Appendix 7: PSAA audit quality monitoring arrangements
PSAA is committed to working with all parties to achieve the aim that the audits that we commission meet the standard required by the local audit system, whilst recognising that PSAA’s role is limited to being the specified appointing person for relevant local government authorities under the Local Audit (Appointed Person) Regulations 2015. We will work within the new local audit arrangements planned from 2023, and on audit quality we will liaise closely with FRC, the body that oversees the quality of auditors’ work to deliver Code of Audit Practice compliant audits. Quality audits involve auditors being sufficiently knowledgeable, skilled and experienced.
Our approach to the wider concept of the quality of audit services is grounded in the International Auditing and Assurance Standards Board’s Framework for Audit Quality. We have taken the attributes the IAASB framework expects to be present in a quality audit and distilled them into three areas, which we assess to consider the quality of audit services under our contracts:
- adherence to professional standards and guidance (where we will draw on the assessments carried out by FRC’s AQR and the ICAEW’s QAD);
- compliance with contractual requirements; and
- relationship management.
The diagram at Annex A provides an overview of our approach.
Adherence to professional standards and guidance
Information on the firms’ adherence to professional standards and guidance will come from the results of professional regulatory reviews completed by the Audit Quality Review Team (AQRT) for the Financial Reporting Council and the Quality Assurance Department (QAD) for the Institute of Chartered Accountants in England and Wales, the principal RSB for local audits in England. The regulators will be reviewing a sample of local audits. PSAA will be informed by but will not be duplicating the work of the regulators.
We will triangulate these results with information on audit quality provided by firms in their transparency reports and from their own internal quality monitoring reviews (iQMRs).
Compliance with contractual requirements
Information on a firm’s compliance with contractual requirements will come from:
- An assessment against a suite of performance indicators. We will report publicly on firms’ performance against targets of particular interest to opted-in bodies. This will include information on delivery of audit opinions and other outputs in a timely manner, to facilitate publication of annual accounts. We will distinguish between those items which are indicative of audit quality and the work of the firm (for example non-compliance with PSAA Terms of Appointment) and those which relate to the local authority financial reporting supply chain as a whole (for example issue of opinion on financial statements by statutory publishing date).
- An assessment of a firm’s compliance with its agreed method statement. The method statement is taken from the firm’s ITT response and incorporated in the contract, and includes inter alia resourcing, continuing professional development of staff, quality assurance arrangements, and achievement of social value commitments. Firms will self-certify their compliance but PSAA also have contractual rights to ensure compliance and adherence to the method statement. We intend to rely on a firm’s internal control procedures for providing this information together with PSAA’s contractual rights. This will be subject to PSAA verification testing and triangulated with audit quality information from other sources e.g. surveys of audited bodies and rights afforded to PSAA under the Firm’s contract with PSAA.
Relationship Management
Information on a firm’s relationship management will come from satisfaction surveys. Surveys will be sent at appropriate times to representatives of both management (for example the Director of Finance) and those charged with governance (for example the Audit Committee Chair) for each opted-in body. Any complaints made will also be assessed in considering overall relationship management.
Reporting on audit quality
Based on these monitoring arrangements, PSAA will report on the three tests (professional standards, contractual requirements and relationship management) and on overall audit quality to stakeholders.
PSSA will meet with firms’ contact partners to discuss audit quality. We will produce quarterly monitoring reports for discussion with each firm, together with an annual report. A summary report on the regime as a whole will also be prepared.
We publish information on the quality of audit services under our audit contracts in order to promote transparency and encourage good practices. All reports will all be published on our website. Our annual reports are provided to audit firms’ quality and assurance partners.
Taking action on audit quality concerns
PSAA has contracted with firms on the basis that appropriate quality audit services will be provided to opted-in bodies in accordance with PSAA’s requirements as set out in the Contract including these Terms of Appointment.
Where PSAA’s audit quality monitoring arrangements identify that an audit may not have reached the required standards (for example failure to meet contractual requirements, or poor feedback from audited bodies) firms will have the opportunity to rectify the situation. In the first instance, PSAA will meet with the contact partner for the relevant firm to discuss:
- the reason for any quality concerns;
- the action being taken by the firm to address the matter; and
- the expected timetable for improvement.
We would expect that, recognising their professional registration requirements, firms will take action to address problems as they are identified. Failure to do so could lead to loss of accreditation from the regulatory bodies. Concerns identified by professional regulators will be managed within that framework.
Where a firm fails to take action, or that action is inconsequential, we would raise the matter with the firm’s audit quality partner or equivalent for the firm as a whole. Ultimately, PSAA’s appointing person contracts provide that firms must comply with our monitoring arrangements.
The contract sets out the processes that may occur in the event that a firm is either in Default of its obligations under the contract, or the Rectification Plan process (as defined in the Contract) applies, or it becomes apparent that any Method Statement does not satisfy the obligations under the Contract and in particular the delivery of the Services. Further the contract provides for termination where there is a material breach or persistent failure. Consistently providing poor quality audits would be viewed as persistent failure.
Appendix 7, Annex A: Audit quality approach diagram
