new chap 1

CHAPTER a 1
7
QUALITY CONTROL
LEARNING OUTCOMES
After studying this chapter, you will be able to:
❑ Gain the knowledge about importance of audit quality.
❑ Understand the importance of quality control system in a firm.
❑ Clearly grasp import of SQC 1 and SA 220.
❑ Apply requirements of SQC 1 and SA 220 in practical situations.
❑ Understand importance of ethics in engagements.
❑ Differentiate between SQC 1 and SA 220.
❑ Understand relationship between SQC 1 and SA 220.
❑ Know briefly about mechanisms for review of audit quality.
© The Institute of Chartered Accountants of India

1.2 ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS
22
CHAPTER OVERVIEW
Quality Control
SQC 1 SA 220
Quality Control for firms that

perform audits and reviews of
Quality Control for an audit of
historical financial information,
financial statements
and other assurance and related
services engagements
CA Jagriti is working in a firm of Chartered Accountants in capacity of a paid employee. The firm
consists of 7 partners and is handling varied types of professional work including audits. There
is heavy load of professional work on her and she handles few audit clients also. The firm’s
business is growing rapidly and many new clients have been added to the client base of the firm
in past 2-3 years. In hindsight, she is thinking whether it was proper on part of the firm to accept
new clients without checking and verifying their backgrounds.
Besides, she also feels that firm is accepting audits of some companies which are engaged in
technical and complex operations. The firm has no past experience for audits of such clients. The
partners also seemed to be stingy in hiring experienced and capable staff to handle such work.
In her mind, she always lamented about the same. Are commercial considerations deciding and
overriding factors? She was brooding.
Increase in volume of professional work without commensurate hiring of capable and qualified
staff is leading to many lapses. She had handled audit of a listed company. The audit was
completed, report issued, and annual report published. She found to her horror that audit report
issued under the Companies Act, 2013 referred to “profit” in financial statements. However,
audited financial statements reflected a “loss.” She developed cold feet and cursed lack of a
proper quality control system in the firm.
Similarly, in another case, she found that issued audit report of the company referred to “cash
flow statement” whereas audited financial statements didn’t comprise of a cash flow statement
as it was a “small company” within meaning of the Companies Act, 2013.
She had made up her mind to make senior partner listen to her. Inviting attention to such serious
lapses in reporting, she politely told her that firm was inviting troubles from regulators. She
underlined need for a proper and effective quality control system in the firm to ensure that work
was carried out in accordance with professional standards and applicable legal and regulatory
framework so that audit report that is appropriate is issued.

QUALITY CONTROL 1.3 a
1. AUDIT QUALITY
High audit quality is central to the auditing profession. It helps in creating trust in users of financial
information. Industry, government and public at large are the stakeholders who rely upon assurance
given by auditors. It is, therefore, necessary to ensure high audit quality throughout the audit
process. Audit quality involves the application of a rigorous audit process by auditors and quality
control procedures that comply with laws, regulations and applicable professional standards.
SQC 1, “Quality Control for firms that perform audits and reviews of historical financial information,
and other assurance and related services engagements” and SA 220, “Quality Control for an audit
of financial statements” deals with issue of establishing quality control systems and responsibilities
of auditors in this regard. Both the standards deal with framework of audit quality. SQC 1 applies to
all engagements and deals with quality at the level of firm. SA 220 deals with audit quality at
individual audit engagement level.
Besides the above two standards, other Standards on Auditing, Code of Ethics issued by ICAI and
certain provisions of the Companies Act, 2013 facilitate quality control process. There also exists a
mechanism for review of quality control through Peer Review Board, Quality Review Board and
NFRA (National Financial Reporting Authority).
2. SQC 1 - QUALITY CONTROL FOR FIRMS THAT

PERFORM AUDITS AND REVIEWS OF HISTORICAL
FINANCIAL INFORMATION, AND OTHER ASSURANCE
AND RELATED SERVICES ENGAGEMENTS
SQC 1 requires that the firm should establish a system of quality control designed to provide it with
reasonable assurance that the firm and its personnel comply with professional standards and
regulatory and legal requirements and that reports issued by the firm or engagement partners are
appropriate in the circumstances. The firm’s system of quality control should consist of policies
designed to achieve these objectives. This quality control standard applies to all firms irrespective
of their constitution.
2.1 Elements of System of Quality Control

The firm’s system of quality control should include policies and procedures addressing each of the
following elements: -
(a) Leadership responsibilities for quality within the firm

(b) Ethical requirements

(c) Acceptance and continuance of client relationships and specific engagements
(d) Human resources
(e) Engagement performance
(f) Monitoring
Quality control policies and procedures should be documented and communicated to the firm’s
personnel. By communicating, the firm recognizes the importance of obtaining feedback on its
quality control system from its personnel. Therefore, the firm encourages its personnel to
communicate their views or concerns on quality control matters.
Leadership
responsibilities
for quality
within firm
Ethical
Monitoring requirements
Elements of
system of
quality control
Acceptance &
continuance of
Engagement client
performance relationships
and specific
engagement
Human
resources
2.1.1 Leadership Responsibilities for Quality within the Firm

SQC 1 requires firms to establish policies and procedures designed to promote an internal culture
based on the recognition that quality is essential in performing engagements. Such policies and
procedures should require the firm’s chief executive officer or the firm’s managing partners to

assume ultimate responsibility for the firm’s system of quality control. The example set by firm’s
leadership encourages an inner culture that recognizes high quality audit work. Further, persons
assigned operational responsibilities for the firm’s quality control system by the firm’s chief executive
officer or managing partners should have sufficient and appropriate experience, ability, and the
necessary authority to assume that responsibility.
It has been laid down clearly that the firm’s business strategy is subject to the overriding requirement
for the firm to achieve quality in all the engagements that the firm performs. Essentially, it implies
that audit quality is paramount in all engagements. It is non-negotiable. In this regard, it should be
ensured that: -
(a) The firm assigns its management responsibilities so that commercial considerations do not
override the quality of work performed.
(b) The firm’s policies and procedures addressing performance evaluation, compensation, and
promotion (including incentive systems) with regard to its personnel are designed to
demonstrate the firm’s overriding commitment to quality and
(c) The firm devotes sufficient resources for the development, documentation and support of its
quality control policies and procedures.
TEST YOUR UNDERSTANDING 1

