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Author: Zané Möhr

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AQI9 – Exploring Workload: Engagement Partner Role (%)

Understanding the level of engagement partner involvement in audit engagements is crucial for evaluating audit quality and team dynamics. Let’s delve into the description, interpretation, and considerations regarding Workload: Engagement Partner Role.

Indicator: Workload: Engagement Partner Role (%) represents the engagement partner’s (excluding EQ review partner) hours charged to the audit client as a percentage of the total audit hours for completed engagements.

Purpose: This metric measures the extent of engagement partner involvement.

How to Interpret the AQI:
Higher Ratios: Indicate greater engagement partner involvement, potentially leading to higher-quality audit files or audits with more areas of significant judgment. However, high ratios may also suggest understaffing, inexperienced teams, or execution issues.
Comparison with Other Ratios: This ratio can be compared with the workload to manager supervision (%) ratio and the EQ review partner hours (%) ratio to provide a comprehensive assessment of team dynamics and audit quality.

IRBA Code Considerations:
Professional Competence and Due Care: Engagement partners are obligated to maintain professional knowledge and skill at the required level and act diligently in accordance with applicable standards.
Client and Engagement Acceptance: Safeguards such as assigning sufficient personnel with necessary competencies and agreeing on realistic timeframes address self-interest threats associated with engagement complexity and resource allocation.

Analysing Workload: Engagement Partner Role (%) offers insights into engagement partner involvement and its impact on audit quality and team dynamics.

As audit professionals, it’s crucial to ensure appropriate resource allocation, maintain professional competence, and uphold the highest standards of diligence and professionalism.

ISA 220(Revised) – Quality Management for an Audit of Financial Statements clarified and added Engagement Partner responsibilities. I believe will see an increase on the ratio in upcoming years.

Our audit templates have been updated to accommodate for the added responsibility and we have done this in efficient and automated documents and reports. It is imperative that engagement partners ensure engagement files created are on the latest versions:

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AQI8 – Exploring Partner Coverage (%)

Understanding the extent of internal monitoring coverage for engagement partners is essential for assessing the depth of an audit firm’s quality management processes. Let’s delve into the description, interpretation, and considerations regarding Partner Coverage.

Indicator: Partner Coverage (%) represents the percentage of engagement partners subject to internal reviews during the calendar year.

Purpose: This metric reflects the internal monitoring coverage of the firm.

How to Interpret the AQI:
Monitoring Investment: A higher percentage indicates a greater proportion of engagement partners subjected to internal quality reviews. This suggests a larger investment in monitoring, potentially increasing the likelihood of detecting shortcomings in audit quality.

Cautionary Note: While higher coverage implies a more robust monitoring system, it does not directly reflect the quality of audit engagements. The effectiveness of the internal review process should be assessed independently, as per AQI7. Read more

IRBA Code Considerations

Responsibilities for Independence and Quality: ISQM1 mandates firms to establish a system of quality management with policies and procedures ensuring compliance with professional standards, regulatory requirements, and independence provisions.

Analysing Partner Coverage provides insights into the level of investment in internal monitoring and risk detection within an audit firm.

As audit professionals, it’s imperative to ensure that internal monitoring efforts are robust and effective, facilitating the detection and mitigation of audit quality shortcomings.

If you do not yet have a System of Quality Management or you have a “manual system”, our Caseware SQM solution allows for creation of a live and true SoQM.

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AQI7 – Exploring Internal Review Results (%)

Analysing internal review results is crucial for evaluating the effectiveness of an audit firm’s quality management processes. Let’s delve into the description, interpretation, and implications of Internal Review Results.

