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Audit Quality

Audits are an important part of any business. How can you tell if the audit quality is good? This question has plagued professionals. Does the quality relate to the person performing the audit, by their ability to discover misstatements, or their ability to meet legal and professional requirements?

In the past, audit quality has been assessed after the audit is finished. It is determined by if the company’s financial statements require restatement, or if a business fails. Recently the quality has been determines by the number and nature of the findings identified during PCAOB inspections. Congress has even tried to regulate auditors and audits with the Sarbanes-Oxley and Dodd-Frank Acts. However, these efforts have done little to reduce the number of restatements or deficiencies reported during PCAOB inspections.

With the inconsistencies in determining a quality audit, the PCAOB and two other organizations have made it their priority to define what constitutes a quality audit. In an effort to create a guide to quality audits, the AQI has three indicators: better informed regulators about audit quality; aid the decision making of audit committees, investors, and managers; positively influence the practices of auditing firms.

Much of what the organizations are pushing is more transparency of audit firm discoursers. This requires publicly releasing information that in the past has remained confidential. Other information would include the number and nature of deficiencies found, the number and size of auditors that resigned, frequency and impact of financial statement restatements, etc.

While there seems to be no answers yet, they are working towards a common goal. Care should be taken when setting regulations so they do not put any undue stress on smaller auditing firms by creating competitive disadvantage that could put the smaller firms out of business. There will be more debates on what is expected, but the results should be beneficial to everyone involved.

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