The Institute’s new publication, Preserving capital market confidence through audit quality, is based on research into the audit practices of major accounting firms in Australia. It assesses the perceptions of the main drivers of audit quality in the firms, including professional scepticism, the sustainability of the profession, effectiveness of communication, and audit committees. A variety of respondent groups were involved, including partners, managers, newly qualified accountants and graduates.

1. Preserving capital market
confidence through audit quality

2. Disclaimer
The research referred to in this document is not an
Institute of Chartered Accountants Australia audit of the practices or files of any members of
the Institute of Chartered Accountants Australia.
The information in this document is provided for
The Institute is the professional body for Chartered Accountants in general guidance only and on the understanding
Australia and members operating throughout the world. that it does not represent, and is not intended to
be, advice. No warranty is given to the correctness
of the information contained in this document or
Representing more than 70,000 current and future professionals its suitability for use by you. To the fullest extent
and business leaders, the Institute has a pivotal role in upholding permitted by law, no liability is accepted by the
Institute of Chartered Accountants in Australia for
financial integrity in society. Members strive to uphold the profession’s
any statement or opinion or for an error or omission
commitment to ethics and quality in everything they do, alongside an or for any loss or damage suffered as a result of
unwavering dedication to act in the public interest. reliance on or use by any person of any material in
this document.
Chartered Accountants hold diverse positions across the business Copyright © The Institute of Chartered Accountants
in Australia 2012. All rights reserved.
community, as well as in professional services, government, not-for-
profit, education and academia. The leadership and business acumen of This report, and all matter or information
members underpin the Institute’s deep knowledge base in a broad range contained in it, must not be communicated
to any person, unless compelled by law. This
of policy areas impacting the Australian economy and domestic and
does not preclude a participating firm from using,
international capital markets. reproducing or communicating this report within
that firm, to regulators or other professional
accounting bodies, or discussing experiences
The Institute of Chartered Accountants Australia was established by
gained during the review with any external advisers
Royal Charter in 1928 and today has around 60,000 members and more or with fellow practitioners.
than 12,000 talented graduates working and undertaking the Chartered
This report and its contents may not be used for
Accountants Program. publicity or promotional purposes, without the
prior written consent of the Institute of Chartered
The Institute is a founding member of the Global Accounting Alliance Accountants in Australia and Beaton Research &
Consulting (which may be given or withheld in their
(GAA), which is an international coalition of accounting bodies and an sole discretion).
800,000-strong network of professionals and leaders worldwide.
Participating firms are reminded of their obligations
under the confidentiality agreements entered into
charteredaccountants.com.au with The Institute of Chartered Accountants and
Beaton Research & Consulting with respect to this
report and the research on which it is based.
The Institute has also agreed not to communicate
information in relation to individual firms arising out
of or obtained during the course of the research
which resulted in this report, to any other party,
unless compelled to by law. The Institute may
publish and discuss the review approach and the
results arising from the research, in relation to
all the firms as a group, without identifying any
individual firms. Prior to publishing the results
arising from the research, the Institute will provide
a draft to the firms to review for accuracy and
prejudicial information. Information obtained during
the course of the research, which does not relate
to audit quality, such as university/Chartered
Accountants Program details, may also be used by
the Institute for other purposes, unless restricted
by law.
First published October 2012
ISBN 978-1-921245-98-5
Published by:
The Institute of Chartered Accountants in Australia
33 Erskine Street, Sydney, NSW, 2000
ABN 50 084 642 571 The Institute of Chartered
Accountants in Australia. Incorporated in Australia.
Members’ liability limited.
2 Preserving capital market confidence through audit quality

3. Foreword
The complexity and dynamic nature of business today presents constant
challenges. Auditors are operating in an environment where economic conditions
are uncertain and users of financial reports are increasingly demanding of more
relevant and useful information. Now more than ever, the independent audit is
critical to investor confidence in capital markets.
Preserving capital market confidence through audit quality presents a summary
of benchmark data from the Institute’s Audit Quality Research 2012 into the audit
practices of five major accounting firms.
Using online quantitative research, we assessed the perceptions of various
respondent groups (partners, managers, qualified Chartered Accountants and
graduates) on the firms’ commitment to the drivers of audit quality. By sharing
with the firms this benchmarked data we’ve provided them with valuable insights
into the effectiveness of their quality systems, assisting them to promote internal
attitudes towards audit quality.
In this paper, we are pleased to present key messages resulting from this
innovative approach. Our objective is to work with the audit profession to promote
improvements in audit quality and help reinforce the value of the audit function.
My sincere thanks to the firms who took part in this research – Deloitte, Ernst
& Young, Grant Thornton, KPMG and PwC – for working with the Institute to
demonstrate leadership in audit quality.
Craig Farrow FCA
President
Institute of Chartered Accountants Australia
Preserving capital market confidence through audit quality 3