Indicator:  Internal Review Results (%) represent the average percentage of all result ratings assigned to engagement partners during internal reviews conducted throughout the calendar year.=

Purpose

How to Interpret the AQI: Rating Scale: Firms typically use a rating scale ranging from 1 to 3, where 1 indicates satisfactory results, 2 denotes low-risk findings, and 3 represents unsatisfactory outcomes. These ratings should be standardised for analysis purposes.
Percentage Breakdown: Results are depicted as a percentage of review ratings. For instance, 35% of engagement partners may receive a satisfactory rating, 45% may receive a low-risk finding rating, and 20% may receive an unsatisfactory rating.
Risk Identification Tool: Internal reviews serve as critical risk identification tools. A high percentage of unsatisfactory ratings may indicate robust internal monitoring processes or potential deficiencies in audit quality. Conversely, a low percentage of unsatisfactory ratings may suggest a weaker internal quality process or consistently high-quality engagements.

Implications: Quality Management Effectiveness: Internal review results provide insights into the effectiveness of a firm’s quality management processes. They help identify areas for improvement and ensure adherence to professional standards.

Correlation with External Inspection Results: Comparing internal review results with external inspection outcomes can gauge the effectiveness of the firm’s internal monitoring processes. Consistent findings across internal and external reviews indicate a robust quality management system.

Analysing internal review results is integral to enhancing audit quality, driving continuous improvement, and maintaining regulatory compliance.

Our SQM App allows for documentation of internal review workprograms, reviews performed and documentation of findings.

As audit professionals, let’s leverage these insights to refine internal quality management processes, mitigate risks, and uphold the highest standards of professionalism.

It’s paramount for the firm to thoroughly evaluate service providers enlisted to aid in the firm review process. Selecting the appropriate service provider to offer guidance on technology and methodology is equally crucial. I’ve observed that when service providers lack expertise in the technology or methodology employed, there’s a risk of erroneous advice and potential loss of efficiency or duplicated work for the firm.

These insights into firm review processes are instrumental in enhancing audit quality, driving continuous improvement, and ensuring adherence to professional standards.
As audit professionals, let’s leverage these observations to refine internal quality management processes, promote transparency, and uphold the highest standards of professionalism.

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AQI6 – Exploring Firm Review Processes

Understanding the quality management processes within audit firms is vital for ensuring the integrity and effectiveness of engagements. Let’s delve into the description, interpretation, and key observations of Firm Review Processes.

Indicator: Firm Review Processes encompass engagement-related reviews conducted by personnel outside the engagement team. This includes the nature, coverage, frequency, and outcomes of these reviews.

Purpose: The aim is to assess the quality of engagements and internal quality management processes.

How to Interpret the AQI:
Assessment of Internal Quality Management: Firm Review Processes provide insights into the effectiveness of internal monitoring systems and the quality of engagement performances. Satisfactory results suggest adequate engagement quality.
Comparison with External Inspection Results: These internal quality management results can be compared with external inspection outcomes to gauge consistency and identify areas for improvement.

Considerations:
ISQM1 paragraph 32(h) emphasises the importance of evaluating service providers

It’s paramount for the firm to thoroughly evaluate service providers enlisted to aid in the firm review process. Selecting the appropriate service provider to offer guidance on technology and methodology is equally crucial. I’ve observed that when service providers lack expertise in the technology or methodology employed, there’s a risk of erroneous advice and potential loss of efficiency or duplicated work for the firm.

These insights into firm review processes are instrumental in enhancing audit quality, driving continuous improvement, and ensuring adherence to professional standards.
As audit professionals, let’s leverage these observations to refine internal quality management processes, promote transparency, and uphold the highest standards of professionalism.

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AQI5 – Understanding Engagement Quality (EQ): Review Partner Hours (%) and EQ Review Team Hours (%)

Assessing engagement quality is essential for maintaining audit integrity and reliability. Let’s delve into the significance of the Engagement Quality (EQ) metrics and how they impact audit quality and effectiveness.

Indicator: EQ Review Partner Hours (%) and EQ Review Team Hours (%) represent the hours charged to the audit client by the EQ review partner and team as a percentage of the total audit hours for completed engagements.

