Audit Quality Maturity Model – Version 1.0 (AQMM v1.0)
CA. Durgesh Kumar Kabra
The author is a member of the Institute. He can be reached at durgeshkabra@gmail.com.
The Case for Enhancement of Audit Quality
Audit documentation is extremely important as what is not documented is not considered done. In these times it becomes almost essential to have an audit documentation tool. Data Analytics also take centre stage as substantive analytical procedures provide the most appropriate audit evidence. Firms need to have these go-to-market tools with checklists.
Audit documentation is extremely important as what is not documented is not considered done.
Audit Quality Cannot be Measured but a Relative Comparison Between Firms Can be Done
Audit quality is a complex subject and no analysis of it has achieved universal recognition. At a macro level, all this can be achieved when there is awareness about audit quality, key stakeholders are encouraged to explore ways to improve audit quality and greater dialogue is facilitated between the key stakeholders on audit quality. Audit quality cannot be measured and judging audit quality can be highly subjective. However a relative comparison is possible between two audit firms.
Even though the bird’s eye view of an audit firm’s overall audit quality is important, what is relevant is the worm’s eye view of the quality of the engagement. The performance of each engagement adds to the overall audit quality and one audit gone wrong can undo all the good the firm has done over decades.
Our auditors are grappling with new accounting standards and auditing in special circumstances of the pandemic where the fraud triangle is certainly present. The uncertainties and judgment calls of the auditor pose big challenges for the auditor. Is the auditor ready enough to take on the projects that they have taken or would it be better than the auditor had a self-assessment tool that would help it to check its audit quality and diagnose what remedial measured it needs to take? Such a model and Implementation Guide would work like mass education for the already literate chartered accountant.
Capacity Building Measure Initiated by the Centre for Audit Quality (CAQ)
The Centre for Audit Quality (CAQ) strives to provide an angular discussion on audit quality. To help bridge the expectation gap the CAQ launched a recommendatory Audit Quality Maturity Model – Version 1.0 (AQMM v1.0), which is a capacity-building measure. The objective of this Evaluation Matrix is for sole proprietors and Audit firms to be able to self-evaluate their current level of Audit Maturity, identify areas where competencies are good or lacking and then develop a road map for upgrading to a higher level of maturity.
Both the Peer Review Board and the Centre for Audit Quality (CAQ) have adopted a collaborative approach, with the CAQ having developed the quality standards and Peer Review Board testing the said standards when they become mandatory. Using this collaborative approach, the AQMM v1.0 would be recommendatory initially and after 1 year the Council will review the date from which it would become mandatory.
Entities Covered under AQMM v1.0:
Firms auditing the following entities are covered in AQMM v1.0:
- (a) A listed entity; or
- (b) Banks other than co-operative banks (except multi-state co-operative banks); or
- (c) Insurance Companies
Note: Firms doing only branch audits of the above-mentioned entities are not covered.
The AQMM v1.0 is divided into three sections and a minimum scoring is required in each section to make it to a certain level of audit maturity:
| Section Reference | Total Possible Points |
|---|---|
| Section 1. Practice Management – Operation | 280 |
| Section 2. Human Resource Management | 240 |
| Section 3. Practice Management – Strategic / Functional | 80 |
| Total Possible Points | 600 |
Audit Maturity Levels and Classification Basis
| Scoring Threshold | Firm Classification | Description & Action Required |
|---|---|---|
| Up to 25% in each section | Level 1 Firm | Indicates that the firm is very nascent – will have to take immediate steps to upgrade its competency or will be left lagging behind. |
| Above 25% to 50% in each section | Level 2 Firm | Indicates firm has made some progress – will have to fine-tune further to reach the next level of competency. |
| Above 50% to 75% in each section | Level 3 Firm | Indicates firm has made substantial progress – will have to fine-tune further to reach the highest level of competency. |
| Above 75% in each section | Level 4 Firm | Indicates firms that have made significant adoption of standards and procedures – should focus on optimising further. |
Detailed Evaluation Criteria and Max Scores
Section 1: Practice Management – Operation (280 Points)
| Evaluation Criteria | Max Scores |
|---|---|
| 1.1 Practice Areas of the Firm | 12 |
| 1.2 Work Flow – Practice Manuals | 16 |
| 1.3 Quality Review Manuals or Audit Tool | 24 |
| 1.4 Service Delivery – Effort monitoring | 36 |
| 1.5 Quality Control for engagements | 80 |
| 1.6 Benchmarking of Service delivery | 16 |
| 1.7 Client Sensitisation | 16 |
| 1.8 Technology Adoption | 64 |
| 1.9 Revenue, Budgeting & Pricing | 16 |
| Total of Section 1 | 280 |
Section 2: Human Resource Management (240 Points)
| Evaluation Criteria | Max Scores |
|---|---|
| 2.1 Resource Planning & Monitoring as per the firm’s policy | 28 |
| 2.2 Employee Training & Development | 44 |
| 2.3 Resources Turnover & Compensation Management | 104 |
| 2.4 Qualification Skill Set of employees and use of experts | 32 |
| 2.5 Performance evaluation measures carried out by the firm (KPIs) | 32 |
| Total of Section 2 | 240 |
Section 3: Practice Management – Strategic / Functional (80 Points)
| Evaluation Criteria | Max Scores |
|---|---|
| 3.1 Practice Management | 20 |
| 3.2 Infrastructure – Physical & Others | 48 |
| 3.3 Practice Credentials | 12 |
| Total of Section 3 | 80 |
High scores are awarded for Quality control and Technology adoption in section 1, Resources turnover and compensation management in section 2, and Infrastructure (Physical & Others) in section 3. The Implementation Guide for the AQMM v1.0 shall follow soon and shall appropriately and effectively guide the users about the relevant tools and techniques to be utilized along with their respective significance, mechanism, and utility.