4. Contents
Executive summary 5
Audit quality – a new approach 6
Sustainability of the profession 7
Professional scepticism: Art, science or both? 8
Communication: Latin “communis”, meaning to share 10
A pillar of corporate governance: the audit committee 12
Influencing the profession 13
Resources 15
4 Preserving capital market confidence through audit quality

5. Executive summary
“Be a yardstick of quality. Some people aren’t used to an sustained viability of the audit profession is critical and in
environment where excellence is expected.“ particular attracting, retaining and developing the right people
for the profession
Steve Jobs
• Professional scepticism is a state of mind. Today public
The global financial crisis coupled with recent corporate expectation is arguably at its strongest levels that all business
collapses has prompted a string of inquiries into the role of professionals, directors, advisors, accountants and auditors
the different operators of the capital markets. Regulators, have that state of mind and are able to demonstrate it. But
governments, academics and the audit profession itself are this is not simple or straight forward. Our analysis of the
all asking challenging questions about the integrity of financial research data shows clearly that auditors at all levels within
information. The purpose of the high quality external audit is a firm are fully aware of the importance and implications of
to provide assurance to investors, in particular, so that they professional scepticism to the quality of their work. It is front
feel confident in the stewardship of management and can and foremost on their mind. Still more can be done by the
trust in the financial information on which they base decisions profession and the firms to nurture and engender professional
to invest. judgement and scepticism to sustain the delivery of quality
auditing
As part of our co-regulatory function in overseeing and
maintaining quality within the audit profession, we (in 2010) • An evolution continues around the audit profession and the
conducted an analysis of quality review as a concept, both skills set required by auditors. These changes are linked to a
in Australia and internationally and thoroughly explored complexity and dynamic nature of business today, the way
the future direction of quality review1. Four evolutionary capital markets operate in a globalised market place and the
processes [education, compliance, mutual recognition, and general economic environment. Effective communication
transparency] were identified as the core elements of the is fundamental to the audit process and a quality audit. The
Institute’s Quality Review Program. Each of these elements research data indicate skills and competencies traditionally
signified crucial milestones in the Program’s history and also regarded as ‘soft’, such as communication, are really the true
intrinsically aligned to our commitment to best practice and drivers of audit quality
continued evolution.
• Quality external auditing is integral to capital market
But for major firms, in particular, we needed to fundamentally confidence. Engagement partners supervise audits that
redesign the review approach. The decision was then taken span continents and oceans. Effective audit is enhanced
that to remain relevant and avoid duplication, an innovative by the mutual respect between auditor and auditee. The
approach was needed to augment the work conducted by auditor’s communication with the audit committee is moving
regulators and the firms themselves. Importantly, we wanted decisively from a compliance-based dialogue to the direction
to add immediate value to the firm being reviewed. of meaningful, effective interchange
Our view was that while detailed inspections of work were • The financial audit is the linchpin for upholding confidence
important, a deeper understanding of the auditors’ mindsets in the capital markets. Our research marks the first major
to the key drivers of audit quality was missing. Understanding research of auditors within major firms and augments the
these mindsets was key to the continuing development of rigour of inspections conducted by regulators and the firms’
audit quality. internal review processes.
From this premise, we took the initiative to develop Audit The audit profession is in a prime position to drive financial
Quality Research 2012, quantitative research of auditors of integrity in the interest of society. The Institute, in turn, has
the major firms aimed at assessing the importance of the a responsibility to continually challenge the different cultures
key drivers of audit quality in those firms. This paper provides within the profession. Our intention is to extend this research
key research findings and analysis of the responses received methodology to other firms within Australia and potentially
across the participating firms and also sheds light on our in other jurisdictions. The message is clear: we will innovate
work to reinforce public confidence in the quality of external and continue to invest time and effort in preserving capital
auditing in Australia. The key research findings include: market confidence through continually improving the quality
of external auditing.
• Quality external auditing is integral to the effective
functioning of our capital markets. It is an essential service
requiring specialist skills and knowledge. Therefore, the
1. Quality Review: past, present and future, Getting the balance right, 2010, Institute of Chartered Accountants Australia
Preserving capital market confidence through audit quality 5

