360-degree reliability - Audit Enquiry

 

New research examining the role of enquiry in the auditconcludes that all facets of the process have to be strengthened.

Enquiry has always been an integral part of an audit - indeed, an audit would be impossible without it - but as far as constituting appropriate evidence under generally accepted auditing standards, it has always been at the low end of the totem pole. Recently, however, it has come to play a more prominent role in the gathering of evidence to support financial statements and other assertions. This is due to several factors: the growing importance of "softer information" in financial and other reports based on estimates, expectations and assumptions; the increasing relevance of perfor- mance measures that may require substantial subjective judgment; and an increasing need to gain an understanding of the attitudes, culture and ethics that influence control in entities, as well as how an entity's information systems capture, process and report information. A research report published in May 2000 by the CICA, Audit Enquiry: Seeking More Reliable Evidence from Audit Enquiry, notes that if the profession is to deliver its traditional assurance services on financial statements appropriately, let alone expand into broader areas, the rigour of enquiry must be increased and the reliability of the evidence obtained through it must be improved. All facets of the enquiry process have to be strengthened.

One of the major findings of the research report is that enquiry can be a very reliable form of evidence if it is pursued comprehensively. This involves what the report refers to as a "360-degree consideration of reliability" - that is, consciously thinking about five elements that can affect the reliability of evidence obtained through enquiry. As the accompanying exhibit indicates, those elements comprise the reliability of the interviewee, the effectiveness of the interviewer, the quality of the process, the credibility of the findings, and the integration and synthesis of the information.

The interviewee

Traditionally, the auditor has been concerned about the competency of inter-viewees and whether or not they could be biased, in the sense of having an interest in the outcome that would affect the way they reported results. Today, although competence and honesty are still a concern, we see that there can be multiple valid perspectives. It is assumed that the answers provided are affected by the professional training of those being interviewed, their personal histories, and their relations with others inside and outside the organization. This affects what they see as significant and what may be invisible to them. The auditor's task is to make sure that an appropriate range of perspectives is represented. This may be accomplished by interviewing a range of individuals and by observing group processes where perspectives are explored.

The interviewer

Among those surveyed, members of the auditing profession and of other professions spoke about a cluster of issues relating to the effectiveness of the interviewer. Asking the right questions and listening to the answers are crucial in this regard, and these skills can be learned. Knowledge of the business is key to establishing credibility and earning the trust of the interviewees. It guides the interviewer in asking pertinent questions and recognizing gaps and inconsistencies. It's important that interviewers engage in self-reflection to monitor their own state of alertness and the level of rapport they are able to build and maintain. The interviewer's attitude and demeanour can help put the interviewee at ease so that difficult and probing questions can be asked when necessary. Sensitivity to the various environments in which interviews are taking place is also helpful. In deciding what to ask and when to ask it, interviewers will want to take context into account - from the current state of the industry to the atmosphere in a particular office.

The process

Much can be done to manage and monitor the interview process. Briefing and debriefing with other team members before, as well as after, crucial interviews help prepare the interviewer to ask the necessary questions and to assess what has been learned, or not learned. Care in matching the right people on the audit team with those in the entity can bring considerable benefits and avoid potential damage. Often this is a matter of matching people at comparable levels, but it can also mean knowing when to send in a person who is able to ask a naïve question in an informal atmosphere (such as a plant tour).

Sequencing, and scheduling who is interviewed and when, can avoid unproductive sessions and utilize the time of senior staff most effectively. The setting in which interviews take place can also make a big difference in how attentive and forthcoming the interviewees will be. A certain amount of privacy and freedom from distraction will be necessary if the information to be covered is sensitive.

How questions are framed is another aspect of the interview process. Often the team will use models to frame sets of questions or the sequence of interviews. Models may include those used by the industry or the entity, financial or systems models, and others. Using models helps avoid gaps and duplications during questioning. Obtaining consistent results by using several models, instead of one, to approach the same issues provides a higher confidence level.

The research report gives practical guidance that auditors can use in planning and conducting effective interviews.

The findings

The credibility of the findings can be affected by both verbal answers and non-verbal behaviour. We are most familiar with evaluating answers to questions that have been expressed verbally, but familiarity with non-verbal cues is important, too. Edginess, changes in voice or expression during the course of an interview and disparities between facial expressions and the content of what is being said, may all raise questions that call for additional interviews or corroboration. Such cues could indicate that the interviewee has noticed something that does not fit. Verbal answers may be compared across the organization or with others in the industry and analysed for logic and consistency. Credibility of the findings can also be enhanced by establishing protocols for documenting both verbal answers and non-verbal behaviour.

Integration and synthesis

Teams acquire a great deal of information during the course of an audit, from vague impressions to statements supporting particular assertions. All of this information is, potentially, evidence. Information that does not conform to expectations will raise a red flag. Information that corroborates what has been stated elsewhere will conform to expectations. Reliable processes of integration and synthesis enable the audit to be conducted more efficiently and reduce the level of audit risk. Ideally, the teamwork that produces an integrated picture of a large client organization replicates the picture that an individual auditor forms in a one-auditor assignment. When the audit involves many people, the infrastructure for integrating and synthesizing information and evidence must be carefully thought out. Pattern recognition, aggregate models, running summaries of interviews conducted, assumptions made and verified, and inconsistencies evaluated are among the tools that enhance the reliability of the integration and synthesis of the evidence needed to form an opinion.

The report concludes that many aspects of enquiry can be strengthened by attention to these five elements. Enquiry need not be thought of as leaving an auditor exposed to misinformation or deception. There are many ways to cross-check and corroborate information gained via enquiry, from revisiting one individual many times (in the rare instances when only one person has the information) to comparing the information received from different persons, to measuring it against comparable situations in the same industry. If an audit meets the standards of reliability in these five areas - even if it has relied heavily on enquiry - the opinions reached should merit confidence.

The research report also concludes that it's necessary to address three areas. First, the CICA Handbook - Assurance should give enquiry the serious treatment it deserves. Attention must be given to a number of issues: the use of audit teams; the provision of guidance on improving the reliability of enquiry; the relations between the auditor and individuals both inside and outside the entity being audited; the interview process; acknowledging the concept of 360-degree reliability; and documentation. Secondly, training is needed on matters such as advanced interview skills, observing and interpreting non-verbal cues, and the use of models. Finally, this report has only just begun to scratch the surface of this subject; additional research is needed on several related issues, such as how systemic understanding and post-modern theories might be applied in the audit. In many ways, the research report is a beginning, not an end, and it is hoped that the ideas contained therein will provoke further discussion - and, yes, enquiry.

Article by Allenna D. Leonard, PhD, was one of the researchers for the Audit Enquiry project and is a partner in The Complementary Set, a consulting firm in Toronto.

Technical Editor - Robert T. Rutherford, FCA, Vice-president, Standards, CICA.