Our commitment to audit quality - Building a better...

Our commitment to audit qualityInformation for audit committees, investors and other stakeholders Ernst & Young LLP November 2015

Contents1 Our commitment to audit quality...........................3

2 Innovating and driving continuous improvement in audit quality.................................5

3 Our people..............................................................8

4 Audit execution...................................................11

5 Supporting audit quality......................................15

6 Monitoring audit quality......................................18

7 PCAOB inspections and related matters.............21

2Our commitment to audit quality

We are pleased to present our 2015 report on the commitment of Ernst & Young LLP (EY US) to audit quality. Performing high-quality audits is of paramount importance to us, and we are proud of the progress we made over the past year to continue to improve the quality of our audits.

Our focus on audit quality is linked to our organizational commitment to build a better working world. At EY, we take seriously the responsibility that has been entrusted to us as auditors of public companies. We know our role as auditors is to serve the public interest and provide confidence to the capital markets by delivering quality audits. We understand that our reputation is based on providing quality audit services.

This report describes our efforts this year to help our people meet the challenges of auditing in today’s increasingly complex business environment and the programs we developed to help us monitor our audit practice. It also discusses inspections by the Public Company Accounting Oversight Board (PCAOB) and related matters.

In this report, we also share with you some firm-level data points with context that we believe provide insight into our audit practice and our firm’s system of quality control. We are fully engaged in efforts to examine audit quality indicators that could provide stakeholders such as audit committees, investors, audit firms and regulators with additional perspective on matters that affect audit quality.

Our goal with this report is to help you understand the depth of our commitment to performing high-quality audits and highlight some of the actions we are taking to further audit quality. We welcome your comments and questions about EY and the matters discussed in this report. Please contact an EY partner for more information.

Audit committees, investors and other stakeholders

Francis C. Mahoney | Vice Chair of AssuranceErnst & Young LLP

Stephen R. Howe, Jr. | Chairman and Managing Partner Ernst & Young LLP


1 Our commitment to audit quality

Our commitment to executing quality audits is central to our Vision 2020 strategy that sets out our purpose and ambition. Our unwavering commitment to audit quality is part of our mission of building a better working world.

Our commitment to quality starts at the top of our organization. We are keenly aware that we need to execute high-quality audits independently, objectively and with professional skepticism to serve the public interest, promote transparency and support investor confidence.

T one at th e top and accountab ilityOur senior leaders focus on setting the appropriate tone and cascading it throughout the organization because we recognize that messaging from our leadership and actions to back it up significantly influence the culture of our organization. The promotion of a quality-oriented culture depends on clear, consistent and frequent messages from all levels of management.

Our message consistently has been that performing high-quality audits is our top priority. We communicate to our people that this is their most important responsibility and that everyone at our firm is accountable for the quality of his or her work. Quality is also a key element of how we evaluate and reward our leaders, our audit professionals and professionals from other service lines who are involved in the execution of audits.

Our shared values guide our people to do the right thing. The EY Code of Conduct provides a clear set of standards that guide our actions and our business conduct. Our people understand that performing high-quality audits means acting ethically, with integrity, to uphold these standards.


T h e imp ortance of th e audit p ractice to E YUnder EY’s Vision 2020 strategy, we seek to be the leading global professional services organization with our Assurance practice as the primary driver of our brand as well as our largest service line. Our reputation for audit quality is fundamental to achieving this ambition.

S us tainab le A udit Q ualityThe EY global network supports the execution of high-quality audits and focuses on continuous improvement around the world through its Sustainable Audit Quality (SAQ) activities. SAQ includes a series of activities to reinforce our quality-driven culture and focuses on the importance of accountability for audit quality. It includes elements such as leveraging technology to transform and innovate the audit, simplification, enablement, quality support and recruiting, training and rewarding our professionals for audit quality.

Throughout this audit quality report for EY US, we describe the many activities underway to improve audit quality, all of which are components of EY’s global SAQ program.

T h oug h t leaders h ip and outreach We see ourselves as thought leaders in our profession and focus on topics that are top of mind for our stakeholders. We engage with standard setters, regulators and other policymakers on a wide range of financial reporting and corporate governance topics.

We seek to promote greater understanding of and dialogue about the audit process with investors. To this end, we convened groups of institutional investors this year to discuss key aspects of the audit and auditor-audit committee interactions. Through these discussions, we shared information about the audit process that is of value to investors and gained a better understanding of investors’ interests and needs regarding the audit and the role of the audit committee.

