(MENAFN- Khaleej Times) Auditors are required by the standards to be more mindful of exercising professional skepticism in the conduct of the audit, which should contribute to raising the quality of the deliverables. By Saad Maniar
Sun 28 Nov 2021, 11:07 AM
The issue of audit quality has always been a key consideration for auditors as it is auditor's responsibility to serve public interest. Performing a high quality audit means that audit risk is reduced and the audit firm is less likely to issue an inappropriate audit opinion.
Performing high-quality audits with independence, integrity, objectivity and professional skepticism is crucial to serving public interest. This assumes importance as the stakeholders rely on transparent, informative and accurate financial reporting for decision-making. Also, the periodic regulatory review plays an important role in enhancing the quality of audit. There is growing focus on ethics, which devolves from higher attention to quality.
The primary output of an audit is an auditor's opinion that provides users with confidence as to the reliability of the audited financial statements. Absence of a modified auditor's opinion is an important signal about the reliability of the financial information. High-quality audits improve stakeholder trust in businesses. They also promote investment and economic growth while playing a crucial role in building trust in the capital markets.
However the fact remains that only DFSA in DIFC and FSRA in ADGM has the framework and supervises the quality of audit. Since 2019, the Ministry of Economy the licencing authority for audit principals has introduced mandatory 30 hours of continuous professional development training to be obtained through their approved training provider, which is valuable especially for the small audit firms, who previously did not have the in-house resources to conduct the trainings.
While auditors are trying their best to improve audit quality, the regulators often find lack of sufficient and appropriate documentation and that auditors make extensive use of judgment – this is very much linked to professional scepticism. Audit regulators often comment that the audit of judgmental balances such as fair values and impairment lacks in quality. Financial restatements of big companies together with bankruptcies of major companies caused by reported financial statement frauds have eroded public trust in audited financial reports, which needs to be restored.
Ingredients of quality audits
Layman, often finds it difficult to understand what is meant when someone tells quality audit. To explain this fact, I would make reference to two standards relating to quality control I.e. ISQC 1 and ISA 220 issued by The International Auditing and Assurance Standards Board (IAASB). The ISAs and ISQC 1 are crucial in supporting high-quality audits, which in turn shall help build public trust and confidence in financial statements.
ISQC 1- Standard on Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements applies to all firms of professional accountants in respect of audits and reviews of financial statements. The new standard ISQM 1 which will replace ISQC 1, will govern the quality of the entire practice including the consulting activities and therefore is expected to raise the bar of the accounting profession. ISQM 1 shall strengthen firm's systems of quality management through a robust, proactive and effective approach to quality management. Firms are required to have systems of quality management designed and implemented in accordance with ISQM 1 by December 15, 2022.
ISA 220, Quality Control for an Audit of Financial Statements is specific to audit engagements and contains specific requirements that should be adhered to in the performance of any audit. ISA 220 deals with the specific responsibilities of the auditor regarding quality control procedures for an audit of financial statements (i.e. at the engagement level).
ISQC 1 contains requirements in relation to: Leadership responsibilities for quality on audits; relevant ethical requirements, in particular independence; acceptance and continuance of client relationships and audit engagements; assignment of engagement teams; engagement performance, meaning the direction, supervision and review of an audit, including consultation and engagement quality control reviews; monitoring and documentation; and human resources
By emphasising the issue of audit quality in the new standard ISQM 1, the IAASB is making it clear that audit quality is something to be taken very seriously. Performance of higher quality audits and tangible efforts on part of the standard setters, regulators, auditors and the accounting profession together shall help restore the public trust in the audit reports issued and also contribute to reduction of the 'expectation gap'. Notably, the audit expectation gap arises as a fundamental difference between what the general public expects from auditing and what a financial audit actually involves.
Auditors are required by the standards to be more mindful of exercising professional skepticism in the conduct of the audit, which should contribute to raising the quality of the deliverables. Notably, professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence.
The writer is a senior partner at Crowe and chairman of ACCA members advisory committee in UAE. Views expressed by him are his own and do not reflect the newspaper's policy.
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