REVISED ISA 220 QUALITY CONTROL ELEMENTS AND FRAUD RISK ASSESSMENT PERFORMANCE

KEMI MONGOADI MATHATHO MBA, CFE IAT(SA) SQR, Audit Director

The current wave of auditing scandals has opened a debate among academics, regulators and the auditing profession on how to restore public confidence in corporate financial disclosures and fraud risk assessments.

The transparency and reliability of financial data play a key role in assessing the key risks in the securities market, banking industry, and society. The performance of high-quality audits can improve the reliability of financial information. Internal and external stakeholders both value audit quality.

The revised ISA 220 Quality Management for an Audit of Financial Statements establishes that the quality management system of an audit firm should consist of the following elements:

• Management and leadership;

• The firm's risk assessment methods;

• Relevant ethical requirements;

• Acceptance and continuation of client connection; and

• Specific resources; monitoring; information and communication.

Due to the importance of audit quality, the International Auditing and Assurance Standards Board (IAASB) issued quality control standards; the International Standard on Quality Control (ISQC) NO.1, and the International Standard on Auditing (ISA) No.220. Such standards include a set of quality control elements that must be implemented both at the audit firm level (i.e., ISQC1) and at the engagement level (i.e., ISA 220) including, for example, leadership responsibilities, assignment of the engagement team, engagement performance (i.e., direction, supervision, review) and documentation.

This article investigates whether auditor performance towards fraud risk assessment may be used to predict the efficacy of some of the ISA 220 quality control elements, focusing on management and leadership, as well as acceptance and maintenance of client relationships.

The Revised ISA 220 adds a new paragraph 34, "Differences of opinion," that stipulates that if there are different opinions in the team on specific problems or between them, the arrangements for resolving such a situation should reflect in the audit firm's quality control procedures. However, the project leader or manager is required to produce an audit report until all differences of opinion have been resolved.

In order to contribute to this discussion and to extend the current literature on audit quality measures, the researcher will investigate whether auditor fraud risk assessment can be relied upon as a direct measure or indicator for the effectiveness of some of the quality control elements established by ISA No.220, as well as identify the important elements (e.g., leadership, information and communication, and manager/ partner attention to the audit team).

Analysing the draft revised quality standards: ISA 220 (revised) Quality Management for an Audit of Financial Statements, the researcher can emphasise and recommend the following:

1. audit firms need to review and modify their quality management policies and procedures at the firm level,

2. audit firms need to review and modify their quality management policies and procedures on the audit mission,

3. when conducting an audit, it is necessary to consider resources from the point of view of not only humans but also technological and intellectual resources,

4. greater attention should be paid to the audit procedures for checking the principle of going concern and subsequent events after the financial statements.

Audit firms should also monitor and manage effectively and efficiently all the factors that have a high impact on audit reports. Finally, audit firms should apply the management by exception principle to save cost and time, and improve profitability even with lowered audit charges to clients.

Audit quality is regarded as one of the important factors that affect the credibility of financial statements and risk management processes. Users are more likely to demonstrate a high level of confidence concerning the information presented in financial statements if the audit of the fraud risk management is perceived to be of high quality. To remain competitive in today’s environment, audit firms must continue to improve the quality of audit services provided and maximize client satisfaction.

Therefore, the audit quality of audit firms must be assessed to ensure that audit processes employed by audit firms are systemic, effective, and in accordance with ISA 220. Proper training for less experienced auditors should be provided in tasks related to fraud risk assessment.

Furthermore, more research is needed to study and analyse quantitative measures of audit quality to provide a more comprehensive and representative set of measures that take into consideration the other ISA 220 quality control elements.

The proposed audit quality indicator, i.e., fraud risk assessment, could be more understandable and useful to auditors, audit committees and quality inspection units as they are more involved and have access to such matters rather than financial statement consumers.

In conclusion, there should be more academic efforts aimed at developing direct measures of audit quality on fraud risk assessments. There is a need to develop measures to serve as indicators for the effective application of quality control elements set by ISA 220.