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Audit quality reviews

The Global Audit Quality Review (AQR) program is the cornerstone of our process to monitor audit quality. Ernst & Young Accountants LLP executes the Global AQR program, reports results and develops responsive actions plans. The primary goal of the program is to determine whether systems of quality controls, including those of Ernst & Young Accountants LLP, are appropriately designed and followed in the execution of audit engagements to provide reasonable assurance of compliance with policies and procedures, professional standards, and regulatory requirements. The Global AQR program complies with guidelines in the International Standard on Quality Control No. 1, as amended (ISQC No. 1), and is supplemented where necessary to comply with Dutch professional standards and regulatory requirements. It also aids Ernst & Young Accountants LLP’s continual efforts to identify areas where we can improve our performance or enhance our policies and procedures.

Implemented annually, the program is coordinated and monitored by representatives of the PPD network, with oversight by the Assurance leadership.

The engagements reviewed each year are selected on a risk-based approach emphasizing audit engagements that are large, complex or of significant public interest. The Global AQR program includes detailed, risk-focused file reviews covering a large sample of listed and non-listed audit engagements to measure compliance with internal policies and procedures, EY GAM requirements, and relevant local professional standards and regulatory requirements. It also includes reviews of a sample of non-audit engagements. These measure compliance with the relevant professional standards and internal policies and procedures that should be applied in executing non-audit services. In addition, practice-level reviews are performed to assess compliance with quality control policies and procedures in the functional areas set out in ISQC No. 1. The Global AQR program complements external practice monitoring and inspection activities, such as regulatory inspection programs and external peer reviews.

The review team in the Netherlands is headed by international team leaders; the teams executing the AQRs also normally include a considerable number of international reviewers, ensuring that the AQR performed is in accordance with our international quality standards and allows for a comparison of results over time and between countries.

AQR reviewers and team leaders are selected for their skills and professional competence in accounting and auditing, as well as their industry specialization; they often work in the Global AQR program for a number of years and are highly skilled in the execution of the program. Team leaders and reviewers are assigned to inspections outside of their home location and are independent of the audit teams reviewed.

The results of the Global AQR program and external practice-monitoring and inspection activities are evaluated and communicated to improve quality. Any quality improvement plans describe the follow-up actions to be taken, the people responsible, the timetable and deadlines, and sign-off on completed actions. Measures to resolve audit quality matters noted from the Global AQR program, regulatory inspections and peer reviews are addressed by our Assurance leadership and our PPD with input from Risk Management groups. The actions are monitored by our PPD and Assurance leadership. These programs provide important practice monitoring feedback for our continuing quality improvement efforts.

2015/2016 AQR results
The 2015/2016 results are as follows in summary:
  2015/2016 2014/2015 2013/2014
Rating 1 34 89% 38 91% 58 83%
Rating 2 4 11% 3 7% 11 11%
Rating 3 0 0% 1 2% 1 1%
Totals 38 100% 42 100% 70 100%
  • Rating 1 – There were no or minor findings
  • Rating 2 – The findings were more than minor but less than material
  • Rating 3 – There were material findings
In fiscal year 2015/2016, our Rating 1 score slightly decreased to 89%. However, within this category (“no or only minor findings”), the 2015/2016 AQR also saw a relative decrease of the number of minor findings in the engagements reviewed. Although the number of files rated “2” or “3” is stable, there is room – and a need - for further improvement, especially in the areas of scoping of group audits, execution of control testing and supervision and review. We will continue our efforts to ensure compliance with statutory rules and with our high quality standards in all aspects of the audit. The message our leadership is continually sending to our partners and staff regarding the importance of quality in everything we do is part of this effort.

The global AQR checklist highlights various subjects including fraud risks. In the 2016 AQR process we have expanded this question for the Dutch practice and included the identification and follow-up on potential corruption risks (next to fraud risks). The purpose of this question was to give an impression if and how corruption risks at our clients are identified by engagement teams in our Assurance practice.

Compared to the previous fiscal year, during the 2015/2016 AQR the number of reviews slightly decreased from 42 to 38 engagements. However, the coverage of audit hours subject to AQR review was similar to last year. This is due to the fact that the selected engagements were larger.

It is encouraging to see that our quality improvements measures are resulting in a positive trend in AQR ratings. We stay focused, though, on what we still can and should do better.

Compared to fiscal year 2014/2015, we further improved IT-related audit work, audit conclusions and supervision and review, as well as the quality of documentation in our audit.

When partners are given a “3” rating on a file, it will negatively impact their quality rating with a downward impact on their overall performance rating. A “2” rating may also have such an impact, since the goal and expectation for any engagement reviewed is a “1” rating.

Twenty-one engagements selected for AQR had also been subject to an EQR. Out of these reviews, 18 (86%) were rated “1” in their AQR; three were rated “2” (14%). In fiscal year 2014/2015, this percentage was 6%.

QARA analyzes which remedial action is needed for engagements rated “2” and “3”. Furthermore, the audit partners involved are required to prepare a Remedial Action Plan (RAP) in which relevant actions aimed at improving their performance are to be included. A RAP is required for all “2” and “3” ratings and submitted to our firm’s Professional Practice Director for approval. The 2015/2016 AQR resulted in four RAPs (the same number as in fiscal year 2014/2015).

Each partner is subject to a regular AQR at least once every three years. In addition to the audits inspected in the regular AQR, partners are also selected for an AQR inspection based on a risk analysis. This risk analysis takes into account any signals that might indicate potential quality issues.

As in previous years, the analysis of the overall outcome of the 2015/2016 AQRs will result in a Quality Improvement Plan (QUIP). A QUIP-based checklist provides all audit teams with reminders of focus areas, as well as best audit practices. The items of the checklist must be implemented in all engagements and their implementation must be documented.

The root cause analysis of the overall outcome of the AQRs from 2015/2016 will be finalized in due course and will be included in the QUIP mentioned above. Common improvement areas will be discussed in internal technical update meetings and will be included as areas of attention during interim reviews at office level. In addition, where appropriate, the PPG or our industry groups will develop specific guidance and templates for improvement.