performance of audit procedures, and responding appropriately to identified or suspected fraud.
How does ISA 240 differ from other auditing standards?
ISA 240 is specifically focused on the risk of fraud in financial statements, whereas other auditing standards address a broader range of topics related to audit planning, execution, and reporting.
The standard requires auditors to maintain a sceptical mindset and exercise professional judgement throughout the audit engagement to identify and respond appropriately to the risk of fraud.
How does ISA 240 affect auditors and audit firms?
ISA 240 requires auditors to plan and perform their audit procedures with professional scepticism and obtain sufficient evidence regarding the risk of material misstatement due to fraud.
This standard affects auditors by increasing their focus on fraud and requiring a better understanding of internal control. Auditors must assess risks of fraud, respond appropriately, and communicate with management about these risks.
ISA 315, titled "Identifying and Assessing the Risks of Material Misstatement," is a standard issued by the International Auditing and Assurance Standards Board (IAASB). The standard provides guidance to auditors on how to gain an understanding of the entity and its environment, the applicable financial reporting framework and the entity’s system of internal control.
The standard emphasises the importance of understanding the entity's internal control and its control environment, as well as the industry, regulatory, and other external factors that may impact the entity's financial statements.
What is the purpose of ISA 315?
The purpose of ISA 315 is to provide guidance to auditors on how to obtain an understanding of the entity and its environment to identify and assess the risks of material misstatement in the financial statements.
Why is it important for auditors to understand the entity's internal control and control environment?
Understanding the entity's internal control and control environment is important because it helps auditors to identify and assess the risks of material misstatement in the financial statements.
What are some external factors that auditors should consider when assessing the risks of material misstatement?
Some external factors that auditors should consider when assessing the risks of material misstatement include industry, regulatory, and other external factors that may impact the entity's financial statements.
What is the difference between inherent risk and control risk?
Inherent risk is the risk of material misstatement existing in the financial statements before considering the effectiveness of the entity's internal control. Control risk is the risk that a material misstatement will not be prevented, detected, or corrected by the entity's internal control.
How should auditors respond to identified risks of material misstatement?
Auditors should respond to identified risks of material misstatement by designing and performing audit procedures that are responsive to the assessed risks. Auditors should also evaluate the effectiveness of the entity's internal control in addressing the identified risks.
ISA 600, titled "Special Considerations - Audits of Group Financial Statements (Including the Work of Component Auditors)", is a standard issued by the International Auditing and Assurance Standards Board (IAASB). The standard provides guidance to auditors on how to perform an audit of a group of financial statements, which may include the financial statements of multiple entities or subsidiaries.
The standard outlines the requirements for auditors to form an opinion on the group financial statements as a whole, and the responsibilities of the auditors in coordinating and communicating with component auditors.
What is the purpose of ISA 600?
The purpose of ISA 600 is to provide guidance to auditors on how to perform an audit of a group of financial statements and to outline the responsibilities of the auditors involved in the audit.
What is the difference between a component auditor and a group engagement team?
A component auditor is an auditor who performs audit work related to a component for the purposes of the group audit, while a group engagement team is the team responsible for the overall audit of the group financial statements.
When should the group engagement team evaluate the work of the component auditors?
The group engagement team should evaluate the work of the component auditors when the work is material to the overall audit and when the component auditors are not part of the same network as the group engagement team.
What are the key considerations for auditors when using the work of component auditors?
The key considerations for auditors when using the work of component auditors include assessing the component auditors' professional competence, considering the materiality of the components, and evaluating the component auditors work for consistency with the group audit objectives.
What is the role of the group engagement partner in the audit of a group of financial statements?
The group engagement partner is responsible for the overall audit of the group financial statements and is responsible for coordinating the work of the group engagement team and component auditors. The group engagement partner is also responsible for forming an opinion on the group financial statements as a whole.
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