Through our Center for Board Matters, we actively engage with directors, investors and others in the governance community on emerging issues of importance. Drawing on our engagement and using our proprietary corporate governance database, we publish analyses related to board composition, proxy season trends, audit committee disclosures and more.

Through our involvement with the Center for Audit Quality, a non-profit group that is dedicated to enhancing investor confidence and public trust in the global capital markets, we actively support independent academic research on topics that have the potential to improve audit quality and further scholarly debate.

Our Ernst & Young Foundation sponsors the annual Ernst & Young Academic Resource Center Colloquium, a gathering of more than 100 faculty members from top schools across the US and Canada. This year, we and top executives from various companies shared insights into how analytics is transforming business and how an analytics mindset will best prepare students for the future of the profession.

W h o w e are f People who demonstrate integrity, respect and teaming f People with energy, enthusiasm and the courage to lead f People who build relationships based on doing the right thing


2 I nnov ating and driv ing continuous imp rov ement in audit quality

To deliver high-quality audits now and in the future, we recognize that we need to both innovate and drive continuous improvement.

We are innovating to transform today’s audit by leveraging technology to help us identify and respond to audit risks. We expect these efforts to enhance investors’ confidence in audited financial statements and ultimately the capital markets.

At the same time, we are focusing on continuously improving quality in today’s audits. We don’t wait for inspections to identify areas where audit quality can be improved. We are proactive and continuously invest in new approaches and tools to identify and address emerging audit risks and resources to support audit teams on quality matters.

I nnov ating to trans f orm th e auditWe are making a substantial, ongoing investment in new audit tools, data analytics and improved methodology and processes, which we believe will transform how we conduct audits and enable us to continue to take audit quality to a higher level.

This year, we launched EY Canvas, our new global audit performance and documentation tool, which leverages state-of-the-art technology. We expect EY Canvas to help us enhance audit quality by, among other things, better aligning audit risks with the audit procedures that address them and help us plan, manage and execute audits. Additionally, EY Canvas enables primary teams in group audits to better plan and manage audits executed around the globe and to timely identify and address issues.


Our analytic tools, including our new EY Helix suite, help us use a client’s data to focus more efficiently and effectively on audit areas of higher risk. We believe these tools will help improve audit quality by giving us a deeper understanding of our clients’ businesses. For example, we can use these tools to apply certain procedures to larger populations and to analyze trends and correlations among accounts.

We will also be launching our new research tool, EY Atlas, which will strengthen our teams’ research capabilities for technical accounting, auditing and financial reporting issues.

We are also innovating to address the challenges of implementing the Financial Accounting Standards Board’s new revenue recognition standard, the broadest new accounting standard to be issued in years. We developed a tool our audit teams can use to evaluate the accounting for an entity’s revenue-generating contracts under the new standard. We expect this to help us do a better job of auditing revenue, which is one of the metrics of most importance to investors.

T ak ing action on audit quality f ocus areas As part of our drive for continuous improvement, we are emphasizing certain audit quality focus areas this year, including:

f Internal control over financial reporting (ICFR) f Testing management’s estimates f Engagement quality review f Implementation of the new PCAOB audit standard on

related parties Much of this year’s training and quality communications is built around these topics, and we’ve developed new tools for our audit teams.

For example, our enhanced guidance for testing management’s estimates, including ICFR, describes the level of executive supervision and review, including collaboration with EY specialists, needed to develop and execute our audit strategy for estimates that are significant to a company’s financial statements.

We are also continuing to improve the rigor, quality and timeliness of engagement quality reviews, in which a partner independent of the audit reviews an audit team’s work in areas requiring significant judgment.

We developed new materials and tools for engagement quality reviewers that are based on the PCAOB audit standards. We also brought the concepts to life through interactive case studies that we developed from real fact patterns as part of training required for all of our partners assigned as engagement quality reviewers on public company audits.

We enhanced our guidelines for selecting reviewers to further evaluate the reviewer’s experiences and whether he or she has appropriate time to perform a quality review. And we took additional steps to recognize and reward our people who perform high-quality engagement quality reviews.

To help our audit teams implement the new PCAOB standard on related parties, we also developed guidance, tools and training.


Analyzing deficiencies and positive quality eventsA robust root cause process is an important part of our system of quality control because it focuses on identifying factors that contribute to audit deficiencies. In turn, we will take more effective remedial actions so we will be less likely to encounter the same issues in the future. We are confident that, with improvements we have made to our root cause process and our monitoring of the effectiveness of our remedial actions, we are improving audit quality. The profession has focused on strengthening firms’ remediation frameworks in recent years, with the encouragement of the PCAOB. We believe the benefits will be long lived.

