Page 147 - DCOM509_ADVANCED_AUDITING

Advanced Auditing

Notes 8.6 Improving Audit Effectiveness

Audit effectiveness is a partnership between regulators, audit firms, and the accounting and
auditing experts that lead and work for these firms. That is, audit effectiveness is a function
of both standards and performance. Standards — whether auditing, quality control, or
independence — provide a floor for auditor performance. Importantly, audit firms should have
incentives to go beyond the floor and compete on the basis of quality. This occurs not only from
enlightened self-interest, but when, for example, audit quality carries a premium and clients are
willing to pay more for higher quality services. And, this introduces another party to the audit
effectiveness partnership — namely clients, including management and audit committees.
First, you must recognize, for public companies post-SOX, audit effectiveness needs to be viewed
from the perspective of an integrated audit — that is, an audit of both the financial statements
and Internal Control over Financial Reporting (or ICFR).
Even so, unlike financial statement audits before the Securities Acts, prior to SOX, for the most
part, companies other than financial institutions didn’t have ICFR audits. There was almost no
voluntary demand for audits of ICFR for reporting to investors in public companies. However,
this does not necessarily mean audits of ICFR do not have value. Everyone agrees that controls
are important — even those running and investing in non-public companies, including those in
the private equity market, want companies with good controls.
Similarly, it has been a challenge to get an effective integration of the ICFR and financial
statement audits which is a key point. It’s all about improving the quality of financial reporting
by mitigating the risk of material misstatement. To do so, the financial statement audit needs to
inform the audit of ICFR and vice versa. Once barriers to achieving integration are removed and
appropriate incentives established, it’s likely that integrated audits will be viewed as big step
forward in audit effectiveness.

Notes Through an audit, an organization can identify a system’s ineffectiveness, take
corrective action, and ultimately support continuous improvement. Unfortunately, a poorly
deployed auditing system can lead to increased, non value-added costs, many hours of
wasted resources, and an eventual, inevitable QMS breakdown.
Management must buy into the fact that the internal audit process is just as critical and important
an activity as any other process within the QMS. An internal auditing system must have the
commitment of senior management. Without their approval, support, and encouragement, the
internal audit process is doomed for failure and worse–time and money wasted. When scheduled
audits are routinely postponed, management is sending a clear message, “Auditing is a low
priority, and we only perform them because it’s a necessary evil.”

Self Assessment

Fill in the blanks:
14. Audit effectiveness is a .…………………….. of both standards and performance.

15. An internal auditing system must have the ……………………………........ of senior
management.

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