AICPA Study Identifies Three Factors Driving Audit Quality

Source: www.aicpa.org

A new study by the Peer Review Program revealed a set of factors that had a strong correlation with quality in single audits. In the study, the Peer Review team randomly selected a sample of 87 single audits from its Enhanced Oversight Program. The engagements selected had year ends of Nov. 30, 2015, or earlier.

Three factors had a strong correlation to quality performance in the sample: 

  • Size of single audit practice
  • Membership in the Governmental Audit Quality Center (GAQC)
  • Qualifications of the engagement partner 

Size of single audit practice 

Firms that performed 11 or more single audits annually, regardless of firm size, had a non-conformity rate of 15%, compared with 49% for firms that performed 2 to 10 single audits each year and 62% for firms that performed one single audit annually. 

GAQC membership

Firms that were GAQC members were two times as likely to conform to standards compared to non-members. Additionally, GAQC member firms that performed 11 or more single audits annually had a 0% non-conformity rate. 

Qualifications of the engagement partner 

Engagement partners who performed more single audits annually had fewer instances of nonconformity in the study. A nonconformity rate of 25% was observed in audits performed by an engagement partner who reviewed and signed 11 or more single audits annually. Nonconformity rose to 44% for engagement partners who perform 2 to 10 single audits each year, and to 68% for engagement partners who perform just one single audit annually. 

Non-conformity also spiked for firms whose engagement partners: 

  • Had less than six years of experience performing single audits
  • Had a history of non-conformity
  • Took less than nine hours of single audit-specific CPE within the previous three years 

These findings support numerous recommendations for firms that the AICPA has promoted through the Enhancing Audit Quality initiative, including: 

  • Accept only engagements that the firm is competent to perform.
  • Keep practice aids and A&A guides up to date.
  • Make sure the engagement team is the firm’s “A” team (and “A” doesn’t stand for “available”).
  • Consider the engagement team’s experience and single audit-specific education.
  • Engage a knowledgeable third party where appropriate.
  • Join the GAQC.
  • Have the engagement team perform appropriate consultations throughout the engagement.
  • Have engagement quality control review criteria that are appropriate in light of the risks of operating in this area.
  • Follow the “shadow/bench/door” best practice for partners that perform materially non-conforming engagements. 

This means shadowing these partners’ work in the area where the nonconformity occurred by involving another partner throughout the engagement; benching the partner by requiring him or her to perform engagements that do not fall into the area where nonconformity was noted; or showing the partner the door. In this system, the severity of the response is based on the severity of the issue.

For more information, read the related Journal of Accountancy article or view an infographic about these single audit quality factors.