While the responsibility for performing quality audits of financial statements rests with the auditors, audit quality is best achieved in an environment where there is support from, and appropriate interactions among, the participants in the financial reporting supply chain. To create an environment which maximizes the likelihood that quality audits are performed on a consistent basis, the Standard on Quality Control (SQC 1) have been put in place for the firms and Quality Control for an Audit of Financial Statements (SA 220) for the quality engagements. The Audit Quality Maturity Model (AQMM) is an amalgamation of well-researched Audit Quality Indicators (AQIs), which put together helps to build up an environment supporting quality reporting.

Decoding AQMM

• The model comprises of a set of Audit Quality Indicators (AQIs) put together for evaluation of the level of audit quality by the firm.
• The model has been broadly categorized into three sections: (1) Practice Management - Operation, (2) Human Resource Management and (3) Practice Management – Strategic/Functional.
• Each section is divided into multiple sub-sections and further into different clauses (AQIs) against which the firm needs to evaluate itself.
• While scoring in most of the AQIs is for existence & full implementation of the policy/procedure, a few have proportionate scores as well.
• A few of the AQIs have negative marking also, thereby reducing the scores under the sub-section.
• Based on the scoring under each of the three sections, the level of the firm in terms of audit quality maturity is arrived.

Section Wise Categorization (Table 1)

Sub-Categorization of 76 AQIs (Table 2)

Section-Wise Score Breakup (Table 3)

Of the 76 AQIs, the firm scores either “0” or the highest allocated score under 58 AQIs having 73% of the total weightage (436/600) while 27% (164/600) of the scores has proportionate markings.

Levels of the Firms under AQMM

The AQMM lays down four (4) levels for the firms, with Level 4 being the topmost in the ladder and Level 1 being the lowest:

• Every firm should try to get to the highest step of ladder to reach the highest level of competency.
• The firm must consistently thrive to reach the next level in the ladder of Audit Quality Maturity Model.

Scoring Uniformity Rule Across Sections (Table 4)

It is important for the firms to keep in mind that the scores across the sections must be uniform / within the range to be able to attain higher level of firm as poor scoring in any of the sections would pull the level of the firm down. This can be explained from the table below:

In the instances above, in spite of scoring well in Individual sections, the firm remains at lower level, except for the last firm, which attains Level 3 by scoring consistent in all the three sections.

Who Must Take Up AQMM Evaluation?

The mandate for AQMM w.e.f. 1st April, 2023, is limited to the firms auditing:

1. A listed entity;
2. Banks other than cooperative banks* (*except multi-state co-operative banks; firms doing only branch audits are not covered);
3. Insurance Companies.

Ideally all firms providing assurance services should take up AQMM evaluation. It would help them to assess their current level of audit quality maturity and pave out a roadmap so that they can become future ready.

“Quality is never an accident. It is always the result of intelligent effort.” – John Ruskin

Scoring under AQMM

The firms which intend to climb up the ladder of the AQMM to improve the ratings, may consider focusing on the following AQIs, amongst others:

1. Quality Control for Engagements: Requires the Engagement Quality Review of engagements as per para 60 of SQC 1, Documentation in respect of SQC 1, availability of Technical Helpdesk / Technical resources in place, Mitigation of risks through procedures etc. carries a weightage of (28.5%) 80 points of 280 in Section 1.
2. Technology Adoption: It is important for the firms to focus on technology adoption as it is an important component of audit in these times. It would enable the firms to analyze the data faster and better. The AQI carries a score of 64 of 280 points in Section 1. Those firms which have not yet adopted technology may consider laying down the timeline for adopting the same.
3. Human Resource Management: Human Resource is an important parameter for assessing audit quality. Section 2.3 carries a weightage of 43.3% (104/240) in Section 2 and covers the various aspects relating to Resources Turnover & Compensation Management. Further, in this section 18.33% (44/240) weightage can be availed by firms having policies pertaining to training and developing human resources.
4. Availability of Infrastructure: Availability of Infrastructure also plays an important role. The availability of Data Analytical Tools, the physical & logical Security of information, adequate internet / intranet etc. are all critical requirements. A weightage of 60% has been given under Section 3.3 (48/80) for such infrastructure.

How Does AQMM Benefit Firms?

When the firm undertakes self-evaluation of its firm audit quality maturity, it scores against the given parameter. The parameters against which the firm does not score or scores proportionately less, are the areas where the firms need to improvise upon. These are the areas to focus, which when worked upon, the firm can attain a higher level of maturity in terms of audit quality.

For instance, a firm does not carry out capacity planning for its assurance engagements and hence does not score under Section 1.4(i) of AQMM which requires the firm to carry out capacity planning for each engagement. The firm can therefore plan to undertake capacity planning for its engagements in the future. Capacity planning includes budgeting for time, cost, and resources for conducting audits. The firm can also lay down the date of undertaking capacity planning, say from December 2023, which would help it to chalk out a roadmap to reaching a higher level of audit quality maturity.

While the AQMM gives an opportunity for the firms to improve their levels, it also gives leverage to the firms who meet the AQI parameters to attain higher level for the firm. Since the level of the firm assessed by the Peer Reviewer is made available in the public domain, it casts responsibility on the Peer Reviewer for discharging his role efficiently.

What’s New with AQMM Evaluation?

The firms which have undergone peer review will have most of the policies and procedures in place, but not been measured. These firms need to understand the requirement under each of the AQI as per the Implementation Guide on AQMM and accordingly score itself. The firm must maintain documentation supporting the scores allocated so that the same can be made available to the Peer Reviewer during the review. However, the firm will have to additionally pull out the information in respect of the certain clauses from their database / demonstrate the implementation of the policy for score appropriately under the AQMM.

Conclusion

By attaining the highest level under AQMM a firm can set the best practices and procedures with adequate monitoring mechanism resulting in highest standards of audit quality. Stakeholders would be looking for firms who are able to demonstrate and measure their quality using AQMM. Though AQMM has been mandated recently, it would be very helpful for firms who are able to early adopt this measuring model and obtain the highest level for their firms. As has been said by Aristotle – “Quality is not an act, it is a habit.”

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Authors may be reached at: caq@icai.in and eboard@icai.in