Over the last year, we fundamentally redesigned and improved our root cause analysis process. We also enhanced our processes not only to accumulate and analyze data to help us proactively identify any systemic trends but also to develop remediation action plans and monitor and analyze the results of these efforts in a timely fashion.

We are already beginning to obtain the benefits from our updated process. For example, it has enabled us to pinpoint specific areas of the audit of internal control associated with a business combination where additional guidance and implementation examples were needed.

We are not using our root cause process only to identify the factors causing audit deficiencies. We are also focusing on positive quality events that represent best-in-class auditing. We are seeking to understand the behaviors and actions that drove the positive results so that we can incorporate them more broadly into our audits.

E nh ancing our Q uality N etw orkSeveral years ago, we created a Quality Network in each of our six US Regions to support audit teams on quality matters and to monitor and execute key elements of our quality agenda. Section 6 of this report includes more detail on the design and operation of the Quality Network.

Over the past three years, we have doubled our investment in Quality Network resources, and we now have 118 professionals in our Quality Network. The growth in their ranks has allowed the Quality Network to more comprehensively support our audit teams.

A priority in 2015 for our Quality Network is expanding its coaching of audit teams to help them understand certain complex audit matters, avoid common audit pitfalls and respond to emerging audit risks. For example, our Quality Network is coaching audit teams addressing a material business combination or a goodwill impairment test with potentially higher audit risk. We believe that this timely coaching drives further improvement in audit quality.

D uring 2 0 1 5 , w e deliv ered ov er

5 , 0 0 0 training h ours specifically for our p ub lic comp any eng ag ement quality rev iew ers .


3 Our p eop le

Our objective is to attract, develop and retain talented people who work together to perform high-quality audits.

Our people are our most important resource and are the foundation for delivering quality audits. The quality of our audits starts with each of our more than 10,000 US audit professionals.

Our people come from diverse backgrounds but share similar values. We recruit people with integrity who exercise sound judgment and have a sense of professional accountability. We work hard to develop and retain talented professionals because we understand that experienced professionals provide the continuity and skills we need to execute high-quality audits.

R ecruiting and h iringWe recruit for our audit practice primarily on college and university campuses while also hiring people with prior work experience. We look for a diverse group of people with strong intellectual competencies and leadership and communication skills who work well in teams.

Hiring people with different backgrounds, genders and experiences helps us build high-performing audit teams with a global mindset. We view diversity and inclusiveness as drivers of organizational effectiveness and ultimately audit quality.

N umb er of U S audit p artners and p rof es s ional s taf f ( on a f ull- time equiv alent b as is )

Fiscal2015

Fiscal2014

Fiscal2013

Audit partners 944 904 869

Executive directors 104 75 59

Senior managers and managers 2,104 1,998 1,842

Seniors and staff 6,966 6,191 5,794

T otal 1 0 , 1 1 8 9 , 1 6 8 8 , 5 6 4

In fiscal 2015, we hired nearly 2,200 new graduates and 710 experienced professionals in our US audit practice. Over the past three years, we have made a significant investment in hiring at the staff level, which has increased our ranks at both that level and the senior level as staff professionals have progressed.

We are making this investment so we can train and develop professionals who can deliver quality audits today and be the leaders of tomorrow. We also expect these staff increases to help our professionals maintain a work-life balance, which is important to our retention efforts.

R etention and eng ag ementRetaining top talent is fundamental to audit quality. Experienced professionals provide continuity on audit teams and develop knowledge that benefits both the individual audit and our broader practice.

R etention rates

2 0 1 3 81.6%

2 0 1 4 80.1%

2 0 1 5 81.4%

The improvement in our retention rate from last year reflects our continuing efforts to retain and engage talented audit professionals. Our US audit professionals told us in our latest survey that now more than ever before our partners and leaders are communicating “a vision of the future that motivates me.”

We also offer opportunities for professional development, mobility, flexibility and community service. We also offer cash bonuses for top performers, reduced work arrangements that allow our people to modify their hours to meet their personal needs and an expanding array of other benefits and recognition programs.



Our Counseling Families program helps keep our people engaged by giving everyone a chance to meet periodically with our partners in small groups to connect, share information and discuss what’s on their mind.

Our career development programs include rotations into our Professional Practice group, Quality Network or learning organization. We also offer short- or long-term assignments with a non-US member firm or six-week assignments working with an entrepreneur in another country. In addition, we host events to celebrate promotions to the professional staff ranks of senior through executive director, where we provide training on building relationships and managing teams.

