Syllabus C: PRACTICE MANAGEMENT

Syllabus C1: Quality control

Syllabus C1a) Explain the principles and purpose of quality control of audit and other
assurance engagements.
Definitions for Quality Control
Learn the meaning of the following terms:
1. Engagement partner
The partner responsible for the audit engagement, performance and report
Also she has the appropriate authority from a professional, legal or regulatory body
2. Engagement Quality Control Review
Provides an objective evaluation, before signing the report,
of any significant judgments & conclusions
It is for listed entity audits and any where the firm thinks such a review is required
3. Engagement Quality Control Reviewer
Someone not part of the engagement team, with experience and authority to
objectively evaluate the significant judgments & conclusions
4. Engagement team
All partners and staff performing the engagement, plus anyone engaged by to do audit
work
This excludes external experts
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5. Firm
A sole practitioner, partnership or corporation of professional accountants
6. Inspection
These provide evidence of compliance with the firm’s quality control policies
7. Listed entity
An entity whose shares (or debt) are quoted on a stock exchange
8. Monitoring
An ongoing evaluation of the firm’s quality control
It includes periodic inspections of a selection of completed engagements
Principles & Purpose
Firms need to be sure that the audits they perform meet quality standards
This is to decrease the risks of:
• Litigation against us for professional litigation
• Incorrect Audit opinion and hence an increased investor confidence in the financial
statements
There are 2 standards on Quality Control
1. At the FIRM level International Standard on Quality Control 1 (ISQC 1) – Quality
Control for firms that perform audits and reviews
2. At the individual AUDIT level ISA 220 – Quality Control for audits of historical
financial
information
ISQC 1 (firm level)
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ISQC 1 identifies six building blocks of a firm’s system of quality control:
1. Ethics
2. Client Relationships
3. Leadership
4. Human Resources
5. Engagement Performance
6. Monitoring
We will look at the above in more detail in the next section. See you there, hotpants….
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Syllabus C1b) Describe the elements of a system of quality control relevant to a given
firm.
Elements of a QC system
This follows on from the previous section
Firm Level Quality Control
The objective of the firm is to establish and maintain a system of quality control to
provide
it with reasonable assurance that:
(a) The firm and its personnel comply with professional standards and applicable legal
and regulatory requirements; and
(b) Reports issued by the firm or engagement partners are appropriate in the
circumstances
1. Leadership
• An internal culture focused on quality is key
• This means training, appraisal & mission statements.
• Commercial considerations never override quality
• Pay & Benefits must reflect commitment to quality.
• Resources must be available to support quality
2. Human Resources
• All staff to have the capabilities & competence to ensure quality.
• Appraisals and development regularly
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3. Engagement Issues - Planning
• Discuss known risks with the client and document
• Staff suitably qualified and experienced, have knowledge of the client
• Contentious areas must be consulted on in a cost effective way
• A timetable for suitable reviews
• Ensure independence and any issues addressed
• Time pressure
All audits should be planned to ensure that adequate time
can be spent to obtain sufficient appropriate audit evidence to support the audit opinion.
4. Engagement Issues - Supervision
• Staff supervised and assessed to control the work flow.
• Any problems tackled immediately and consultation on any deviations from the
original plan.
5. Engagement Issues - Review
• Review has the purpose of identifying previously unrecognised problems and
examining them along with the rest of the work carried out.
• Is the amount of evidence gathered sufficient or is further work required?
• Quality control can be achieved during the review stage by:
1) Learn lessons from mistakes made
2) Appraisal staff immediately after assignments to praise &/or constructively criticise
6. Monitoring
• Ensure new developments in standards and regulations are implemented
• Ensure CPD is kept up to date.
• Any breaches to monitoring system dealt with
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7. Ethical Requirements
• Have procedures to comply with ethical requirements eg. independence
• Emphasise through leadership, education/training, monitoring and dealing with
noncompliance
• Have procedures to identify independence threats eg. prompt notification by
employees
• Ensure that firm is notified of breaches of ethical requirements promptly
Types Of Review
• Hot Reviews
A ‘hot’ review is carried out before the audit report is signed.
Performed by a suitably independent reviewer such as a senior manager (not part of the
management team).
Listed company engagements must have a hot review as well as those of public interest
or with significant risks.
It reviews the quality of the judgements made such as:
• Is the firm independent?
• Are risk assessment judgements justified?
• Use of work outside the audit team.
• Have misstatements been correctly dealt with?
• Do working papers support the conclusions reached?
• Is the final engagement report justified in the circumstances?
• Cold Reviews
• A ‘cold’ review is a review carried out after the audit report is signed.
• It will be designed to identify problems in procedures and poor practice.