Purpose: These metrics quantify the extent of pre-issuance EQ reviews, providing insights into the thoroughness of audit file scrutiny.

How to Interpret the AQI:
Higher Percentages: Indicate greater involvement of the EQ review partner and team, potentially covering more areas of significant judgment in the audit file. However, excessively high percentages may signal overreliance on the EQ reviewer to resolve issues that should have been addressed by the engagement partner.
Lower Percentages: May suggest inadequate time spent by the EQ review partner or insufficient attention to critical judgment areas. It’s essential to ensure all significant judgment areas are adequately addressed, regardless of the percentage of EQ review hours.

Considerations:
Quality Over Quantity: The EQ metrics provide a gauge of review thoroughness but do not inherently signify the eligibility or objectivity of the EQ reviewer. Quality assurance should prioritise comprehensive review coverage rather than simply maximising review hours.
Continuous Improvement: Regular evaluation and refinement of EQ review processes are essential to optimise audit effectiveness and mitigate risks associated with under or over-reliance on EQ reviewers.

This AQI, presented as an average per firm, offers valuable insights into the rigor of EQ review processes and their impact on audit quality.

In AQI2, we explored Fee Recovery, remember to include appropriate budgeted hours for the EQ Partner and Team.

Let’s strive for a balanced approach to EQ review, ensuring thorough scrutiny of audit files while maintaining independence and objectivity.

Our Caseware SQM solution includes a library of Monitoring Activities and can help facilitate EQ Reviewers with tailor made work programs for engagement files and firm monitoring.

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AQI4 – Exploring Tenure: Partner Experience (years)

Understanding the tenure of engagement partners is paramount in evaluating audit quality and expertise. Let’s delve into the significance of this metric and its implications for audit excellence.

Indicator: Tenure: Partner Experience (years) measures the average tenure of engagement partners in years.

Purpose: This indicator reflects the accumulated experience of partners working on audit clients, including technical partners and CEOs, whose time may not be directly booked to audit clients.

How to Interpret the AQI:
Greater Years of Experience: Indicates a higher level of experience and expertise accrued by the engagement partner. This extensive experience may contribute to enhanced audit quality and effectiveness. However, it is essential to assess whether engagement partners have stayed abreast of Continuing Professional Development requirements and gained diverse experience relevant to their role.

IRBA Code Considerations:
Principle of Professional Competence and Due Care: Registered auditors are obligated to attain and maintain professional knowledge and skills at the required level to ensure competent service delivery. This includes acting diligently and adhering to applicable technical and professional standards.

This AQI, presented as an average per firm, offers valuable insights into the proficiency and competence of engagement partners.

As auditors, it’s crucial to prioritise ongoing professional development and adherence to industry standards. Let’s leverage this insight to bolster audit quality and uphold the highest standards of professionalism.

At Caseware we believe that electronic working paper files tell a story, if you are still reviewing paper based files or PDF versions, perhaps it is time to visit our Success Community’s Getting Started page and get your own copy of Caseware Working Papers.

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AQI3 – Exploring Tenure: Firm (years)

Understanding the duration of a firm’s tenure with an audit client is crucial in assessing independence and familiarity threats. Let’s delve into the significance of this metric and its implications for audit quality.

Indicator: Tenure: Firm (years) measures the average number of completed years a firm has served as the audit firm for a client.

Purpose: This indicator provides insights into the level of independence or familiarity threat associated with the auditor-client relationship.

How to Interpret the AQI:
Longer Tenure: Poses a greater familiarity threat to independence, as prolonged relationships may lead to complacency or undue sympathy towards the client’s interests.
Shorter Tenure: Indicates less experience and knowledge of the client’s business, potentially impacting the depth of the audit. However, it also mitigates familiarity threats associated with long-term relationships.

IRBA Code Considerations:
Familiarity Threat: Arises from a long or close relationship with a client, potentially compromising the auditor’s objectivity and independence. This threat underscores the importance of vigilance and professional skepticism in maintaining integrity throughout the audit process.