We sponsor groups such as our Professional Women’s Networks that host local networking events to help our younger women professionals connect and team with our more senior women. Other networks we sponsor focus on ethnicity, sexual orientation, age, physical abilities, veteran status and parenting status.

We are proud of the recognition we have received, including:

f Fortune magazine’s “100 Best Companies to Work For” for the 17th year

f DiversityInc magazine’s “Top 50 Companies for Diversity” for the 12th year

f Top 10 in Working Mother magazine’s “100 Best Companies for Working Mothers” for the 10th year

P rof es s ional dev elop mentDeveloping the technical and leadership skills of our people is a key component of our audit quality agenda. Our younger professionals get on-the-job coaching on technical skills and exercising professional skepticism and judgment from our audit partners, who have an average of 21.5 years of experience at EY, and other more experienced professionals on the audit.

We have begun a multiyear transformation of our global core audit training. Our new approach blends interactive classroom training with training delivered online and on-demand when it is needed.

Classroom time focuses on simulating the audit experience to bring key concepts to life, reinforced by group discussions designed to teach our professionals not just what to think but how to think critically and deliver quality audits.

We require each audit professional to obtain at least 20 hours of continuing professional education each year and at least 120 hours over a three-year period. Most of our audit professionals significantly exceed these requirements. On average, our professionals obtained 110 hours of continuing professional education in each of the past three years.

P erf ormance manag ementOur people’s performance is measured by comparing an individual’s contributions to a set of expectations for each rank. Our Audit Career Framework outlines these expectations, what it takes to progress to the next rank and how an individual’s personal performance and goals support EY’s strategic priorities.

Performance and pay are linked through variable compensation for non-partners. To be eligible for full variable pay, they must meet certain quality thresholds.

Partners are also evaluated and compensated based on quality and risk management criteria. In accordance with the Securities and Exchange Commission (SEC) and other independence rules, audit partners do not earn compensation based on the sale or provision of non-audit services by EY to companies they audit.

Noncompliance with quality standards may result in compensation adjustments, required special training, additional supervision and/or reassignment. A serious noncompliance matter or pattern of noncompliance may result in actions that include separation.

W e now h av e nearly

3 0 % more p rof es s ionals at th e s taf f and s enior lev els th an w e did th ree years ag o.


4 A udit ex ecution

We are committed to making sure that our audit teams have the resources and time they need to execute high-quality audits.

The execution of high-quality audits starts with working with companies that share our commitment to quality and transparency in financial reporting. Executing high-quality audits also requires a commitment of sufficient resources and time to conduct the audit.

We believe that providing appropriate supervision and involvement by audit executives and specialists in fields such as information technology, tax and valuation are essential to performing high quality audits.

1 , 0 6 0P ub lic comp any clients 2 0 1 3 1,078

2 0 1 4 1,071

2 0 1 5 1,060

N umb er of p ub lic comp any clients

Note: excludes the nearly 700 mutual fund issuers we audit and evaluate at the fund complex level


C h oos ing th e comp anies w e w ill auditFundamental to delivering quality audits is determining whether to accept or continue a client or engagement. To make that determination, we have a rigorous process for evaluating risk, conflicts of interest and independence issues.

We consider factors such as the entity’s financial condition, management’s approach to meeting its internal control and financial reporting responsibilities, the integrity of management, the strength of the audit committee and other governance matters. Client acceptance and continuance decisions are approved by our Professional Practice group, which is independent of our Regions and is described in section 5 of this report.

We continue to have the leading market share in auditing Fortune 500 companies (29%), Fortune 1000 companies (30%) and Russell 300 companies (27%). In each of the past four years, we have also been the leader among auditors of companies that completed initial public offerings.

T ime w e dev ote to auditsThe number of hours we spend on public company audits has continued to increase, but the rate of increase has slowed compared with previous years. The growth in our public company audit hours over the past three years reflects an increase in our audit effort in a number of areas, including ICFR, testing the accuracy and completeness of information (data and reports) produced by the entity and the engagement quality review.

As the table below shows, this year’s increase has moderated as audit teams have absorbed and implemented the guidance and tools we have issued over the past several years.

P ercentag e increas e in total p ub lic comp any audit engagement hours from the prior fiscal year

2 0 1 3 14.7%

2 0 1 4 19.8

2 0 1 5 9.6

A udit ex ecutiv e inv olv ementWe believe that audit quality is enhanced by timely, direct executive participation in audits. We annually review the assignment of partners to the entities that we audit to make sure the partner in charge has the knowledge, skills, abilities, experience and capacity to fulfill his or her responsibilities, and we comply with the audit partner rotation requirements.