• The cold review should make recommendations for improvements.
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Syllabus C1c) Evaluate the quality control procedures that are in place for a given firm.
Engagement Performance
Direction, Supervision and Performance
Directing the engagement team means telling them about:
1. Their ethical responsibilities
Their need to plan and perform an audit with professional skepticism
2. The objectives of the work to be performed
3. The nature of the entity’s business
4. Risk-related issues
5. Problems that may arise
6. The detailed approach to the performance of the engagement
Supervision includes:
• Seeing if the team has enough time and competence to do their job
Also whether they understand their instructions
• Addressing significant matters arising during the audit and modifying the plan
appropriately
• Identifying matters for consultation with experienced engagement team members
Reviews include:
• Ensuring that work of less experienced team members is reviewed by more
experienced
ones
• Ensuring that significant matters have been raised for further consideration
• Appropriate consultations have happened
• The work performed supports the conclusions reached and is appropriately
documented
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The Engagement Partner’s Review of Work Performed
This involves timely reviews of the following:
1. Critical areas of judgment
2. Significant risks
Engagement Quality Control Review
Note the following:
• It helps to see if sufficient appropriate evidence has been obtained
• It is done throughout the audit so significant matters are promptly resolved before the
date of the auditor’s report.
• Documentation of the review may be completed after the auditor’s report (as part of
the
assembly of the final audit file)
• The extent of the review depends on:
1) The complexity of the audit
2) If the entity is listed and
3) The risk of an inappropriate auditor’s report
Assigning the Audit Team
You need to consider the team's competence and capabilities
This means looking at their:
1. Understanding of, and experience with, similar audits
2. Understanding of professional standards and regulations
3. IT expertise and any specialist accounting / auditing
4. Knowledge of the client's industry
5. Ability to apply professional judgment
6. Understanding of the firm’s quality control policies
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Individual level of Quality Control
Individual Level Quality Control
ISA 220 Quality Control for Audits of Historical Financial Information specifies the following
quality control procedures that should be applied by the engagement team in individual
audit assignments.
Client acceptance procedures
There should be full documentation, and conclusion on, ethical and client acceptance
issues in each audit assignment.
The engagement partner should consider whether members of the audit team have
complied with ethical requirements, for example, whether all members of the team are
independent of the client.
Additionally, the engagement partner should conclude whether all acceptance
procedures
have been followed, for example, that the audit firm has considered the integrity of the
principal owners and key management of the client.
Other procedures on client acceptance should include:
1. Obtaining professional clearance from previous auditors
2. Consideration of any conflict of interest
3. Money laundering (client identification) procedures.
• Establish the identity of the entity and its business activity e.g. by obtaining a
certificate of incorporation
• If the client is an individual, obtain official documentation including a name and
address, e.g. by looking at photographic identification such as passports and driving
licences
• Consider whether the commercial activity makes business sense (i.e. it is not just a
‘front’ for illegal activities)
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• Obtain evidence of the company’s registered address e.g. by obtaining headed letter
paper
• Establish the current list of principal shareholders and directors.
Engagement team
Procedures should be followed to ensure that the engagement team collectively has the
skills, competence and time to perform the audit engagement.
The engagement partner should assess that the audit team, for example:
1. Has the appropriate level of technical knowledge
2. Has experience of audit engagements of a similar nature and complexity
3. Has the ability to apply professional judgement
4. Understands professional standards, and regulatory and legal requirements.
Direction
The engagement team should be directed by the engagement partner.
The planning meeting should be led by the partner and should include all people
involved
with the audit.
There should be a discussion of the key issues identified at the planning stage.
Procedures such as an engagement planning meeting should be undertaken to ensure
that the team understands:
1. Their responsibilities
2. The objectives of the work they are to perform
3. The nature of the client’s business
4. Risk related issues
5. How to deal with any problems that may arise; and
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Supervision
Supervision should be continuous during the engagement.
Any problems that arise during the audit should be rectified as soon as possible.
Attention should be focused on ensuring that members of the audit team are carrying
out
their work in accordance with the planned approach to the engagement.
Significant matters should be brought to the attention of senior members of the audit
team.
Review
The review process is one of the key quality control procedures.
All work performed must be reviewed by a more senior member of the audit team.
Reviewers should consider for example whether:
1. Work has been performed in accordance with professional standards
2. The objectives of the procedures performed have been achieved
3. Work supports conclusions drawn and is appropriately documented.
Consultation
Finally the engagement partner should arrange consultation on difficult or contentious
matters.
This is a procedure whereby the matter is discussed with a professional outside the
engagement team, and sometimes outside the audit firm.
Consultations must be documented to show:
1. The issue on which the consultation was sought; and
2. The results of the consultation.
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