Audit Quality Review

Many countries no longer leave audit quality to the profession alone. Independent bodies, such as the PCAOB in the United States, the FRC in the United Kingdom and NFRA in India, inspect audit firms on a regular cycle, with larger firms inspected more often. Inspectors select completed audits, often of listed or high-risk clients, and test whether the auditor gathered enough evidence for the key judgments, such as estimates and revenue. They also look at the firm’s system of quality management: partner training, independence checks, how difficult questions are escalated, and how complaints are handled. Findings go to the firm, and serious ones may appear in a public inspection report or lead to sanctions. A review does not re-audit the client or change the audited accounts. Findings from these inspections feed back into how firms train staff and review difficult judgments.

A national audit oversight body selects 20 audits of listed companies completed by a mid-sized firm. In four of them, the auditor accepted management’s forecasts for an asset impairment without testing the assumptions. The regulator sends the firm a private letter on those files and publishes a finding about its quality controls. The firm agrees to retrain staff and to require a second partner to review high-risk estimates.