CAQ’s Guide to Audit Quality Reports
Most large accounting firms publish reports describing how the firm seeks to maintain, promote, and strengthen audit quality. Since these reports are voluntary, their content varies and is tailored to each firm’s specific facts and circumstances. Nonetheless, as the Center for Audit Quality (CAQ) observes, these reports “provide valuable information to stakeholders at the firm level about how an accounting firm defines, approaches, and executes its audit quality mission.” Audit committees are undoubtedly one of the target audiences for audit quality reports.
The CAQ has prepared an analysis of the audit quality reports issued as of February 2023 by the eight firms represented on the CAQ’s governing board -- BDO International, Crowe LLP, Deloitte & Touche LLP, EY, Grant Thornton LLP, KPMG LLP, RSM US LLP, and PwC LLP. Audit Quality Reports Analysis: A Year in Review examines both the qualitative disclosures and quantitative metrics that frequently appear in these reports and provides commentary on how each metric may provide insight into the firm’s audit quality.
The qualitative disclosures in audit quality reports describe in narrative form the accounting firm’s audit quality activities and “provide context to quantitative metric disclosures.” The CAQ’s analysis found that there are six common categories of qualitative disclosure –
Firms’ Messages and Commitments to Stakeholders (a message from firm leadership, often highlighting the centrality of audit quality to the firm’s mission, how the firm defines audit quality, and its commitment to stakeholders and the public interest).
Audit Methodology and Execution (description of the firm’s audit methodology and audit execution strategy and of the firm’s views on compliance with professional standards, best practices, and role in the financial reporting ecosystem).
People and Firm Culture (insight into how the firm attracts and retains talent and how it fosters a culture of quality, inclusion, and learning).
Quality Management and Inspections (discussion of the firm’s systems of quality management and of the types of inspections to which the firm is subject).
Technology and Innovation (discussion of use of technology to digitize and innovate audits; some firms include discussion on how they employ data analytics and artificial intelligence or machine learning to enhance audit quality).
The Future of the Profession (firm perspectives on the future of the profession, including how the firm is planning for ESG and other emerging assurance areas).
The quantitative metrics in audit quality reports “can provide additional information and data for understanding and discussing factors that contribute to quality audits, particularly when considered in conjunction with robust qualitative disclosures to provide appropriate context.” The CAQ report lists 15 common quantitative metrics. For each metric, there is a description of what the metric includes, a discussion of how it may be useful to readers in assessing audit quality, and an example of the metric drawn from the quality report of one of the eight firms. The 15 metrics are:
Metrics Related to Audit Firm Inspections (e.g., number of internal and external inspections and results).
Metrics Related to Continuing Professional Education and Training for Partners and Professionals (e.g., annual or comparative quantities of training hours firmwide, by level or per person).
Metrics Related to Use of Specialists, National Office or Center of Excellence Support (e.g., ratios, hours, or percentages of usage or availability of specialists, national office, or centers of excellence).
Metrics Related to Audit Report Reissuances and Financial Statement Restatements (e.g., percentage or number of audit reports reissued or client financial statements restated).
Metrics Related to Firms’ Independence Monitoring or Consultation Programs (e.g., number of consultations or hours devoted to such consultations).
Metrics Related to Partner or Professional Tenure at the Firm or Other Forms of Experience (e.g., average years at the firm for various levels of professionals).
Metrics Related to the Firm’s Personnel Composition by Level (personnel counts or percentages by level or position).
Metrics Related to Personnel Oversight (e.g., ratio of partners to managers or managers to staff).
Metrics Related to Personnel Turnover (e.g., professional turnover for comparative periods).
Metrics Related to Firms’ Investments in Technology and Audit Transformation (e.g., dollars or hours invested in developing or using advanced audit technologies).
Metrics Related to Diversity (e.g., number or percentage of employees by various diversity categories).
Metrics Related to Excess Hours Worked (e.g., hours worked by categories of firm personnel in excess of a standard work week).
Metrics Related to Audit Milestone Completion (e.g., percentages or ratios of hours spent on various phases of audit engagements).
Metrics Related to Staff Utilization (e.g., percentage of time spent on audit work relative to total hours worked).
Metrics Related to Audit Preparation and Supervision (e.g., ratios of hours spent supervising audits relative to hours spent preparing audit documentation).
Comment: The CAQ’s guide is a good introduction to the type of information found in audit firm quality reports, and the commentary on the relevance of the quantitative metrics is particularly useful. Audit committees should review their accounting firms’ audit quality report as part of their evaluation of the firm’s work. Information in the report, coupled with the CAQ’s guide, could be the basis for a discussion with the firm about audit quality. These reports would also be a good source for audit committees of companies that are considering retaining a new firm.