METHODOLOGICAL PRINCIPLES FOR FORMULATING RECOMMENDATIONS BASED ON AUDIT QUALITY CONTROL INSPECTIONS AND ASSESSING THEIR IMPLEMENTATION

Abstract

Introduction. Audit quality is crucial for ensuring confidence in financial statements and stability of financial markets. Public oversight bodies play a vital role in monitoring and enhancing audit quality through quality control inspections. However, the current approach to formulating and following up recommendations provided to audit firms primarily targets symptomatic manifestations of deficiencies rather than addressing their root causes. This limited approach reduces the long-term effectiveness of public oversight, posing risks for the recurrence of deficiencies and inadequate improvement in audit firms’ quality management systems. Purpose. The purpose of this research is to scientifically substantiate methodological principles for formulating recommendations following audit quality control inspections, and to propose clear criteria for assessing their implementation status, thus enhancing the effectiveness and impact of public oversight of audit activities. Methods. The study employed comprehensive analysis and synthesis of data obtained from the generalized outcomes of audit quality inspections conducted over a multi-year period. The research methodology included systematic review, logical generalization, and critical analysis of existing regulatory frameworks, standards, and practices related to audit quality oversight. Particular attention was given to the identification of gaps in current practices and opportunities for methodological improvements. Results. The research revealed that existing recommendation practices predominantly emphasize compliance with specific standards without sufficiently addressing the underlying root causes of audit deficiencies. A novel classification framework for recommendations is proposed, encompassing four distinct categories: condition-based recommendations for compliance with criteria, root-cause-based recommendations, current-state corrective recommendations, and rights-restrictive recommendations. The study underscores the necessity of a combined approach to recommendations, tailored to the nature and severity of identified deficiencies, enabling simultaneous reduction of quality risks, addressing root causes, and timely rectification of current issues. Furthermore, the study proposes differentiated timelines for implementing recommendations based on their type and complexity. Conclusion. To enhance the effectiveness of audit quality control inspections, it is recommended to adopt a mixed selection methodology combining risk-oriented and random selection approaches for evaluating recommendation implementation. Establishing minimum observation thresholds can further improve the objectivity and reliability of assessments. Additionally, introducing a differentiated assessment scale for evaluating recommendation implementation based on the number of provided recommendations will mitigate overly strict negative outcomes. Successful implementation of these measures requires enhanced competencies of both inspectors and auditors, active participation of audit firms in recommendation formulation, and promotion of a culture emphasizing quality and professional responsibility within the auditing profession.