6. Audit quality – a new approach
“Change will not come if we wait for some other person or to reinforce public confidence in the quality of auditing in
some other time. We are the ones we’ve been waiting for. Australia.
We are the change that we seek.”
The research has been designed to seek the views of
Barack Obama partners, managers and qualified Chartered Accountants on
the drivers of audit quality3, with graduates responding to
Regulation of the audit profession has moved a long way questions on skills and competencies. In total, 1,702 partners
in a small number of years. Traditionally, only professional and staff at the participating firms were involved in the
accounting bodies conducted reviews of auditors’ work research from a total of 5,050 invitations. The research was
as a requirement of membership. The United States’ conducted on an anonymous basis with participants offering
Sarbanes-Oxley Act of 2002 established the Public Company an unbiased view without any incentive or disincentive. From
Accounting Oversight Board to oversee auditors of public the responses, a benchmark report details the data by firm.
companies following the Enron collapse and other corporate
failures. This was a watershed moment for the profession: By sharing with the firms benchmark data about their
Here was a government body that not only produced responsiveness to the drivers of audit quality, the research
standards but had a primary responsibility to inspect the provides firms with insights into the effectiveness of their
auditors of public companies in order to protect investors and quality systems, and helps promote internal attitudes towards
the public interest2. audit quality. Conducting and examining the research in a
much shorter timeframe than traditional methods of audit
Most major financial markets have since created and inspections allows the participating firms to respond and
appointed regulatory bodies with powers to inspect auditors. employ any level of remediation in a timely manner that will
In Australia, audit regulation activities have developed only add to audit quality.
significantly since the introduction of enhanced regulatory
requirements for auditors in July 2004, the issuing of legally Our review approach placed reliance on ASIC’s Audit
enforceable auditing standards in July 2006 and amendments Inspection Program and the firms’ national and international
enabling greater co-operation with international audit reviews, together with examining any remedial action taken
regulators in July 2007. by the firms. We will work with the firms to correlate findings
from the research with issues arising from their internal
With the commencement of the Australian Securities review program and the ASIC inspection. Supplementary to
and Investments Commission’s inspections in 2005 and this, we will assess whether this approach can be adapted for
the establishment of the Audit Quality Review Board, we other practice areas within the firms other than audit, based
reconsidered our review approach for the major firms who on a risk assessment of the type of work undertaken and the
were subject to reviews by ASIC, the AQRB and their own extent of other internal and external reviews of the firm.
internal reviews. The decision was then taken that to remain
relevant and avoid duplication, an innovative approach was
needed to augment the work conducted by ASIC, the firms
themselves and the AQRB (which completed its three year
charter in 2009).
Analysing the findings from ASIC’s public reports, we
concluded that there was an important piece missing from
the review process. Our view was that while detailed
inspections of work were important, a detailed understanding
about the auditors’ attitudes to the key drivers of audit quality
was missing. Understanding these mindsets was key to the
continuing development of audit quality.
From this premise, we took the initiative to develop
quantitative research of auditors of the major firms - research
which is aimed at assessing the importance of the key
drivers of audit quality in those firms. This paper provides
key messages and analysis of the responses received across
the participating firms and also sheds light on our work
2. Public Company Accounting Oversight Board website www.pcaob.org
3. The benefit of audit: A guide to audit quality, 2009, Institute of Chartered Accountants Australia
6 Preserving capital market confidence through audit quality