Providing appropriate supervision and on-the-job coaching for our people is very important to the delivery of quality audits. The ratio of partners to all professional staff has risen due to our significant investment in hiring staff-level professionals, as described in section 3. We are continuing to provide appropriate supervision and coaching for our more junior professionals.

R atios of audit ex ecutiv es to oth er audit p rof es s ionals

Fiscal2015

Fiscal2014

Fiscal2013

Partners to all professional staff 1 to 9.7 1 to 9.1 1 to 8.9

Partners, executive directors, senior managers and managers to seniors and staff

1 to 2.2 1 to 2.1 1 to 2.1

Senior managers and managers to seniors and staff 1 to 3.3 1 to 3.1 1 to 3.1


We audit five of the top 10 companies on Fortune magazine’s 2015 list of the world’s most admired companies.

I nv olv ing s p ecialis ts in th e ex ecution of th e auditWe are involving more subject-matter specialists in our audits in response to the rising complexity of business activities, accounting standards, tax matters and information technology systems.

Our information technology (IT) specialists are playing a larger role in audits because of our greater emphasis on auditing ICFR and IT systems and the data and reports they generate. Their work represented 6.9% of total audit hours in 2015.

The number of hours our tax specialists incurred on audit engagements was 5.7% of total audit hours in 2015. The number of hours of audit support provided by our transaction specialists (primarily on issues related to valuation) was 1.6% of total audit hours in 2015.

E v aluating w ork loadDemands on our professionals have continued to increase as a result of the complexities we have described and our focus on continuous improvement, particularly in areas such as ICFR and engagement quality reviews.

We continue to closely evaluate the workloads of our audit executives on both client and non-client activities to determine that they have the time necessary to perform quality work and that an appropriate level of executive involvement can occur at all stages of the audit.

Initially, our audit partners and executive directors evaluate their responsibilities and ability to handle their workload. Assurance leadership and the Quality Network in each Region review the results, work with partners and executive directors to set priorities and rebalance workload when necessary.

During the process, leadership emphasizes the need to focus on audit quality and the executive’s responsibility to raise any concerns. We have a similar process for senior managers and tax executives serving audit clients.

A v erag e annual h ours incurred b y audit p rof es s ionals

Fiscal2015

Fiscal2014

Fiscal2013

Partners 2,619 2,596 2,603

Executive directors 2,559 2,534 2,521

Senior managersand managers 2,483 2,472 2,467

Seniors and staff 2,399 2,400 2,385

Average hours for our partners and other audit professionals have remained stable over the past three years.

4 6 %Over last 3 years



H ours on audit eng ag ements

I nf ormation tech nolog y s p ecialis ts

T ax s p ecialis ts

T rans action s p ecialis ts


A udit ex ecution miles tonesSetting milestone dates for completion of audit activities throughout the audit cycle and monitoring progress against those milestones help us enhance audit execution. Our emphasis on milestones also reduces the time between when work is done and when it is reviewed and allows for the right level of attention on audit areas at the right time, enhancing our ability to be more proactive and forward looking with our clients, among other benefits.

Our audit teams establish milestone dates for certain audit activities. Our experience has shown that the most successful audit teams plan their work and then work their plan, making changes to the plan if necessary.

We believe that establishing audit milestone dates, monitoring our progress using our new EY Canvas tool and doing our best to achieve the planned timetable will help us deliver high-quality audits.


5 S up p orting audit quality

Our commitment to quality is also demonstrated through our investment in our quality infrastructure, which supports our teams in performing quality audits.

We continue to invest in our infrastructure to support audit quality. We have significantly increased the number of professionals in our Quality Network and the amount of time they spend supporting audit teams on quality matters and executing key elements of our quality agenda.

We have also expanded our Professional Practice group, which: consults with audit teams on accounting, auditing and SEC reporting matters; creates thought leadership; and develops and maintains our audit methodology, guidance, tools and training. Our Independence function helps our professionals and our firm maintain our independence, which is essential to achieving audit quality.

Our ratio of Quality Network and Professional Practice partners/executive directors to audit partners is now 1 to 4 . 5 .


Q uality N etw orkWith the addition of more professionals in key roles, our Quality Network is focusing on coaching teams starting early in the audit process and providing other types of support throughout the year to help teams address difficult auditing issues.

Each of our six US Regions has a Quality Implementation Leader who works with the Assurance Managing Partner to improve our execution and support our quality initiatives.