This AQI, presented as an average per firm, offers valuable insights into the dynamics of auditor-client relationships and their impact on audit quality. As auditors, it’s essential to balance the benefits of long-term client relationships with the need for independence and objectivity. Let’s leverage these insights to enhance audit quality and uphold the highest standards of professionalism. Caseware Cloud allows for the documentation of “Client Since” field for easy reporting on client tenure.
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AQI2 – Exploring Independence: Fee Recovery (%)

Understanding the nuances of audit fee recovery, is pivotal in assessing audit quality and efficiency. In this piece, we are going to explore the intricacies of this vital metric and its implications for audit firms.

Indicator: Total audit fees billed to the client as a percentage of the total audit fees internally charged for completed engagements.

Purpose: This metric sheds light on how effectively firms recover fees for their services.

How to Interpret the AQI:

  • Low Percentage: Indicates that a firm has charged less for its services, leading to fees being “written off” and not fully recovered. This could stem from inefficiencies in supervision, project management, or succumbing to fee pressures.
  • High Percentage: Reflects efficient fee recovery, indicating better project management, accurate budgeting, and alignment of actual time spent with budgeted hours.

IRBA Code Considerations:

  • 300.6 A1 (a): Highlights self-interest threats arising from quoting excessively low fees, compromising the ability to deliver services by professional standards.
  • 330.3 A1 & A2: Emphasizes the impact of fee levels on an auditor’s ability to perform professional services and the ethical considerations associated with quoting fees below market standards.

This AQI provides valuable insights into audit firms’ operational efficiency, budgeting accuracy, and adherence to professional standards.

As we navigate the complexities of audit quality, let’s leverage these indicators to drive improvements in service delivery, project management, and adherence to professional standards.

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AQI1 – Understanding Independence: Non-audit Fees (%)

In the world of auditing, maintaining independence is paramount. One crucial metric in assessing this independence is the percentage of non-audit fees billed in relation to total audit fees. In this piece, we are going to unpack what this metric entails and delve into how it impacts decision-making and quality.

Indicator: Non-audit fees billed as a percentage of total audit fees to the client.

Purpose: To provide insights into the firm’s dependency on a client for non-audit services.

How to Interpret the AQI: The AQI (Audit Quality Indicator) measures the firm’s reliance on non-audit services compared to audit services. A higher percentage suggests a greater reliance on non-audit services like taxation and consulting. While this may signal client demand or diversified services, it can also raise concerns about independence.

Implications of a Higher Percentage:

  • Diminished Independence Perception
  • Potential Threats to Audit Quality
  • Increased Demand for Non-Audit Services from Clients
  • High potential for Conflicts of Interest

Regulatory Guidance:

King IV Report on Corporate Governance for South Africa, 2016: Recommends audit committees oversee non-audit service provision by external auditors.
Companies Act 71 of 2008: Requires auditors to be deemed independent by the audit committee.
IRBA Code of Professional Conduct for Registered Auditors: Addresses fee dependencies and independence considerations extensively.

Understanding and upholding independence is not just a regulatory requirement but also a cornerstone of trust and reliability in auditing. Let’s stay vigilant in ensuring practices uphold the highest standards of independence and quality.

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IRBA released the 2023 Audit Quality Indicators (AQI) report

The Independent Regulatory Board for Auditors (IRBA) released the 2023 Audit Quality Indicators (AQI) report on 16th February. The full report can be accessed here. Over the coming weeks, I’ll be diving into these AQIs to understand how they can enhance audit quality for firms and share the insights with you every Friday, starting from the 8th of March. The 14 AQIs are an invaluable resource for stakeholders in the financial reporting ecosystem. They provide tangible, measurable insights for meaningful discussions on factors influencing audit quality. The full report can be accessed here.

The 5 AQI categories include:

  • Independence
  • Tenure
  • Review
  • Workload
  • Other

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