7. Sustainability of the profession
Research finding: play a strong role. When auditors commence their work, they
are often seen by the CFO as a necessary disruption to the
Quality external auditing is integral to the effective
business. The audit committee is in the position to better
functioning of our capital markets. It is an essential service communicate with and ensure the full benefit of the audit
requiring specialist skills and knowledge. Therefore, the work is carefully understood by the management or client.
sustained viability of the audit profession is critical and
in particular attracting, retaining and developing the right The demand for skilled professional accountants, auditors and
people for the profession. finance managers continues to be a key issue for Australian
businesses, and the broader economic picture. Another
challenge for the profession is that over the next 40 years,
The audit profession provides services that are of immense the number of people in Australia aged over 65 will double5.
value in supporting well-informed capital markets and fulfilling Growth in the workforce population is also set to drop
the public interest. The global financial system of today faces during the same period (growth in those of workforce age is
many risks. The audit profession is in a prime position to drive expected to drop from 1.2 per cent per annum over the last
financial integrity and skill for the public interest. ten years to zero over the next four decades).
The Institute has a responsibility to continually challenge the Attracting the younger emerging generation and skilled
different cultures within the profession. The dynamic nature migration remains vital to ensuring Australia has the
of business today places demands on the profession that not appropriately skilled accounting and finance professionals
only expand the roles of the accountant and auditor but also needed to maintain and build sustainable organisations that
requires flexibility and adaptation by the profession to meet will enhance Australia’s prosperity.
market demands.
Traditional notions of accountants and auditors, such as the How would you rate the overall appeal of the
classic bean-counter stereotype, still exist and the research audit profession today?
results indicate that less than 50 per cent of the participating
auditors consider the audit profession to be appealing. n=421 n=392 n=635
(45) (35) (39)
Generations X and Y have grown up, and Generation Z is 100
now hitting the job market. The next challenge for employers
and for professional bodies is to deal with the needs of
Generation C – always clicking, always connected and always 80
communicating. Younger people are generally looking for
greater work/life flexibility, than previous generations. To 60
attract and retain staff, more flexible work options and an
improved work/life balance, will need to be offered4. Managers
4
40 Graduates
Qualified Cas
5
By being digitally connected, young professionals are now 5
looking to work in very different ways. It stands to reason
% 20 40
that they will want different career pathways. In a corporate 31 34
world where finance careers are becoming less uniform, the
emergence of career paths based on a corporate ‘lattice’ rather 0
than a corporate ladder will be the norm. Our latest leadership
paper in the academic series, Emerging Pathways for the
Next Generation of Accountants, also sheds light on the future 20
45
47 46
professional working in increasingly diverse and connected
teams, including through shared service centres. 40
How organisations such as the major accounting firms and 10
16 14
the professional bodies steer this generation through their 60
careers will be very important. More work is also needed to
Not at all Somewhat Very
Appealing
improve communication and the understanding of the value appealing appealing appealing
of the external auditor. This is where audit committees can
Results:
Bars represent the % for each response category on scaled questions.
4. Emerging Pathways for the Next Generation of Accountants, 2012, Institute of
Chartered Accountants Australia Due to rounded numbers being displayed, the round values in bars may, in some
cases, total to slightly more or less than 100%.
5. Young Professionals Career Motivation Study - An Insight into Chartered Accountants
aged under 40 years, 2012, Institute of Chartered Accountants Australia
Preserving capital market confidence through audit quality 7

8. Professional scepticism: Art, science or both?
show their quality to competitors and also add to the
Research finding:
confidence of the business and broader community.
Professional scepticism is a state of mind. Today public An integral element of that judgement is professional
expectation is arguably at its strongest levels that all business scepticism. Auditors are regularly accountable for
professionals, directors, advisors, accountants and auditors demonstrating challenging judgements in environments of
have that state of mind and are able to demonstrate it. But significant uncertainty, complexities and pressures. That is
this is not simple or straight forward. Our analysis of the the business reality of today.
research data shows clearly that auditors at all levels within
a firm are fully aware of the importance and implications of “Scepticism is a virtue in history as well as in philosophy.”
professional scepticism to the quality of their work. It is front
Napoleon Bonaparte
and foremost on their mind. Still more can be done by the
profession and the firms to nurture and engender professional
Our research shows that professional scepticism ranks in
judgement and scepticism to sustain the delivery of quality
the top three most important skills across all respondent
auditing. Being aware of threats is a key step. groups within the participating firms. Auditors understand
its importance and that it is key to their success. That is a
particularly relevant result because at times when auditors’
Auditor independence, objectivity and professional judgements are challenged, often after a lengthy period
scepticism are critical attributes that underpin a quality from completion of the audit work, the first default, and
audit, and these attributes can and should be continuously arguably the easiest, obfuscation can be the auditor’s lack of
improved. The need for high quality judgement by business professional scepticism. That flawed interpretation is usually
professionals has never been more in demand. Those linked with an implication to a lack of independence by the
professionals that consistently make the right decisions auditor.
To what extent are the following To what extent do you believe your
skills and attributes important in your engagement teams demonstrate
current role: Professional scepticism? the following skills and attributes:
Professional scepticism?
n=254 n=421 n=392 n=635 n=254 n=421 n=392
(100) (97) (97) (97) (94) (86) (83)
partners
100 7 100 7
Managers Qualified Cas partners
graduates
Managers
21 Qualified Cas
80 80
21 19
53
58
60 70 60
83 6 6
45
38 35
40 40
Mean
%
32
29
Mean
20 5 % 20 5
24
28 27 29
14
12 10
3 4
0 0
2 3 2 6
1 12 12
2 3
1
20 4 20 4
Relatively less 1 2 3 4 5 6 7 Extremely Never 1 2 3 4 5 6 7 Always
important important
8 Preserving capital market confidence through audit quality

