Tag: The Future of Financial Reporting in the Public Sector

Audit Quality Indicators (AQIs)

Throughout this series, we’ve explored a range of Audit Quality Indicators (AQIs) essential for evaluating and enhancing audit quality within firms. From Independence to Staff Turnover, each AQI provides valuable insights into different aspects of audit performance and organisational dynamics.

Here’s a quick recap of the key topics we’ve covered

Independence

Assessing the balance between audit and non-audit fees to safeguard independence and decision-making integrity.

Tenure

Evaluating the duration of firm-client relationships and its implications for independence and familiarity threats.

Review Processes

Understanding the effectiveness of internal review mechanisms in maintaining audit quality.

Workload Distribution

Analysing the allocation of workload among engagement partners and managers to ensure effective supervision and resource management.

Technical Resources

Examining the ratio of engagement partners to technical partners and its impact on access to expertise and audit quality.

Training

Assessing the investment in structured training for audit staff to enhance professional competence and maintain high-quality standards.

Staff Turnover

Understanding the turnover rate and its implications for team consistency, innovation, and audit quality.

What’s Next? As we conclude this series, it’s crucial for audit professionals and firms to leverage these AQIs as tools for continuous improvement. By monitoring and interpreting these indicators, firms can identify areas for enhancement, implement targeted strategies, and uphold the highest standards of audit quality and professionalism.

Let’s Keep the Conversation Going! I encourage fellow audit professionals to continue exploring and discussing the significance of AQIs in ensuring audit quality and client satisfaction. Together, let’s strive for excellence in our practices and contribute to building trust and confidence in financial reporting.

Thank you for following along with this series, and I look forward to engaging with you further on this important topic!

Staff turnover

Assessing staff turnover provides valuable insights into the firm’s ability to maintain consistency within its engagement teams. Let’s delve into the description, interpretation, and implications of Staff Turnover: (%).

Staff Turnover Indicator

Staff Turnover: (%) represents the percentage of staff who have left the firm, excluding those whose training contracts have ended, in categories such as engagement partners, audit managers, and audit supervisors. It is calculated based on the opening number of staff in each category, divided by the average number of staff for the year.

Purpose of this ratio

This ratio provides insights into the firm’s ability to retain talent and maintain stable engagement teams.

How to Interpret the Audit Quality Indicator (AQI)

Indicator of Team Consistency

Staff turnover serves as an indicator of the firm’s ability to maintain consistent engagement teams. Consistency within teams can contribute to sustainability and foster improved audit quality and professional knowledge retention.

Balancing Retention and Recruitment: Firms aim to strike a balance between retaining existing staff and recruiting new talent. While low turnover rates indicate stability, some turnover can bring in fresh perspectives and ideas to enhance audit quality.

Implications and Considerations

Sustainability and Audit Quality: Consistent teams foster continuity and familiarity, which can positively impact audit quality and client service. Reduced turnover rates may indicate higher levels of satisfaction and engagement among staff.

Promoting Innovation: While low turnover rates are desirable, some level of turnover can inject new energy and perspectives into the firm, fostering innovation and adaptation to changing industry dynamics. Retention Strategies: Firms should focus on implementing effective retention strategies to retain top talent while also attracting new professionals. Investing in professional development, creating a positive work culture, and offering competitive benefits can contribute to employee retention.

Analysing Staff Turnover

Staff Turnover(%) offers insights into the firm’s workforce dynamics and its implications for audit quality and organizational sustainability.

As audit professionals, it’s essential to prioritise strategies that promote both staff retention and innovation, ultimately contributing to sustained audit quality and client satisfaction.

The engagement partner to technical partner ratio offers insights into the availability of technical support for engagement partners within an audit firm. Let’s explore the description, interpretation, and IRBA Code considerations regarding Technical Resources: Partner (Ratio).

Indicator

Technical Resources: Partner (Ratio) represents the ratio of engagement partners to technical partners within the audit firm.

Purpose

This ratio indicates the level of access engagement partners have to technical expertise and support.

How to Interpret the Audit Quality Indicators (AQI)

Higher Ratios

A higher ratio implies that each technical partner serves more engagement partners, potentially indicating limited access to technical resources for engagement partners. In contrast, a lower ratio suggests greater access to technical expertise.

