Raising the bar to Audit Quality within SMPs

This autumn issue of The Accountant, is dedicated to small and medium sized practitioners, a sector of the audit practice, I particularly relate to. This article seeks to address the difficulties being encountered by small audit practitioners in raising the audit quality standards & suggests ways as to how these set-backs can be overcome. My findings emanate from reports generated by public oversight bodies and from my own experiences in the professional and regulatory fields.

What is audit quality?

Audit Quality (AQ) is a complex and multifaceted conceptual framework. It goes far beyond mere compliance with ISAs and dwells on adherence to professional ethics, good practice governance, risk management, and succession planning. All these are key to ensuring that audit quality is maintained in the longer term. Apart from being a conceptual framework, AQ is a mind-set, which all audit practices small or large, need to instil amongst their personnel, along with a number of other qualities and skills normally required of their audit teams.

Quality Assurance (QA) is the independent process by which audit quality procedures within audit practices and their audit engagement files can be monitored and assessed as to whether these meet international standards set by IFAC. This independent regulatory process was instigated by the EU to protect the Public Interest and to stimulate confidence in corporate financial reporting, particularly audited financial statements. This QA process in Malta has been around for over 10 years and has sought to ensure that standards in statutory audits (including those carried out by SMPs) are raised and maintained.

Quality Assurance and SMPs in Malta – 10 years on

It is encouraging to note that the number of audit firms with more than 1 partner and with full time employees have increased. It is equally encouraging to note that mergers between medium sized audit and accountancy firms have also gained popularity over the last decade. Nevertheless, a large proportion of the audit practices in Malta (like in many other EU jurisdictions) are still made up of sole practitioners, many of which with few or no employees at all. Good number of these small practices still choose to carry out both assurance and other business advisory services. The client portfolio of SMPs in Malta is generally a mix of ultra-micro, micro or small businesses and medium sized entities. This begs the question as to why ultra-micro entities which are generally owner-run businesses with no systems of internal control and which, and often proving to be difficult, if not impossible to audit, are still required to be audited. In many other EU jurisdictions, these type of entities are audit exempt, and hence fall outside the scope of their national QA process. I am in no way suggesting that these type of entities are not to be subjected to external independent scrutiny, but that this should take the form of a “review engagement” which seeks to give assurance that the financial statements being presented do not require material modifications to come into line with the relevant financial reporting framework.

The audit profession in Malta has always strived for good quality audits. Nevertheless, there are still practices which, in spite of all their efforts to come in line with AQ, are still struggling with auditing standards, ethics, as well as the legal and the financial reporting and ethical frameworks of accounting. There are, of course, also those practices (albeit a small minority) which fall substantially short of the standards required, and which, unfortunately, have neither the resources nor the expertise, to raise their standards.

While it would be fair to say that the quality of audit work and compliance with international standards on auditing and professional ethics is generally poorer outside the larger international network firms, I have come across a considerable number of other small audit practices which have been investing in audit quality and have set themselves a mind-set to promulgate quality across all their business lines. These efforts have translated into a higher quality service which is a more effective and efficient and yielding better returns.

Unlike other professions, the audit profession in Malta is the one profession where quality standards of its warrant holders are externally and independently monitored. Ten years down the line, I believe, that there is still need for improvement in several areas of the QA process. This is particularly true in regard to the need of redefining the scope of QA and invigorating the enforcement mechanism of the QA process. The infrastructure currently available to the competent authority to enforce its sanctioning powers against those defaulting warrant holders, has often been described as “toothless” and ineffective in protecting the reputation of the audit profession generally. I find this to be grossly unfair, particularly for those audit practices which strive hard (very often at a significant cost) to get their house in order after a QAU inspection, whilst others, do not make an effort to effectively address quality assurance issues noted during their QAU visit. Irrespective of whether the problem is one of human resources, or one of giving the QAU wider powers and autonomy, to execute its function more effectively, it is a problem which needs to resolved sooner rather than later.

The more common pitfalls in the audits carried out by SMPs

The more common pitfalls noted from SMPs’ audit file reviews, are illustrated in figure 1.

Areas requiring improvement or significant improvement Planning Fieldwork Completion ISQC1
Inventory X X
Completeness of income/revenue recognition X X X
Going concern X X
Related party balances X X
Audit report modification wording X
Communicating with TCWG X
Identifying, assessing and reacting to risk of material misstatement X X X
Data Analytics X X
Internal controls & Fraud X X
Audit evidence and documentation X X
Independence Issues X X
Regulatory compliance X X X
Professional Scepticism X X
Laws & Regulations X X
Quality Control Procedures Manual X

Figure 1

On a closer evaluation, one finds that it is particularly challenging for smaller practices to adopt an independent and a professionally sceptical mind on their audit engagements, in view of the sheer size of their audit clients and the close rapport they have with them.

Unlike larger international network firms, SMPs lack the technical and other support services enjoyed by firms with international networks. Moreover, a number of other challenges being faced by SMPs are making it that more difficult to apply a proactive quality management attitude. Human resources, fee pressures and keeping up with regulation, are only three of a number of other obstacles being faced by SMPs today.

Other root causes of poor audit quality amongst SMPs stem from the following:-

  1. Balancing the cost of increased regulation and the low audit fees being charged by poor quality audits;
  2. Constant deadlines often trigger off an unsustainable work life balance in smaller practices, which often alienate the thinking process that is ever so critical in the execution of an effective audit;


There is still a lot of room for improvement in so far as AQ is concerned. Nevertheless, I believe the QA process did contribute towards better quality audits. However, in order to sustain the Audit Quality framework which exists today, it is of critical importance for one to continue to:-

  1. Raise awareness of the key elements to AQ;
  2. Encourage key stakeholders (including the business community, regulators, investor groups, standard setters etc.) to explore together other ways to improve audit quality; and
  3. Facilitating greater dialogue between key stakeholders on QA in order to understand better how the vast regulatory changes within the profession impact different stakeholders in different ways.

It is only with this Audit Quality framework in mind that one can aspire to maintain and improve on the integrity, objectivity, professional competence and due care ever so critical in the execution of statutory audits

This article, I augur, will be the basis of further discussions by all stakeholders concerned, and with a view to ensure that audit quality in Malta continues to be improved. High quality audits underpin public trust and confidence in business and the economy generally. Audit quality is a key driver of good audits and is vital to promoting a culture of continuous improvement in auditing.

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