9. However, the research data shows that both challenges where independence, objectivity and scepticism are visibly
and opportunities exist for the audit profession and firms. valued attributes, reinforced by their internal systems of
Innovative ways of nurturing and enhancing the right skills quality control.
and approach needs to be cultivated to ensure the right level
of professional scepticism is constantly exercised. Coaching “The IAASB’s International Standards on Auditing (ISAs)
and mentoring are such essential ingredients in developing explicitly recognise the fundamental importance of
and sustaining this skill. It is vital that the intuition held by professional scepticism. Nevertheless, adopting and applying
many experienced audit practitioners is transferred to those a sceptical mindset is ultimately a personal and professional
still developing and that it is delivered with a real sense of responsibility to be embraced by every auditor. It is an
the changing demographics of the audit profession. It is also integral part of the auditor’s skill set, is closely interrelated
important to recognise that those with greater knowledge and to the fundamental concepts of auditor independence and
service can still improve themselves. professional judgment, and contributes to audit quality. The
auditor’s education, training, and experience are therefore
We also see significant value in further work being undertaken critical. Audit firms themselves have an important role to play
around the human tendencies that could limit the exercise in cultivating a sceptical mindset in auditors, as do regulators,
of professional scepticism such as when auditors are often oversight bodies, and those charged with governance.”
confronted (sometimes deliberately) with an incomplete
definition of the problem, knowing or sensing that limitation Professor Arnold Schilder, Chair of the International
is vital. Auditing and Assurance Standards Board
Finally, it is up to each individual on the audit team to
discharge his or her professional responsibilities to perform
a quality audit, and for their firms to cultivate an environment
To what extent do you believe the following To what extent have you had Is there an emphasis in the
skills and attributes were included in the training in your firm with regard to workplace on the following skills
university course undertaken by you: the following skills and attributes: and attributes: Professional
Professional scepticism? Professional scepticism? scepticism?
n=635
(43)
100 7
80 n=635 n=392
(86) (93)
60 100 7 100 7
6
Qualified Cas
Graduates
Graduates
40 6 80 80
45
16 25
20 60 6 60 6
5
22
Mean
% 40 40
0 37
30
24
Mean
Mean
20 4 % 20 5 % 20 5
25 18
19
40 0 0
8 5
9 3 2
1 1
5
60 3 20 4 20 4
Not at all Very much Not at all Very much Never Always
1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7
Preserving capital market confidence through audit quality 9

10. Communication: Latin “communis”, meaning to share
For managers, qualified Chartered Accountants and
Research finding:
graduates participating in the research, communication
An evolution continues around the audit profession and the rated as the top skill needed in their current roles (partners
skill set required by auditors. These changes are linked to a rated this third highest). The research data also highlights
complexity and dynamic nature of business today, the way communication as a key area for future training, particularly
capital markets operate in a globalised market place and the among graduates, who cited effective communication as
general economic environment. Effective communication one of the most important aspects of training that they
is fundamental to the audit process and a quality audit. The believed would allow them to perform their roles more
research data indicate skills and competencies traditionally effectively.
regarded as ‘soft’, such as communication, are really the
true drivers of audit quality. Communication is critical to the way in which auditors
handle the complexity and dynamic nature of business
today. It is the way they share knowledge and evolve
Communication is at the very heart of auditing. strategies.
Communication within audit teams gives rise to shared
wisdom and enhances or encourages professional “The single biggest problem in communication is the illusion
scepticism. That communication is also how audit findings that it has taken place.”
are best assessed and developed to give the right audit
outcomes. An auditor’s communication with a client is core George Bernard Shaw
to the delivery of insights beyond financial reporting, and
these go to the way management and directors can better An important evolution in audit thinking is underway.
safeguard a business and its assets. Communication has traditionally been seen as a soft skill
To what extent do you believe your To what extent do you agree or disagree
engagement teams demonstrate with: Effective and open discussions with all
the following skills and attributes: members of the audit team regarding matters
Communication? significant to the audit take place on a regular
basis throughout the engagement?
n=254 n=421 n=392 n=254 n=421 n=392
(83) (90) (83) (98) (96) (91)
100 7 100 7
Managers
partners
partners
Managers
Qualified Cas Qualified Cas
11
80 80
18
24 46
62 34
60 6 60 6
48
42
36
40 40
42
39
Mean
Mean
% 20 5 % 20 31 5
34
30 30
11 16
4
0 0
6 7 1 2 3
9 1
1 2 2
1 1 2
2
20 4 20 4
Never 1 2 3 4 5 6 7 Always Strongly 1 2 3 4 5 6 7 Strongly
disagree agree
10 Preserving capital market confidence through audit quality

