The Center for Audit Quality has released a paper setting out an approach to developing audit quality indicators, which it will be pilot-testing with several auditing firms and audit committees.

The CAQ Approach to Audit Quality Indicators represents a two-year effort with firms to develop perspectives on which audit quality indicators could be the most relevant and how and to whom they should be communicated.  The paper describes in detail the CAQ’s approach to communicate a set of potential audit quality indicators, or AQIs, which will be pilot-tested by CAQ member firms with select audit committees.

The Public Company Accounting Oversight Board has been developing its own set of audit quality indicators, and the CAQ’s pilot test could provide some valuable feedback that may influence which indicators the PCAOB ends up adopting.

In developing its approach, the CAQ has sought input from various key stakeholders including investors, audit committees, regulators, academics and the audit profession.

“We recognize that regulators, including the PCAOB, also are conducting important work in the area of audit quality indicators,” said CAQ executive director Cindy Fornelli in a statement. “We hope that the CAQ Approach to Audit Quality Indicators, and the subsequent pilot testing, will be valuable to their efforts.”

The CAQ Approach to Audit Quality Indicators is based on a two-fold focus:

1. Communications of AQIs that are directed at audit committees.

The CAQ Approach to communicating a set of potential AQIs recognizes the vital role the audit committee plays in providing oversight of the audit. These communications are intended to supplement other communications provided to the audit committee, including the auditor’s required communications under professional standards, as well as information included in the audit firm’s audit quality and transparency reports (if issued by the audit firm).

2. Communication of AQIs that are focused largely on engagement-specific indicators.

Communication of indicators at the engagement level could drive actions that might help maintain or increase audit quality on an engagement, and may also assist the audit committee in evaluating the effectiveness of the audit firm.

In addition, AQIs may be quantitative in nature, but these indicators are most useful when accompanied by contextual information to enhance an audit committee’s understanding of engagement-specific matters.

“At the highest level, our approach flows from the commonsense notion that information collection and communication must be tailored to be useful and to avoid excessive cost and overload,” said Fornelli. “This effort reflects our ongoing commitment to improving audit quality, and we look forward to working with audit committees and other key stakeholders to continue to assess and refine the CAQ Approach to Audit Quality Indicators.”

The CAQ Approach includes a set of potential AQIs that taken as a whole could help audit committees with their audit oversight functions. This set of AQIs encompasses four key elements of audit quality:

o    Firm leadership and tone at the top
o    Engagement team knowledge, experience, and workload
     * Knowledge and experience of key engagement team members (e.g., engagement partner(s), manager(s), and engagement quality review partner(s))
      * Audit firm training requirements
      * Trends in engagement hours and related timing
      * Allocation of resources by significant risk areas
      * Specialists and national office personnel involvement by significant risk areas
      * Key engagement team members’ workloads
o    Monitoring
      * Internal quality review findings
      * PCAOB inspection findings
o    Auditor reporting
      * Reissuance restatements and withdrawn auditor’s reports

The CAQ plans to begin soon a profession-wide effort with its member firms to perform pilot testing with engagement teams and their related independent audit committees. The pilot testing will run through the completion of the 2014 audit cycle.

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