Key Implementation Dimensions
Availability and Use of Standard Formats of Documentation
The Yes/No criteria in many instances talk of ‘availability’ and ‘use’ of standard formats of checklists and engagement documentation. The firm should allocate 25% of the respective allocated score to the presence of the document format and 75% of the respective allocated score should be for actual implementation and use of the standard formats of documentation/policies.
Audit Tools
The recent advances in technology have significantly changed the way we audit these days. The Audit Documentation tool, Data Analytics tool, Digital Library and the Practice Management tool are the key essential audit tools needed by auditors today. These go-to-market tools provide a one-stop solution to all the audit documentation and monitoring requirements of the firm. The audit documentation tool should include audit and accounting standard checklists.
Technology Adoption
The one thing that all successful firms have in common is technology. Technology in today’s scenario has become the backbone of every industry, be it manufacturing or service industry. Not just for survival but an organization uses technology to have a competitive advantage over its peers. The AQMM v1.0 provides a list of to-dos that the organization must maintain as these practices at the office will lead to the smooth and enhanced functioning of the organization. Scoring is based on the presence of items mentioned in the checklist in a binary Yes/No pattern.
Technology adoption in service delivery like the use of audit tools, analytical tools and Digital Competency Maturity Model (DCMM) Version 2.0 attracts points. The DCMM Version 2.0 may be referred to arrive at the technical maturity of the firm.
Human Resources & Training Hours
This model recognizes the importance of human capital, the most crucial resource for the firms, and will help to strengthen its operations. Firms having a revolving door with high staff turnover will attract lower scores.
Prescribed Mandatory Training Hours under AQMM v1.0:
- Junior Level: 60 training hours
- Mid-Level: 30–60 training hours
- Partners: More than 30 training hours
- CPE Compliance: All partners need to comply with the CPE requirements of ICAI. If the firm does not have the qualified resources, the services of an expert should be taken.
Negative Scoring Framework
The AQMM v1.0 introduces stringent negative scoring mechanisms to discourage malpractice and promote compliance rigor:
- Disciplinary Misconduct & Advisories: The firm will attract negative scoring in case an advisory has been issued by a government/ICAI, debarment/blacklisting, or if there is a case of professional misconduct on the part of the member of the firm where he has been proven guilty. A firm will attract negative scoring only once for a particular incident.
- Reworked Statutory Audit Engagements: A firm attracts negative scoring when statutory audit engagements are reworked after the auditor’s report is signed. The same could result from filing errors, information insufficiency or wrong interpretation of provisions, etc. The audit team “moonwalking” at a client’s place may lead to a disciplinary case and hence the firm needs to monitor the percentage of assignments re-worked.
- Auditor-Client Disagreements & Disputes: The number of client disputes (other than fees disputes) and how they are addressed also attract negative scoring. Auditor-client disagreement is defined as disputes occurring between the client and audit firm involving accounting principles or practices, financial statement disclosure, or auditing scope or procedures.
There is a significant positive relation between auditor resignation and auditor client disagreement. The results often suggest that auditor resignations are more often accompanied by auditor-client disagreement disclosure. The disagreements (other than fees disputes) affect the client retention decisions and result in loss due to audit failure. Relative to non-disagreeing clients, disagreeing clients are more likely to have earning manipulations and a higher risk of material misstatement. Thus, successor auditors are more likely to charge disagreement firms with higher audit fees. So, it is highly recommended to avoid disagreements and express opinion on the audit conducted by the firm.
AQMM v1.0 Status Should Not be Publicised
Strict Ethical Restriction: The AQMM v1.0 status should however not be publicized or mentioned by sole proprietors and Audit firms on the public domain e.g. on professional documents, visiting cards, letterheads, or signboards, etc. as it may amount to solicitation in view of the provisions of Chartered Accountants Act, 1949. It should not be disclosed even on a website. It may, however, be made available to anyone on the specific pull basis i.e. where he wishes to see the said status, it may be provided to him.
Conclusion
The Audit Quality Indicators (AQIs) should raise more questions, bring about competition between audit firms and create market demand for audit quality. The AQMM not only helps firms arrive at their maturity level but also has a mechanism to help guide the members to specifically improve upon their audit quality.
The Audit Quality Maturity Model – Version 1.0 (AQMM v1.0) is a cross-functional evaluation model for practicing firms covering engagement teams, firm leadership, IT helpdesks, human resources team, administration department, legal matters, and the management information systems of the firm. It is a unifying force for having all hands on deck to help steer the firm from the brown waters of unplanned audits to the blue waters of being globally recognized for audit quality.