11. peripheral to the hard core of auditing financial statements.
The profession has come a long way. The discrepancies
between the levels at which the respondent groups believed
that there was effective communication during an audit
engagement indicates the importance younger staff place
on effective communication. It also highlights a source of
potential improvement in what is a key driver of audit quality.
Sharing of skills and experience is not only important to
any single audit. It is also a critical part of the maintenance
and development of the profession of auditing. Only part
of auditing can be learned by book study; judgement and
professional scepticism need to be fostered by shared
experiences. One of the greatest threats we see to the
effective communication of the profession is the technology
advancements of today. Because of the advent of technology
in society today, traditional face-to-face communication skills
have diminished.
And now that you are working in audit The top three skills for each respondent group have been calculated based on
the highest ranked average scores for all questions on the most important skills
services, to what extent do you believe and attributes in respondents’ current roles. Note: where skills have the same
the following skills and attributes are average score the skills are ranked alphabetically.
important in performing your role as an
auditor: Communication?
Average score (out of 7).
Top 3 skills - Partners
1. Professional scepticism 6.8
2. Objectivity 6.7
n=635 3. Communication 6.6
(98)
Graduates Top 3 skills - Managers
100 7
1. Communication 6.6
2. Professional scepticism 6.6
3. Teamwork and leadership 6.6
80
Top 3 skills - CAs
62
1. Communication 6.4
60 6 2. Task and time management 6.4
3. Professional scepticism 6.3
40 Top 3 skills - Graduates
1. Communication 6.5
2. Task and time management 6.5
Mean
% 30
20 5 3. Professional scepticism 6.4
7
0
1
Using an average score (a measure of central tendency) takes into account
variation in ratings across the entire distribution of scores from extremely
important right through to not at all important, i.e. the average score takes into
20 4 account not only those who think the attribute is important, but also those that
think it is unimportant and the degree to which they feel this.
Relatively less 1 2 3 4 5 6 7 Extremely
important important
Preserving capital market confidence through audit quality 11

12. A pillar of corporate governance: the audit committee
of directors as the representatives of the shareholders. In
Research finding:
Australia and the UK, the committee’s role in overseeing
Quality external auditing is integral to capital market the external auditor is not bound through legislation, but is
confidence. Engagement partners supervise audits that considered best practice.
span continents and oceans. Effective audit is enhanced
by the mutual respect between auditor and auditee. The Candid and open communication between the external auditor
auditor’s communication with the audit committee is and audit committee is imperative and it is equally important
moving decisively from a compliance-based dialogue to the that these two parties communicate effectively to strengthen
direction of meaningful, effective interchange. the corporate reporting and governance process.
The responses in this Audit Quality Research 2012 indicate
The volatility of capital markets combined with the thirst for that the senior members of the audit engagement team place
transparency and corporate accountability demands a response a greater emphasis on the quality of the relationships with the
from boards, management and external auditors. In practice, audit committee, management and the board, and this may be
a three-way relationship exists between the committee, because they have a greater client-facing role than the others in
management and the external auditor. Our recent thought the team.
leadership paper, Walk the line: Discussions and insights with
leading audit committee members, highlights the importance of It is important for the lead audit partner and his or her senior
the relationships that need to be forged and the communication team members to understand the audit committee, including
lines that need to develop among boards and management the chairman, so both teams can develop a sense of respect
with the external auditor. and confidence for each other’s responsibilities. Such a
relationship also establishes an environment in which clear,
Overseeing an effective engagement with the external direct and candid communication flourishes. “No surprises”
auditor is a key responsibility of the audit committee. The has long been a goal of effective communications and a strong
audit committee recommends the external auditor, assesses relationship between the audit committee and auditor. Any
its independence, discusses the audit scope and determines efforts and measures by the firms to increase transparency
the external auditor’s compensation. In the United States, and effective communication around the audit is a step
the Sarbanes-Oxley Act says that the external auditor works forward in enhancing audit quality and strengthening corporate
for and is accountable to the audit committee and the board governance.
To what extent do you agree or disagree To what extent do you agree or disagree with:
with: The quality and timelines of most audit Your clients provide co-operation and support to
committee / board / owner interaction on your the engagement team?
clients ensures a quality audit?
n=254 n=421 n=392 n=254 n=421 n=392
(91) (87) (79) (95) (88) (81)
100 100 7
7
partners
Managers
partners Managers
80 80 17 9
13 Qualified Cas
24 Qualified Cas
9
12
60 60 6
6
44
52 35
44 36
40 44 40
Mean
Mean
% 20 5
% 20 5
35 37
30 30
26
22
0 0
7 9 4 8 12
13
1 1 2
3
2 6 1 5
2 1 1
20 20 1 4
1 4
3 3
40 40
Strongly 1 2 3 4 5 6 7 Strongly Strongly 1 2 3 4 5 6 7 Strongly
disagree agree disagree agree
12 Preserving capital market confidence through audit quality