Teams regularly use Quality Network resources to:

f Address difficult auditing issues or questions f Conduct a coaching session for the team that focuses on

challenges in a particular audit f Gain a better understanding of common audit challenges early

in the audit cycle f Raise and help address concerns related to staffing

Our coaching initiative is designed to help teams better understand complex audit matters and make necessary adjustments during the audit. Coaching may be initiated when common audit deficiencies are identified in a particular industry, an engagement profile changes or a large transaction occurs. We expect this coaching to help us improve the quality of our audits and prevent audit deficiencies.

P rof es s ional P ractice Partners and other executives in our Professional Practice group are technical subject-matter specialists on accounting, auditing and SEC reporting matters and also perform risk management activities.

Over the past three years, our Professional Practice group, which is independent of our Regions, has conducted an average of more than 3,000 consultations with our audit teams each year.

Professional Practice also:

f Develops thought leadership for our clients and audit teams f Develops and operates our Audit Quality Review monitoring

program f Monitors and maintains our quality control policies and

procedures f Proactively addresses emerging accounting, auditing and

regulatory developments

We have Professional Practice partners in each of our six US Regions to afford greater accessibility and interaction with our audit partners and teams. This proximity allows them to know the partners and their capabilities better, be more attuned to the effects of the regional economy and better understand the businesses we audit and the related risks.

We have expanded our ranks of professionals in Professional Practice to keep pace with our growing audit practice and the increase in audit partners.

P rof es s ional P ractice p artners to audit p artners

2 0 1 3 1 to 8.2

2 0 1 4 1 to 7.8

2 0 1 5 1 to 7.9

In the last three years, we have increased overall Professional Practice staffing by 32% and staffing at the partner level by 18%.


C ulture of cons ultationWe have long promoted a culture of consultation to help drive audit quality. We believe consultation is an important way to address the challenges of more complex accounting standards that in recent years have required more significant audit judgments. We believe our consultation culture is a sign of strength.

We require consultation in certain cases but also strongly encourage our people to exercise professional skepticism and challenge whether we have arrived at the appropriate conclusion. We encourage all personnel — regardless of their level — to ask questions. In our view, better questions drive better answers and highlight how fundamental our professional skepticism is to the audit.

We believe that we are smarter as a group and that sharing ideas and leveraging the firm’s resources help us get to the most appropriate position. Our people are encouraged to make full use of the broad and diverse collective knowledge and experience available within the firm.

We also encourage our people to speak up if they disagree or are uncomfortable with any matter in an audit engagement. While differences of professional opinion that arise during an audit generally are resolved at the audit team level, we have a process in place to elevate disagreements to a higher level of authority within the firm. When a matter that goes beyond the audit team is resolved, we document the resolution.

C ommon audit meth odolog yA key aspect of our global audit methodology (EY GAM) is making risk assessments to determine the nature, timing and extent of our audit procedures. It also highlights the importance of applying appropriate professional skepticism when executing audit procedures.

We recently reorganized EY GAM to structure it by topic and made the concepts and requirements clearer and easier for our people to reference and read. References to PCAOB standards are embedded, and we aligned EY GAM with our new EY Canvas audit tool described in section 2.

Our indep endence f unctionOur Independence function, which has 21 partners, provides the infrastructure and resources to help our professionals and EY US meet applicable professional standards, regulatory requirements and our standards of quality with respect to independence.

Toward that end, we have implemented a number of policies, tools and processes to support EY US and our professionals. Our Global Independence System helps our professionals identify the entities from which independence is required and the independence restrictions that apply. Our Service Offering Reference Tool helps us assess and monitor our portfolio of services on an ongoing basis to confirm that they are permitted by regulation and professional standards. And our Business Relationship Evaluation Tracking process supports our compliance with independence requirements by helping professionals evaluate and obtain advance approval of potential business relationships to avoid conflicts.


6 M onitoring audit quality

We use a number of programs to evaluate the progress we are making to continuously improve audit quality.

Monitoring our audit performance and the effectiveness of our actions to improve audit quality is a key part of our system of quality control. That’s why we enhanced our framework for monitoring the effectiveness of our actions this year. We also perform in-process reviews of audits, inspections of audits after the report is issued and more focused reviews. We also monitor our compliance with independence requirements.

Our overriding objective is to make certain that our quality control system and practices are designed and operate to provide reasonable assurance that our work meets professional standards and regulatory requirements. The results of our monitoring provide us with a basis to conclude that we are meeting this important objective.


P re- is s uance rev iew sWe review specific areas of selected audits of public companies before we issue audit reports. We use these pre-issuance reviews to assess how the guidance and tools we deployed to improve audit quality are being applied. These reviews also provide timely feedback to our teams so they can make adjustments, if necessary, before we issue audit reports.

