Monitoring and remediation

Many auditors underestimate the value of regular and robust monitoring of their systems of quality management, followed by focused remediation. If monitoring and remediation is performed correctly, the firm’s system of quality management is bolstered, which results in improved quality of engagements, and improved staff competence and morale. This, in turn, boosts profitability and client confidence. The evaluation of deficiencies needs to be brutally honest, however, so that the root cause of deficiencies may be properly addressed.

Firm-level considerations

The firm’s monitoring and remediation process must provide relevant, reliable and timely information about the design, implementation and operation of the system of quality management. This process must further ensure that appropriate actions are taken to respond to identified deficiencies and remediate them on a timely basis.

When designing and performing monitoring activities, firms need to consider quality objectives, risks and related responses. Changes in the system of quality management, results of previous monitoring activities, and complaints and allegations about possible audit failures should also be considered. Monitoring activities need to cover both completed engagements and the quality system. It is also very important to ensure that the individuals performing monitoring activities are objective, and have the competence, capabilities and time needed to perform this task effectively.

Based on the results of the monitoring process, firms need to evaluate findings to determine whether deficiencies exist. The firm must evaluate the severity and pervasiveness of identified deficiencies by investigating the root cause, and evaluating the effect on the system of quality management.

Remedial actions, which will constitute amended responses to risks, must be designed and implemented to address identified deficiencies, with due consideration of the root cause determined. The root cause analysis starts with questioning the ‘who’, ‘what’, ‘why’ and ‘how’ related to the deficiency occurred, with evidence to support the reasons. The responsible person is then informed of the proposed amendments to responses.

The person assigned operational responsibility for the monitoring and remediation process, must evaluate whether responses to risks are appropriately designed and implemented, and effectively address previously identified deficiencies. If not, responses must be modified to ensure that they are effective.

When findings indicate that required procedures were not performed on an engagement, or the report issued might be inappropriate, the firm must take appropriate action to comply with relevant requirements, consider the implications of the inappropriate report, possibly seek legal advice, and address the matter accordingly. Withdrawal of the audit report and the reissue of an updated audit report should be considered throughout.

A description of the monitoring activities performed, identified deficiencies, status of areas of consideration, proposed actions, and remedial actions needs to be communicated to the person(s) with ultimate responsibility for the system of quality management. Likewise, the same information must be communicated to engagement teams and other staff to enable them to take prompt action. The more frequent such communication occurs, the sooner the identified deficiencies may be addressed.

Engagement-level considerations

The engagement partner must take responsibility for obtaining an understanding of the information from the firm’s monitoring and remediation process as communicated, determining the relevance and effect on the audit engagement, and taking appropriate action. The information is communicated to the engagement team and, typically, a working paper is prepared indicating where the issues are addressed on the engagement. Throughout the audit, the team must remain alert for information that may be relevant to the firm’s monitoring and remediation process, and communicate it to those responsible for the process.

Common concerns identified

In many instances, audit regulators find that the monitoring process was inefficient because it did not identify all the deficiencies. Care should be taken to design and perform monitoring procedures thoroughly, ensuring that all quality objectives and responses to quality risks are addressed, as unidentified deficiencies may go unchecked and result in audit failures.

It is common that identified deficiencies are not appropriately remediated because the remediation process lacks substance. If the root cause of deficiencies is not thoroughly investigated and determined, and remedial measures are not focused on the root cause, the deficiencies will recur. Vague and general remedial measures will not be useful for improving audit quality, and should be avoided at all costs. For example, poor performance on a section of an audit file shall have a specific response, ensuring that the correct procedures in the audit section are communicated and understood, and knowledge evaluated by means of technical memos, training, surveys, and re-review of engagement files, or any combination of the above.

In summary

Focused monitoring and remediation can greatly improve audit quality, if properly performed. However, many firms generally lack the time and appropriate resources needed to understand the requirements, and thoroughly address this important aspect of quality management.

LEAF can assist firms with the administration of the quality management system, which includes the assessment of monitoring and remediation processes through firm and engagement-level monitoring reviews, methodology design reviews, and staff training on the relevant requirements and procedures.

References

1.    IAASB, ISQM 1: Quality management for firms that perform audits or reviews of financial statements, or other assurance or related services engagements
2.    IAAS, ISA 220 (Revised): Quality management for an audit of financial statements

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