13. Influencing the profession
of recent times, and what the profession can do on its own to
Research finding:
address the current challenges. Nevertheless, the simple facts
The financial audit is the linchpin for upholding confidence
are that confidence and stability are critical to the success of
in the capital markets. Our research marks the first major
capital markets, and auditing helps bring these attributes to our
research of auditors within major firms and augments the markets. Instead of risking a crisis, it is important to uphold this
rigour of inspections conducted by regulators and the firms’ trust and confidence in the auditing profession. The objective,
internal review processes. after all, is to ensure that the needs of companies are met and
that these companies have access to high-quality, reasonably
priced auditing services.
An excerpt from correspondence sent by a partner at Ernst
Young: Probably a more long-term challenge for the firms and the
professional bodies is to deal with the needs of the digitally
“We appreciate the effort made by the Institute to provide savvy Generation C – always clicking, always connected and
insights into the mindsets of our people to audit quality and always communicating. According to our latest leadership
to provide benchmarks against the results from other firms. paper in the academic series, Emerging Pathways for the Next
It is refreshing that the Institute uses this innovative research Generation of Accountants, managing the aspirations of the
methodology rather than file inspection - which is the approach youngest generation in finance in this fast changing workplace
used by our internal quality programme and by the regulators. presents a new kind of higher education student and employee.
The research approach provides some different perspectives
and also involves some of the junior team members who are ‘Young people are now Internet literate, digitally connected
generally not affected by inspections.” and will want to work in very different ways, and hence will
want different career pathways. In a corporate world where
Denis Thorn CA, Partner – Ernst Young finance careers are becoming less uniform, the emergence
of career paths based on a corporate ‘lattice’ rather than a
The participating firms have provided overwhelming support corporate ladder will be the norm. The future professional will
and endorsement for the research in offering in-depth analyses also work in increasingly diverse and connected teams, including
of the underlying elements of the drivers of audit quality within through shared service centres. How organisations such as the
audit practices of the firms. These firms have undertaken to ...professional bodies steer this generation through their careers
draw on their particular results to enhance any aspects that will be very important.’
could be improved. We will continue to engage with the firms
to correlate findings from the research with issues arising from Another challenge facing the profession, including the academic
their internal review program and the ASIC inspection. Overall, world, is that ‘the student of tomorrow will have more education
the research results indicate a high degree of consistency across options available to them and they will be born in a digital age
all respondent groups in relation to a strong commitment to audit where their learning experience involves digital applications and
quality. social networks. How, when and where candidates learn will be
their choice, and they will naturally see themselves as part of a
“I have been trying to point out that in our lives chance may global environment.’
have an astonishing influence and, if I may offer advice to the
young laboratory worker, it would be this - never to neglect an This is the reality of today’s candidates and our next generation
extraordinary appearance or happening.” of Chartered Accountants. Our earlier research shows 40 per
cent of candidates are aged between 21 and 25 years, and 38
Alexander Fleming per cent of candidates are between 26 and 30 years6. This young
cohort of professionals is technology and Internet savvy in all
While the professional bodies, standard setters and regulators areas of their work and personal lives, with their education and
each play a role in guiding the profession, it is up to each learning no exception.
individual on the audit team to discharge his or her professional
responsibilities to perform a quality audit. Audit firms and We are adapting to these changes and starting from 2013, the
practices must also continue to innovate and cultivate an Chartered Accountants Program will be more contemporary in
environment where independence, objectivity and professional its content and delivery, incorporating modern learning design
scepticism are visibly valued attributes. and teaching methods with the latest technologies. This will be
a joint Program delivered in conjunction with the New Zealand
The debates continue about the role that the auditing profession Institute of Chartered Accountants, which will further enhance
itself has played in bringing about some of the corporate failures the Chartered Accountants designation on both sides of the
6. Young Professionals Career Motivation Study - An Insight into Chartered Accountants aged under 40 years, 2012, Institute of Chartered Accountants Australia
Preserving capital market confidence through audit quality 13