We determine the number and the focus of our pre-issuance reviews based primarily on the specific audit areas where we believe quality needs to be improved and we have taken remedial actions. In 2014, we performed 83 pre-issuance reviews focused on specific aspects of ICFR and 59 focused on how we decided which locations to include in the scope of our audit if an entity operates in multiple locations.

In 2015, we will perform pre-issuance reviews of 84 engagements, principally focused on aspects of ICFR, auditing management estimates, substantive testing of income statement balances, execution of engagement quality reviews and adoption of the new PCAOB auditing standard on related parties.

We reduced the number of pre-issuance reviews focusing on multilocation audit scoping due to the actions we took last year, including providing additional guidance and training and executing our pre-issuance reviews.

Audits that have undergone pre-issuance reviews have demonstrated improved post-issuance inspection results.

A udit Q uality R ev iew p rog ramIn our Audit Quality Review program, we inspect audits after the report is issued. We select engagements using a risk-based approach that focuses on audits that are large, complex or of significant public interest. Another factor in the selection of audits for this program is how long it has been since a partner’s last inspection. The program measures an audit’s compliance with professional standards, relevant regulatory requirements and our policies and procedures.

As part of this program, we also conduct post-issuance reviews in specific audit areas to evaluate audit quality.

During our 2015 inspection year, we will review 191 audits (generally of financial statements for the year ended 31 December 2014). During our 2014 inspection year, we reviewed 207 audit engagements under our post-issuance review programs, compared with 283 audits in our 2013 inspection year.

We have focused our efforts on performing pre-issuance reviews and coaching engagement teams over the last couple of years, which has allowed us to decrease the number of post-issuance reviews.

While the 2015 post-issuance reviews are not yet completed, we are continuing to see improvement in various audit areas, including ICFR.

U s ing monitoring to inf orm our actionsWe use the data we collect when findings are identified in our internal monitoring programs to help us improve audit quality throughout our practice. We track all findings, look for trends and analyze overall results as part of our continuous improvement efforts.

As discussed earlier, we identify the root cause(s) of significant findings and assess whether an individual matter may be more pervasive and require us to take additional actions, such as enhancing our audit methodology, policies, procedures or training. We also are analyzing positive quality events and look for ways to replicate the behaviors and actions that drove them.

This year, we also enhanced our framework for monitoring the effectiveness of our actions to help us better determine whether we are on track to achieve the key objectives of our action plans. As part of this process, we are identifying leading indicators so we can adjust our action plans, when necessary, in a more timely fashion. We are applying this framework to both actions we take to remediate deficiencies and those we take to proactively address risks to audit quality.


R es tatementsWe monitor the level and nature of restatements of our clients’ financial statements as part of our continuous improvement efforts because the number and causes of restatements due to errors may be considered a signal of potential audit quality issues.

The percentages and numbers in the table below are based on our audits of SEC registrants filing on Form 10-K and include our audits of nearly 700 mutual fund issuers each year.

Year of filing N umb er of res tatements

% of is s uers w e audit

2 0 1 2 16 0.8

2 0 1 3 22 1.1

2 0 1 4 13 0.6

The most common audit areas giving rise to restatements included revenue recognition and income taxes.

I ndep endence comp liance monitoring All EY US client-serving professionals at the rank of manager through partner are required to confirm compliance with independence policies and procedures quarterly. All other EY client-serving professionals and certain others, based on their role or function, are required to confirm compliance annually.

Managers through partners are also required to record securities they hold, along with securities held by members of their immediate families, in our Global Monitoring System (GMS). Anyone who purchases a proscribed security or holds a security that becomes proscribed receives a notice and is required to sell the security.

Each year, we test compliance with our personal independence confirmation requirements and with our requirement to report information into GMS. We audit each partner’s compliance with our independence policies approximately every five years, and EY US leadership is audited every three years.

For the 2014–2015 testing period, EY US tested the compliance of more than 1,500 partners and other personnel.


We want to drive further improvements in audit quality and are fully committed to doing so. We value the PCAOB inspection process because it helps us identify areas where we can continue to improve our performance.

Pursuant to the Sarbanes-Oxley Act of 2002 (the Act), the PCAOB conducts inspections to assess compliance with the requirements for auditing public companies. In those inspections, the PCAOB reviews portions of selected public company audit engagements and evaluates the sufficiency of an audit firm’s system of quality control.

The PCAOB most often selects individual audits and identifies areas of the financial statements that are the most difficult or inherently uncertain.

Given the risk-based nature of its inspections, the PCAOB cautions against extrapolating the results to make broad conclusions about the deficiencies throughout a firm’s audit practice.

