The IAASB’s Work to Enhance Audit Quality

Prof. Arnold Schilder, Chairman

THE IAASB’S PUBLIC INTEREST MISSION

• Our objectives are to serve the public interest by– Setting high-quality auditing, assurance, and other related standards;

and

– Facilitating the convergence of international and national auditing and assurance standards,

thereby enhancing the quality and consistency of practice throughout the world and strengthening public confidence in the global auditing and assurance profession.

• Auditing and quality control standards serve a fundamental role in underpinning audit quality and investors’ and other users’ confidence in the audit and financial reporting.

HOW THE IAASB’S WORK SERVES INVESTORS

• Financial information must be relevant, timely and reliable to meet the needs of users…

• Users of audited financial statements must have confidence that the auditor has worked to a suitable standard and that “a quality audit” has been performed…

• But users cannot often directly evaluate audit quality, so they look to– The auditor’s opinion and other elements of the auditor’s report – External oversight bodies and their reports on inspection findings – both at a

global level and on individual audit firms

– Other important elements of the financial reporting supply chain, like the involvement of the audit committee and transparency reports

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OUR FRAMEWORK FOR AUDIT QUALITY

• Primary responsibility for performing quality audits rests with auditors, but …

• Each stakeholder plays an important role supporting high-quality financial reporting

• Audit quality is best achieved in an environment where there is support from other participants in the financial reporting supply chain

• “Contextual factors” have the potential to impact the nature and quality of financial reporting and, directly or indirectly, audit quality

OUR CURRENT STRATEGY AND WORK PLAN

• Our most important strategic objective is to ensure that our standards – the International Standards on Auditing or ISAs –continue to form the basis for high-quality, valuable and relevant audits conducted worldwide by responding on a timely basis to issues noted in practice and emerging developments

• At the same time, we cannot let auditing standards or the process to set them inhibit innovation or stifle the potential best practices of the future

• And we are continually focused on engaging our stakeholders in dialogue about public interest matters – their expectation is that we– Use our voice as the global auditing standard setter and our robust due

process to develop globally-relevant solutions in coordination with others Coordination with national regulators like the PCAOB is often stressed, and is an

integral part of our process – the topics of mutual interest are MANY!

HOW THE PCAOB AND IAASB INTERACT

• Pleased to see growing and positive interactions between IAASB and PCAOB– Participation in each others’ advisory groups (SAG and IAASB Consultative

Advisory Group)

– Meetings with Board members and Senior Staff Started in the context of the Auditor Reporting project, but continues today

– PCAOB observership of IAASB Task Forces / Working Groups Accounting Estimates and Quality Control, perhaps others in the future

– Increased IAASB engagement with the International Forum of Independent Audit Regulators and its Standards Coordination Working Group (of which PCAOB is a member)

– Other touch points – PCAOB participation in IAASB professional skepticism panel, liaison on PCAOB Audit Quality Indicators project, etc.

OUR INVITATION TO COMMENT – ENHANCING AUDIT QUALITY

• Consultation to explore the way forward on three fundamental topics – professional skepticism, quality control and group audits

• Feedback from the consultation will shape the IAASB’s standard-setting efforts and address key public interest issues – Fostering an appropriately independent and challenging skeptical mindset of

the auditor– Enhancing documentation of the auditor’s judgments– Keeping ISAs fit for purpose– Encouraging proactive quality management at the firm and engagement level– Exploring transparency and its role in audit quality– Focusing more on firms (including networks) and their internal and external

monitoring and remediation activities– Reinforcing the need for robust communication and interactions during the

audit

• What is professional skepticism?

• What are the skills/competencies required to exercise PS?

• What are the impediments affecting the consistent application of PS?

• How can the concept of PS be emphasized in the context of the projects on quality control, group audits, and accounting estimates (ISA 540)?

• What other actions may be necessary by the IAASB / International Accounting Education Standards Board / International Ethics Standards Board for Accountants? Framework? Guidance? Training? …..

PROFESSIONAL SKEPTICISM: KEY QUESTIONS BEING CONSIDERED

QUALITY CONTROL QUALITY MANAGEMENT APPROACH‒• Exploring a more proactive, scalable

and robust response to managing quality:o More easily adaptable to rapidly changing

business environmento Focus on monitoring and remediation –

investigating root causes of identified deficiencies, reassessment of quality risks and implementing remedial actions

o Emphasis on importance of firm governance, including leadership responsibilities for quality

o Tone at the top – where is more emphasis needed?

QUALITY CONTROL (cont.)

• Emphasis on importance of the role and responsibilities of the engagement partner

• Exploring transparency reporting trends, including feasibility of international requirements

• The impact on audit quality of evolving audit delivery models • Involving other auditors that are not component auditors – is more

guidance needed?• Firms that operate as networks – are more requirements and guidance

needed? • Monitoring and remediation (including “root-cause” analysis)• Engagement quality control reviews – reinforce importance and elevate

prominence

• How to drive a “top-down” approach as groups become more complex and structures continue to evolve

• Focus on roles and responsibilities of the group engagement partner and group engagement team, including sufficient and appropriate involvement in component auditor’s work

• Acceptance of a group audit (including access issues)• Component materiality• Work on components that are not significant• Consolidation procedures • Emphasis on importance of strong two-way communication between group

engagement team and component auditors• Requirements and guidance for component auditors?

GROUP AUDITS (OTHER AUDITORS) – NEED FOR A FRESH LOOK?

ISA 540 – AUDITING ACCOUNTING ESTIMATES, INCLUDING FAIR VALUES

• Accelerated standard-setting efforts to revise our standard, with a focus on – Enhancing the ISAs to be sufficient and appropriate for the evolving and

complex business environment of today Strengthen auditor’s work, including the use of an auditor’s expert Drive auditors to perform appropriate procedures Address challenges encountered in practice

– Fostering an appropriately independent and challenging skeptical mindset of the auditor Direct how the auditor obtained sufficient appropriate accounting estimates

in relation to significant accounting estimates– Communications, interactions and documentation, as well as transparency

Communications with audit committees, as well as supervisors or other regulatory or oversight bodies

Auditor reporting and involvement of engagement quality control reviewer

OTHER INITIATIVES

• ISA 315 – Identifying and assessing risks of material misstatement through understanding the entity and its environment– Interactions with a number of other projects; exploring common inspection

findings e.g., significant risks, tests of controls, documentation, scalabilty– Understanding the business is fundamental in order to apply professional

skepticism• Data analytics and effects of technology on the audit– What are the potential benefits (and risks) to audit quality? Do the standards

today restrict innovation? Do they need to change to reflect increasing use?

• Integrated reporting

• Other topics monitored by our Innovation Working Group– Corporate governance– Cybersecurity

THE IAASB’S AUDITOR REPORTING STANDARDS Au

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t Audit Opinion – Required to be presented first

Key Audit Matters – Required for listed entities

Going Concern – Additional focus

Other Information – Enhanced work effort and new section

Responsibilities – In the audit; Independence and ethical obligations; Engagement partner (listed entities)

Effective for 2016 audits – feedback from UK and early adopters has been very positive!

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