Key Points
- AQIs operate at two levels: firm-wide indicators (such as staff turnover, inspection results) and engagement-specific indicators (such as partner involvement hours, specialist use).
- Most regulators recommend between 10 and 25 indicators rather than a single composite score.
- AQIs do not measure audit quality directly; they flag conditions that make quality failures more or less likely.
- Firms that fail to link their chosen AQIs to the quality risks identified under ISQM 1 face inspection findings on their monitoring process.
What is Audit Quality Indicators?
ISQM 1.42 requires the firm to establish a monitoring and remediation process that includes performing monitoring activities to provide relevant, reliable, and timely information about the design, implementation, and operation of the system of quality management. AQIs sit inside that monitoring process. They give the firm's leadership a structured way to spot patterns (rising staff turnover on complex engagements, declining hours at the review stage, recurring inspection deficiencies in a particular service line) before those patterns produce engagement failures.
The IAASB's 2014 Framework for Audit Quality identified input, process, and output factors across three levels: engagement, firm, and national. AQIs translate those factors into trackable metrics. Accountancy Europe's 2022 position paper on AQIs distinguishes firm-level indicators (results of internal and external inspections, staff retention rates, investment in training) from engagement-level indicators (partner involvement, ratio of experienced staff, timeliness of engagement quality review completion). Neither ISQM 1 nor the IAASB Framework prescribes a fixed set of indicators. The firm selects indicators that respond to its own quality risks, and ISQM 1.43 requires the firm to design monitoring activities that include inspection of completed engagements. AQIs supplement those inspections with trend data that individual file reviews cannot capture.
Worked example
Client context: Hoffmann Maschinenbau GmbH is a German engineering company with revenue of €28M, reported under HGB. The audit is performed by a 40-person regional firm based in Stuttgart. The firm's ISQM 1 monitoring partner reviews AQIs quarterly.
Step 1 — Select indicators linked to identified quality risks
The firm's risk assessment under ISQM 1.25–27 identified two principal quality risks: insufficient experienced-staff availability during peak season (January to March) and late identification of going concern issues on manufacturing clients exposed to supply chain disruption. The monitoring partner selects four firm-level AQIs (staff turnover rate, average audit experience per engagement team, percentage of engagements with internal inspection findings rated "improvement required," and timeliness of completion relative to the reporting deadline) and two engagement-level AQIs for the Hoffmann audit specifically (partner hours as a percentage of total engagement hours, and number of days between draft report issuance and engagement quality review sign-off).
Documentation note: record the link between each selected AQI and the quality risk it monitors per ISQM 1.42, including the rationale for excluding other candidate indicators.
Step 2 — Collect and evaluate data
For Q1 2026, the firm's staff turnover rate is 18% (up from 12% in Q1 2025). Average audit experience on the Hoffmann engagement is 4.1 years per team member, below the firm's 5.0-year target. Partner involvement on the Hoffmann engagement stands at 14% of total hours. The engagement quality review was completed two days after the draft report, within the firm's five-day target.
Documentation note: record each AQI value alongside the prior-period comparator and the firm's internal threshold. Flag the staff turnover rate and experience-per-team-member metric as below threshold.
Step 3 — Respond to indicator trends
The monitoring partner escalates the two below-threshold indicators to the firm's leadership team. The leadership team approves a corrective action: reassign a senior manager with 11 years of manufacturing audit experience to the Hoffmann engagement for the FY2026 cycle, and accelerate the Q2 recruitment timeline to address the turnover spike. These responses feed back into the firm's remediation process under ISQM 1.44.
Documentation note: record the escalation, the corrective actions approved, the responsible person, and the target date for implementation. Cross-reference to the firm's remediation log per ISQM 1.44.
Conclusion: the AQI review produces two actionable findings with documented corrective responses, defensible because each indicator traces to an identified quality risk and the firm's remediation process addresses the root cause rather than the symptom.
Why it matters in practice
Firms select AQIs that are easy to measure (total training hours, number of CPD courses completed) rather than indicators that respond to the specific quality risks identified in their ISQM 1 risk assessment. ISQM 1.42 requires monitoring activities to provide information about the system of quality management as designed. If the chosen indicators do not connect to the firm's own quality risks, the monitoring process fails to satisfy the standard, regardless of how many data points the firm tracks.
The FRC's December 2024 inspection findings for Tier 2 and Tier 3 audit firms identified that firms frequently collected AQI data without establishing thresholds or trigger points that would prompt investigation. Data collection without defined escalation criteria turns AQIs into a compliance exercise that produces no corrective action, which undermines the remediation loop that ISQM 1.44 requires.
Audit quality indicators vs. key performance indicators (KPIs)
| Dimension | Audit quality indicators | Key performance indicators (general) |
|---|---|---|
| Purpose | Monitor conditions that affect audit quality at the firm and engagement level | Track business performance against strategic or financial targets |
| Governing framework | ISQM 1.42–44; IAASB Framework for Audit Quality | No single standard; varies by industry and management framework |
| Typical users | Firm leadership, engagement partners, audit committees, regulators | Board of directors, executive management, investors |
| Examples | Staff turnover on audit engagements, partner involvement hours, inspection deficiency rates, timeliness of engagement quality reviews | Revenue growth, client retention rate, utilisation rate, fee realisation |
The distinction matters because firms sometimes repurpose operational KPIs (utilisation rates, fee recovery) as AQIs. Utilisation tells you how busy the team was. It tells you nothing about whether the team performed enough work at the right level to reduce quality risks. An engagement where the team logged high utilisation but skipped the planned tests of controls is a quality failure that a utilisation KPI would never flag.
Related terms
Frequently asked questions
How many audit quality indicators should my firm track?
There is no prescribed number. Accountancy Europe's 2022 position paper found that most regulatory initiatives recommend between 10 and 25 indicators. The right number depends on firm size and the number of quality risks identified under ISQM 1.25–27. A 15-person firm with a narrow service portfolio will need fewer indicators than a multi-office firm serving public interest entities. Select indicators that your leadership team will act on; discard those that produce data no one reviews.
Do I have to share AQIs with audit committees?
ISQM 1 does not mandate external disclosure of AQIs. However, several jurisdictions encourage or require it. The FRC's Audit Quality Practice Aid recommends that firms provide AQI data to audit committees of listed entities as part of the auditor's transparency report. ISA 260.16 requires communication of matters relevant to the oversight of the financial reporting process, and AQI trends that affect the engagement (such as staff turnover on the engagement team) fall within that scope. In practice, sharing a concise set of engagement-level AQIs builds audit committee confidence and pre-empts questions about resourcing.
What is the difference between AQIs and the monitoring activities in ISQM 1?
AQIs are one input to the monitoring process, not the whole of it. ISQM 1.43 requires inspection of completed engagements as a distinct monitoring activity. AQIs track trends across engagements and across time. Inspections evaluate whether a specific engagement complied with professional standards. Both feed the evaluation under ISQM 1.54, where the firm concludes on whether the system of quality management provides reasonable assurance that its objectives are being achieved.