P art I of th e P C A OB rep ortThis public section of a PCAOB report describes the procedures performed during the inspection and certain observations regarding audit performance deficiencies on selected engagements.

I ns p ection yearF is cal year of

audits ins p ected ( g enerally)

N umb er of ins p ected audits

Audits identified in P art I

2 0 1 2 December 2011 52 25

2 0 1 3 December 2012 57 28

2 0 1 4 December 2013 56 20

Findings related to auditing ICFR were in 19 of the 20 issuer audits cited in Part I of our 2014 inspection year report; 18 audits included findings related specifically to deficiencies in substantive testing. The most frequent findings included:

f Identifying and/or testing the design and/or operating effectiveness of controls f Testing the accuracy and completeness of issuer-produced data or reports f Identifying and testing controls addressing risks related to a particular account

or assertion

7 P C A OB ins p ections and related matters


The sufficiency of testing related to an account to address an identified risk, evaluating control deficiencies and testing significant assumptions used by management in developing an estimate were also frequent findings. Revenue (including accounts receivable), inventory and long-lived assets were the audit areas in which findings were most common.

P art I I of th e P C A OB rep ort and s tatus of ins p ection rep ortsThis nonpublic section of the PCAOB’s inspection report provides observations on a firm’s system of quality control. The PCAOB’s assessment of a firm’s system of quality control is based on its performance in individual audits and the PCAOB’s review of certain firm practices, policies and processes related to audit quality in the following areas:

f Management structure and processes, including tone at the top f Practices for partner management, including allocation of

partner resources and partner evaluation, compensation, admission and disciplinary actions

f Policies and procedures for considering and addressing the risks involved in accepting and retaining clients, including the application of a firm’s risk-rating system

f Processes related to a firm’s use of audit work performed by its foreign affiliates on the foreign operations of US issuer audits

f A firm’s processes for monitoring audit performance, including processes for identifying and assessing indicators of deficiencies, independence policies and procedures, and processes for responding to defects or potential defects in quality control

Under the Act, the PCAOB may make public any quality control deficiencies identified in this section of the report if they are not addressed to the PCAOB’s satisfaction within 12 months.

During 2015, the PCAOB informed us that we have addressed all of the matters in Part II of our 2011 and 2012 inspection reports to its satisfaction. As a result, those reports are closed.

S tatus of op en ins p ection rep orts

2 0 1 3 Report issued in August 2014; Our final response filed in August 2015; PCAOB review of our response is in process

2 0 1 4 Report issued in June 2015; Our final response is to be filed no later than June 2016

2 0 1 5 Inspection is currently in process

Our p ers p ectiv e on th e P C A OB ’ s ins p ection rep ortsWhile we are pleased with the improvements in our inspection results from the prior year, which reflect the significant actions we have taken and continue to take to improve our performance, we recognize we must continue to drive further improvements and are fully committed to doing so.

We value the PCAOB inspection process because it helps us identify areas where we can continue to improve our performance. Our overriding objective is to perform quality audits.

P eer rev iewWe participate in the American Institute of Certified Public Accountants (AICPA) peer review program that requires a review every three years of our system of quality control for our private company audit practice.

Our most recent peer review was conducted by KPMG in 2013. KPMG inspected a sample of private company audit engagements and also evaluated our system of quality control for our private company audits.

KPMG issued a report in December 2013 with a pass rating that concluded that our system of quality control for our private company audits had been suitably designed and complied with during the peer review year to provide us with reasonable assurance of performing and reporting in conformity with applicable professional standards in all material respects. Our next peer review is scheduled for 2016 (reviewing primarily 2015 year-end audits).

Oth er rev iew sWe are also committed to performing high-quality audits of employee benefit plans (EBPs). We perform annual audits of more than 1,000 EBPs that are subject to the Employee Retirement Income Security Act of 1974 (ERISA), and our audits therefore are subject to inspection by the US Department of Labor (DOL). In addition to periodic firm inspections and inspections of specific plan audits, the DOL periodically performs reviews to assess the quality of audits of plans subject to ERISA. We also monitor our audits of EBPs through our annual post-issuance review process, and these audits are included in the AICPA peer review program. Audits of EBPs that file an annual Form 11-K with the SEC are also subject to inspection by the PCAOB.

EY | Assurance | Tax | Transactions | Advisory

About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

© 2015 EYGM Limited. All Rights Reserved.

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This and many of the publications produced by our US Professional Practice group are available free of charge on AccountingLink at www.ey.com/accountinglink.

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

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