14. Tasman. The new Program offers more flexibility and caters for
the different learning styles of candidates, yet still maintains the
quality and rigour that is at the heart of the Program.
Next steps
The global financial system of today faces many risks and we
feel the audit profession is in a prime position to drive financial
integrity in the interest of society. The Institute, in turn, has
a responsibility to continually challenge the different cultures
within the profession. This paper has sought to provide the
key findings from the Audit Quality Research 2012 on major
accounting firms. Our intention is to extend this research
methodology to other firms within Australia and potentially in
other jurisdictions. The message is clear: we will innovate and
continue to invest time and effort in preserving capital market
confidence through continually improving the quality of external
auditing.
14 Preserving capital market confidence through audit quality

15. Resources:
• The benefit of audit: A guide to audit quality, 2009, Institute of Chartered Accountants Australia
• Continuous cycle of audit quality: Framework for managing audit quality sustainability, 2010, Institute of Chartered
Accountants Australia
• Audit Policy: Lessons from the Crisis, 2010, The European Commission Green Paper
• Young Professionals Career Motivation Study - An Insight into Chartered Accountants aged under 40 years, 2012, Institute of
Chartered Accountants Australia
• Walk the line: Discussions and insights with leading audit committee members, 2012, Institute of Chartered Accountants
Australia, Financial Reporting Council (UK), The Institute of Chartered Accountants of Scotland
• Emerging Pathways for the Next Generation of Accountants, 2012, Institute of Chartered Accountants Australia, University of
South Australia
• Quality Review: past, present and future, Getting the balance right, 2010, Institute of Chartered Accountants Australia
• The Center for Audit Quality www.thecaq.org
• The Public Company Accounting Oversight Board www.pcaob.org
The five drivers of audit quality:
1. The culture within an audit firm
2. The skills and personal qualities of audit partners and staff
3. The effectiveness of the audit process
4. Factors outside of the control of auditors
5. The reliability and usefulness of audit reporting.
The benefit of audit: A guide to audit quality
Co-regulatory environment:
The following diagram illustrates the co-regulatory environment regulating the work of Chartered Accountants in Australia.
IFAC Institute of Chartered FRC
Accountants Australia
Obliges member bodies to conduct a Quality reviews consider the Responsibility for monitoring
mandatory Quality Review Program. review work conducted by other the effectiveness of auditor
bodies, provided there is sufficient independence requirements
documentation to rely on. in Australia. The FRC has a
memorandum of understanding with
Conducts the Institute.
quality
reviews
Chartered
ATO
Compliance
Accountants Conducts
ASIC
Conducts compliance reviews of reviews of
approved
in Practice audit
inspections
Has responsibility, under the
SMSF approved auditors as part of auditors
Corporations Act, for the surveillance,
its compliance program in relation to investigation and enforcement
Australia’s tax and superannuation of audit independence and audit
laws. standards. Its Audit Inspection
Program is currently focused primarily
on auditors of listed entities. From
2013 all SMSF auditors must be
registered with ASIC.
Other regulatory bodies
The activities of accounting
practices are monitored by a range
of regulatory and other bodies
depending on the nature of the
practice and type of engagement
conducted. This includes the Tax
Practitioners Board.
Preserving capital market confidence through audit quality 15

16. Contact details
Institute of Chartered Accountants Australia
National office
33 Erskine Street
Sydney NSW 2000
GPO Box 9985, Sydney, NSW 2001
Service 1300 137 322
Phone +61 2 9290 1344
Fax +61 2 9262 1512
Email service@charteredaccountants.com.au
charteredaccountants.com.au