IRBA Code Considerations

Professional Competence and Due Care

The IRBA Code emphasises the importance of maintaining professional knowledge and skill at the required level and acting diligently in accordance with applicable standards. Access to technical expertise ensures competent professional service delivery.
Need for Technical Expertise: Engaging with technical experts and consulting on technical or industry-specific issues is essential for exercising professional judgment effectively and addressing threats to compliance with fundamental principles.

Analysing Technical Resources: Partner (Ratio) provides insights into the availability of technical support within the audit firm and its impact on audit quality and decision-making processes.

As audit professionals, it’s crucial to ensure access to adequate technical resources, maintain professional competence, and uphold the highest standards of diligence and professionalism.

Assessing the total hours of structured training delivered for audit professional staff provides valuable insights into a firm’s commitment to improving audit quality and maintaining professional knowledge. Let’s delve into the description, interpretation, and IRBA Code considerations regarding Training: Hours per Person.

Indicator for IRBA Code considerations

Training

Hours per Person represents the total hours of structured training delivered for audit professional staff in the previous calendar year as a ratio to the average monthly audit professional staff count for the same period.

Purpose

This ratio reflects the firm’s investment in formal training and development initiatives.

How to Interpret the  AQI (Audit Quality Indicators)

Level of Investment

The level of investment in formal training serves as an indicator of the firm’s dedication to enhancing audit quality and fostering professional development among its staff.

Consideration of Training Quality

When interpreting this metric, it’s essential to consider the type, quality, and relevance of the training provided. Additionally, distinguishing between input-based (attendance) and output-based (knowledge gained) training is crucial for a comprehensive understanding.

IRBA Code Considerations

Professional Competence and Due Care: Registered auditors are obligated to ensure that individuals working under their authority receive appropriate training and supervision, as stipulated in the IRBA Code.

Exercise of Professional Judgment

Professional judgment involves applying relevant training, knowledge, skill, and experience to make informed decisions. Adequate training plays a pivotal role in developing professionals’ ability to exercise sound judgment.

Work Environment Considerations

The work environment, including educational, training, and experience requirements, influences the evaluation of threats to fundamental principles. Firms must create a conducive environment that supports ongoing learning and development.

Analysing Training

Hours per Person offers insights into the firm’s commitment to professional development and its impact on audit quality and staff competence.

For our Caseware users, we launched our complimentary hashtag #GetAhead training series designed to enhance the skills of trainees. By enrolling your trainees, you not only elevate the quality of their work but also ensure that manager supervision is effectively utilised at the appropriate level.

As audit professionals, it’s essential to prioritise continuous learning, uphold professional standards, and ensure adequate training and supervision for all staff members.

Assessing the ratio of audit professional staff to partners in an audit firm provides valuable insights into the capacity of partners to supervise junior team members and the level of support available for partners. Let’s explore the description, interpretation, and IRBA Code considerations regarding Span of Control: Professional Staff.

IRBA Code considerations 

Indicator – Span of Control: 

Professional Staff (Ratio) represents the ratio of audit professional staff headcount (including accounting, audit, and risk professionals) to partners in the audit firm.

Purpose of professional staff ratio

This ratio indicates the balance between partner responsibilities and available professional staff support

How to Interpret the AQI (Audit Quality Indicators)

Higher ratios suggest that partners have more responsibilities and potentially face increased time pressure due to managing a larger team. This may divert their attention from individual audit engagements. However, higher ratios can also indicate efficient management of professional staff or a well-resourced firm with skilled professionals requiring less supervision.

IRBA Code Considerations

Professional Competence and Due Care: Partners and professional staff are obligated to maintain professional knowledge and skill at the required level and act diligently in accordance with applicable standards. This principle underscores the importance of effective supervision and support within the audit firm.

Our audit templates have been updated to provide partners with appropriate information in engagement files so that they can focus their attention. It is imperative that engagement partners ensure engagement files created are on the latest versions:

1. Audit International: 25.1
2. Probe Audit Premium Plus: 2023.20.13

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

Cloud Market Trends in South Africa

The use of cloud-based solutions in South Africa is on an upward trajectory. The SA Cloud Market Report 2023 published by BMIT last year, that the compounded annual increase in South Africa’s cloud-based services market will be over 27% in the next five years. Many Departments of Public Service and Administration can benefit from cloud-based solutions.

