1. 30 APRIL 2013
I
n recent years we have seen a significant level of focus on the
quality of the financial reporting supply chain.
The current economic environment continues to highlight the
critical need for high-quality financial reporting.
In New Zealand, as in many overseas jurisdictions, we have
also seen a period of significant change in the regulatory oversight
of audit. These changes emphasise the integral role that audit plays in
enhancing the degree of confidence intended users have in the financial
statements produced by entities required to report in New Zealand.
It is understandable, therefore, that in the wake of the global financial
crisis the debate over users’ confidence in financial reporting has
broadened to include legitimate questions around the relevance and
future of audit.
The current debate represents a significant opportunity for key
stakeholders to consider the issue of audit quality, to assess whether
recent developments have enhanced, or will enhance, audit quality and
to identify what further actions or interventions may be required.
The recent release of the International Auditing and Assurance
Standards Board’s (IAASB) Audit Quality framework not only highlights
the international nature of the audit quality debate but reminds us of the
influence that developments overseas have on local perceptions of audit
quality, on the domestic regulatory environment and on the activities and
priorities of standard setting bodies such as the NZAuASB.
Although the IAASB’s role is that of the international standard setting
body, the leadership role they have taken in seeking to positively influence
and broaden the audit quality debate is commendable. Through the
development of the framework the IAASB has attempted to firstly define
“audit quality” and to then identify the essential elements that constitute
or contribute to audit quality, emphasising the important interface
between each of these elements. This approach enhances the robustness
and credibility of the resulting framework.
Importantly, the IAASB acknowledges that audit quality is best
achieved in an environment where there is support and cooperation from
all participants in the financial reporting supply chain.
The important role of standard setters
The purpose of an audit is to enhance the confidence that intended
users have in the financial statements of an entity. This is generally
achieved by auditors gathering sufficient appropriate audit evidence to
express an opinion on those financial statements.
The IAASB framework distinguishes the
elements essential for achieving audit quality.
The development and promulgation of high
quality auditing and assurance standards
(including professional and ethical standards)
by standard setting bodies are integral to
both the input and output elements of the
framework.
Auditing and assurance standards describe
the underlying objectives of the audit,
establish the minimum requirements for the
performance of the audit engagement and
assist understanding through the provision
of application and other explanatory
material. Similarly, these standards identify
the professional and ethical expectations or
requirements of assurance practitioners and of
engagement firms.
High-quality standards take account of
the complex environment that influences
auditor behaviour and actively promote the
importance of auditors continuing to exercise
sound professional judgement and scepticism
throughout the engagement.
They promote consistency between audit
engagements and positively influence the
behaviour of auditors.
Through the planning and performance
of assurance engagements, auditors are
expected to demonstrate an understanding
of, and compliance with, the principles and
requirements set out in the standards. At a firm
level, the principles and requirements set out
in the standards are generally integrated into
the firm’s audit methodology and approach,
and enable oversight and quality control at an
audit engagement level.
Similarly, the requirements set out in
the standards establish the benchmarks
against which oversight bodies responsible
for external audit inspections conduct their
investigations. They enable the inspection body
to assess whether the principles set out in the
standards are well understood and whether the
requirements have been consistently applied
both within audit firms and at an individual
audit engagement level.
Within the output element of the framework,
auditing and assurance standards have a
direct impact on the significant outputs of
the audit process – auditor reporting and
communication. The standards developed by
the NZAuASB directly influence the structure,
form and content of the auditor’s report.
Audit quality – a
standard setter’s
perspective
Enhancing audit quality through high-
quality auditing and assurance standards.
Neil Cherry FCA
FEATURE: Audit

2. 31APRIL 2013
Other standards positively influence the
nature and extent of communication between
the auditor, the entity, its governing body and
other key stakeholders.
standard setting structure
While identifying the direct relationship
between auditing and assurance standards
and the outcome of enhanced audit quality,
it is equally important to appreciate that the
environment, and institutional structure, in
which those standards are developed also has
a significant impact on the recognition of, and
confidence in, the standard setting processes
and the development of high-quality standards
within a jurisdiction.
There are a number of important features
of recent changes to New Zealand’s standard
setting environment and structure that are
likely to positively influence perceptions of
audit quality. These include:
Independence of the standard setting
structure – Since 1 July 2011 responsibility
for the development of auditing and assurance
standards (in those circumstances where
there is a statutory requirement for assurance
practitioners to follow these standards) has
rested with an independent Crown Entity, the
External Reporting Board (XRB). The XRB
has, in turn, delegated this responsibility to
the NZAuASB. The current structure operates
independently of those undertaking assurance
engagements and the professional accounting
bodies that generally represent the interests
of assurance practitioners and their firms.
It is worth noting that NZICA now requires
its members undertaking any assurance
engagements to follow the standards issued by
the NZAuASB.
International recognition – From a
regulatory perspective, recognition of, and
confidence in, the standards developed by
the NZAuASB is enhanced by the fact that
New Zealand’s standard setting structure is
functionally equivalent to those in many other
overseas jurisdictions.
Linkages across the financial reporting
supply chain – In addition to its responsibility
for the development of auditing and assurance
standards, the XRB also has responsibility
for the development of financial reporting
standards meaning that it is uniquely placed
to not only consider ongoing developments in
financial reporting but also to understand the
implication these developments may have on
the performance of assurance engagements.
Input from a user perspective important –
Throughout all aspects of the standard setting
process and structures the XRB and NZAuASB
maintain a strong user perspective focus.
The XRB’s decision to establish an external
reporting advisory panel (XRAP) enables it to
bring a broad user perspective into the strategic
and operational aspects of the standard setting
process as appropriate.
International convergence and
harmonisation of New Zealand’s standards
– The NZAuASB has adopted a policy of
achieving convergence of New Zealand’s
auditing and assurance standards with those
developed by the IAASB, unless there is a
compelling reason not to do so. The NZAuASB
also maintains a policy of achieving greater
trans-Tasman harmonisation of its standards.
While providing for accommodation of
local needs, the policy of the NZAuASB
acknowledges the importance that a common,
internationally recognised, body of standards
has for enhancing audit quality.
Due process in the development of auditing
and assurance standards – The NZAuASB
is committed to following due process in
the development of auditing and assurance
standards including: releasing exposure
drafts for comment; involving stakeholders
throughout the standard setting process; and
ensuring appropriate consideration is given
to the benefits and impacts of the proposals
on audit quality, assurance practitioners, user
needs and the audit market before a standard
is finalised.
The IAASB’s audit quality framework is a
reminder of the challenges that continue to
face the audit market.
It is clear from the standard setting agenda
that there is more work still to be done – a
significant priority being the consideration of
future developments in auditor reporting.
Importantly, how effective these
developments are, or have been, and whether
they capture all of the conditions necessary for
ensuring audit quality can only be measured
in terms of whether they secure long-term
confidence in audit as an integral component
of the financial reporting supply chain.
Neil Cherry FCA is Chair of the New Zealand
Auditing and Assurance Standards Board.
High-quality
standards
take account
of the
complex
environment
that
influences
auditor
behaviour

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