RSM South Africa

Management can improve audit quality

If the saying that “any publicity is good publicity” were true, auditors would have come very close to celebrity status lately.  After recent events like state capture, the SARS report, VBS Bank, Steinhoff, etc. it is almost impossible to go through a week without some self-proclaimed expert pronouncing on the “state of the (audit) profession” and, rightly or wrongly, the question is asked if the audit service that was performed met the appropriate quality standards.

But exactly what is meant by “audit quality”?

An audit is a product like many other products:  The inputs are the auditor’s training, experience, staff, methodology, time, etc. The process is the actual application of all these inputs in an audit engagement and the output is the auditor’s opinion.  That opinion is included in an auditor’s report.  The report itself can cover two pages or more, but the critical part is the sentence that reads, “we are satisfied that the financial statements fairly present the financial position, …”.

“Audit quality”, like quality time, sound quality, quality food or quality of life, is therefore simply about the quality of the auditor’s opinion.  Will the auditor’s opinion stand the test of time?  Can it be relied on or should the user do their own homework first?  Can the receivables be collected for the same amount as management reports?  Are the reported sales all the sales of the company?  And what about those other words that appear everywhere nowadays – “intangibles, goodwill, impairment, etc.”?  If they are not tangible, then how do we know that they really exist or, even trickier, that they have been valued correctly?  Can the reader of the financial statements accept these things because the auditors have done their job properly or does he/she need to do a bit more work just to be safe?

If all the inputs and processes combine to produce an audit opinion that is reliable then audit quality has been achieved.

Unfortunately, audit quality can seldom be measured unless something goes wrong.  Audit quality is like an airbag – you only know if it was working or not when your investment has hit a wall.  Until then, the user can only rely on the system that produced the audit and on the manufacturer’s assurances that it was properly installed.

Audit firms, networks, regulators, stock exchanges, etc. go to great expense to improve audit quality.  But the company itself, or more specifically its management and directors, can also play a role in improving audit quality.

Firstly, the basic principle:  The auditor only audits information that is presented by management.  The general programming principle of “garbage in, garbage out” applies – if the financial information is generally reliable, well organised and accessible the quality of the audit work will obviously be better.

In addition to the information that the auditor requests for the audit, management can also assist by providing additional information that they know is necessary for an understanding of the business and operations.  Management will always have a much better understanding of the challenges and other influences and, by sharing this with the auditor, the auditor can provide a better service.

Auditors spend a lot of time at the beginning of the audit on assessing risks of misstatement in the financial statements.  This should not be done in a vacuum.  If the auditor’s assessment of risk aligns to that of management, the audit will provide much more benefit to all involved.  For example, if the sales director is worried about sales not being invoiced on time to calculate his team’s commission correctly, he will probably have implemented a process to mitigate the risk.  By sharing this concern and the resolution with the auditors, the sales director will not only save valuable audit time but might also receive expert tips on how the process can be improved further.

In short, it comes down to effective two-way communication between all the roleplayers.  Improved audit quality is in everyone’s interest and this is greatly enhanced if everyone communicates openly about what they know, what they worry about and what they expect from the financial reporting process and the audit process.  Where the auditor has an open channel of communication they can perform better work and provide a quality product.  This affects everyone involved, from the board of directors, the audit committee, management at all levels, to the most junior accounting staff member.

Henk Heymans

Audit Director, Johannesburg

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