This is in line with the demand for cloud-based services in Africa. According to digital research consultancy Xalam Analytics, the industry on the continent consistently shows an annual 25-30% growth rate.  

Overcoming Misconceptions in the Public Sector
Many departments of public service and administration in South Africa’s public sector are not benefitting from cloud-based solutions, being under the impression that the government is limiting the use of these services. This perception is currently preventing many departments from taking advantage of cloud-based services and becoming more efficient and effective in fulfilling their deliverables.  

Fortunately, the reality is that South Africa’s government departments of public service and administration are permitted to use cloud-based services and the Department of Public Service and Administration (DPSA) have published guidelines set out by the Determination and directive on the usage of cloud computing services in the public service that outlines the processes that should be followed.  

Government Directives Encouraging Cloud Adoption
The directive actively encourages the use of cloud services. According to the directive, “The Head of Department must ensure that Cloud Services are the first option explored before any on-premise infrastructure investments are made. This option must be fit for purpose, and preference (not exclusive use) must be given to private government cloud where the capability exists”.  

Ministerial Guidance on Cloud Services
In a notice by the Minister for the Public Service and Administration (MPSA), Ms Ayanda Dlodlo, on 10 February 2022, said, “The purpose of the Determination and Directive is to provide clear guidance to public service departments on adopting and using Cloud Computing services and technologies”. 

Minister Dlodlo provided details on the three permitted services and four deployment models. These include “Public Cloud, Government Private Cloud, Hybrid Cloud and Community Cloud.  The cloud service models are Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS),” she said.  

Steps to Implement Cloud-Based Solutions

The guidelines have been created to provide clear instructions to ensure that government departments can benefit from the efficiency of cloud services, particularly regarding financial management, data analytics, security, and audit capabilities available on the cloud.  

Step 1: Cloud Readiness Assessment
The first step is to complete a cloud readiness assessment. This allows the department to understand its current systems and investigate the requirements to suit its objectives.   The directive states that any consideration for a cloud-based solution needs to be “fit for purpose”, and the “proper procurement processes” must be adhered to.  

Step 2: Business Plan Development
The second step is the business plan, which needs to include the following details: These include the outcome of the risk assessment, the scope of services required, the budget, the cost of ownership, the skills and infrastructure required and the benefit the solution will provide.  

The security and ownership of the data need to be outlined. The level of data needs to be ascertained, and the classification needs to comply with the Minimum Information Security Standards (MISS). The Head of Department must ensure, where possible, that Information classified as “Secret” or “Top Secret” should prefer not to be moved to a Public, Hybrid or Community cloud service.  

In addition to the contract requirements in the directive, the service provider must also furnish the government department with the following information: This includes all data processing to comply with the Protection of Personal Information Act (POPIA), the geographic location where the data is stored, the jurisdiction which governs the contract’s operations and the area where the data is confined.  

Cloud-based service providers can guide the Head of Departments in the public sector to assist with benefitting from the services whilst being compliant with the directive and all relevant legislation.  

To facilitate the adoption of cloud-based solutions, departments can consider platforms like Caseware Cloud, which empowers the preparers and reviewers of financial statements in public entities, state-owned enterprises, TVET colleges, municipalities, municipal entities, constitutional entities, legislatures, and trading accounts. Caseware Cloud enables public sector financial professionals to store a single centralized copy of every financial statement engagement and collaborate seamlessly from any location at any time.  

How can Caseware help integrate Cloud Solutions for Public Sector?

Caseware Cloud operates on a Software as a Service (SAAS) model and employs redundancy architecture, ensuring robust reliability and accessibility. Completely web-based, it adheres to the highest industry security standards, including ISO 27001:2013 and SOC 2, Type 1 & 2 certifications. Data is securely stored across multiple geographic locations, with continuous and seamless backups, safeguarding against any potential disruptions or data loss. 

By Stephan van der Merwe, Product Manager, Caseware Africa 

Indicator: Workload: Manager Supervision (%) represents the total audit manager hours charged to the audit client as a percentage of the total audit hours for completed engagements.

Purpose: This metric gauge the level of supervision provided by audit managers.

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:

• Audit International: 25.1
• Probe Audit Premium Plus:  2023.20.13

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

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