What is Audit Quality? The CAQ Updates its Disclosure Framework
The Center for Audit Quality (CAQ) has published a disclosure framework (Framework) to assist accounting firms in determining, assessing, and communicating information to help stakeholders in understanding how the firm supports and monitors audit quality. Audit Quality Disclosure Framework (Update), released in June, is a revised version of the CAQ’s original audit quality disclosure framework, published in 2019. The CAQ believes that “a combination of metrics—taken as a whole and supplemented with robust discussion—may provide those overseeing the audit and other stakeholders with information and additional transparency into the firm’s systems and processes that impact audit quality.”
While the Framework is a tool to assist accounting firms in formulating their disclosures, a general understanding of the Framework may also be useful to audit committees, which are one of main audiences for firm audit quality disclosures. A high-level outline of the Framework is set forth below. Audit committees may also want to review the CAQ’s recent publication, Audit Quality Reports Analysis: A Year in Review, which examines the audit quality reports issued by eight large U.S. accounting firms. See CAQ’s Guide to Audit Quality Reports, April 2023 Update.
The Framework is voluntary and is intended to be illustrative. “A firm has flexibility to identify and tailor the information that it believes may be most relevant and meaningful to audit quality.” The disclosures discussed in the Framework are firm-level, not engagement-level, disclosures. The Framework is organized at three levels of detail:
Components of Audit Quality. The Framework discusses seven Components of Audit Quality. These are listed below.
Points of Focus. For each Component of Audit Quality, the Framework identifies Points of Focus that describe potential processes, policies, and procedures that a firm may use to address or support that Component. Points of Focus are qualitative and lend themselves to narrative disclosure.
Examples Performance Metrics and Other Qualitative Information. To enhance the understanding of a Point of Focus, a firm may consider supplementing a narrative description with firm-level performance metrics or other qualitative information, including measures and graphics.
The Framework discusses seven Components of Audit Quality, including Points of Focus with respect to each. The seven Components are:
Governance and Leadership
Relevant Ethical Requirements, Including Independence
Acceptance and Continuance of Client Relationships and Specific Engagements
Information and Communication
Monitoring and Remediation Process
Comment: While the CAQ’s guide seeks to assist accounting firms in preparing audit quality reports, it could also be helpful to an audit committee in understanding how to use and interpret such reports. Audit committees should review their accounting firm’s audit quality report as part of their evaluation of the firm’s work. The information in the report can provide a good basis for a discussion with the firm about its approach to audit quality and the metrics by which to judge the firm’s efforts. These reports are also a potential source of information for audit committees of companies that are considering retaining a new firm.