ABC & Associates, Chartered Accountants, has a policy to accept the clients wherein the risk
evaluation is conducted with respect to the Company and the promoter. XYZ Limited approached
ABC & Associates. The promoter of XYZ Limited is a close associate and family friend of Mr. A,
Managing Partner of ABC & Associates. XYZ Limited has been in the news in the previous year for
certain inquiries from the regulatory authorities in relation to certain matters. The existing auditor of
XYZ Limited has resigned and has created a casual vacancy. XYZ Limited is ready to offer 25% more
than the existing fees and has approached ABC & Associates for appointment as Auditor. Mr. A has
a strong recommendation to the Firm to accept the audit.
What is your understanding of the functioning of the tone at the top of the firm ABC & Associates,
Chartered Accountants.? What are the considerations one should exercise to uphold Quality of the
Firm?

2.1.2. Ethical Requirements

The firm should establish policies and procedures designed to provide it with reasonable assurance
that the firm and its personnel comply with relevant ethical requirements contained in the Code of
Ethics issued by ICAI.
The Code establishes the fundamental principles of professional ethics which include integrity,
objectivity, professional competence and due care, confidentiality and professional behaviour.
Fundamental principles should be emphasized by:
A process for
Actions of the spreading
dealing with
leadership of awareness and Monitoring
non-
the firm training
compliance
Observance of “Independence” in all engagements is the founding requirement. The firm should
establish policies and procedures designed to provide it with reasonable assurance that the firm, its
personnel and (including experts contracted by the firm and network firm personnel) maintain
independence where required by the Code. Such policies and procedures should enable the firm to: -
(a) Communicate its independence requirements to its personnel
(b) Identify and evaluate circumstances and relationships that create threats to independence,
and to take appropriate action to eliminate those threats or reduce them to an acceptable level by
applying safeguards, or, if considered appropriate, to withdraw from the engagement.
There should exist a mechanism in the firm by which engagement partners provide the firm with
relevant information about client engagements and personnel of firm promptly notify firm of
circumstances and relationships that create a threat to independence. All breaches of independence
should be promptly notified to firm for appropriate action. Its objective is to ensure that independence
requirements are satisfied.
At least annually, the firm should obtain written confirmation of compliance with its policies and
procedures on independence from all firm personnel required to be independent in terms of the
requirements of the Code.

SQC 1 lays special emphasis on familiarity threat. Using the same senior personnel on assurance
engagements over a prolonged period may impair the quality of performance of the engagement.
Therefore, the firm should establish criteria for determining the need for safeguards to address this
threat. In determining appropriate criteria, the firm considers such matters as -
(a) the nature of the engagement, including the extent to which it involves a matter of public
interest and
(b) the length of service of the senior personnel on the engagement.
Examples of safeguards include rotating the senior personnel or requiring an engagement quality
control review. The familiarity threat is particularly relevant in the context of financial statement
audits of listed entities. For these audits, the engagement partner should be rotated after a pre-
defined period, normally not more than seven years (except in cases where audit of listed entities is
conducted by a sole practitioner). However, to ensure quality control exists in such firms and
appropriate reports are issued, there is a process for mandatory peer review of such firms.

MNP & Co., a firm of auditors, is appointed by a bank to conduct stock audit of a borrower. It deputes
one of its paid Chartered accountant employees, Sudhanshu, to conduct above said stock audit. He
leverages it as an opportunity to prevail upon the client to get the accounts audited from their firm. He
also assures the client of a clean stock audit report without adverse comments as a quid pro quo. Is
approach of Sudhanshu proper? How does it reflect upon the quality control system of firm?
2.1.3. Acceptance and Continuance of Client Relationships and Specific Engagements

A firm before accepting an engagement should acquire vital information about the client. Such an
information should help firm to decide about: -
Integrity of Client, promoters and key managerial personnel.
Competence (including capabilities, time and resources) to perform

engagement.
Compliance with ethical requirements.

The firm should obtain such information as it considers necessary in the circumstances before
accepting an engagement with a new client, when deciding whether to continue an existing
engagement, and when considering acceptance of a new engagement with an existing client. Where
issues have been identified, and the firm decides to accept or continue the client relationship or a
specific engagement, it should document how the issues were resolved.
With regard to the integrity of a client, matters that the firm considers include, for example:
• The identity and business reputation of the client’s principal owners, key management,
related parties and those charged with its governance.
• The nature of the client’s operations, including its business practices.
• Information concerning the attitude of the client’s principal owners, key management and
those charged with its governance towards such matters as aggressive interpretation of
accounting standards and the internal control environment.
• Whether the client is aggressively concerned with maintaining the firm’s fees as low as
possible.
• Indications of an inappropriate limitation in the scope of work.
• Indications that the client might be involved in money laundering or other criminal activities.
• The reasons for the proposed appointment of the firm and non-reappointment of the
previous firm. The extent of knowledge a firm will have regarding the integrity of a client
will generally grow within the context of an ongoing relationship with that client .
In considering whether the firm has the capabilities, competence, time and resources to
undertake an engagement, following matters have to be taken into consideration: -
• Firm personnel have knowledge of relevant industries or subject matters;

• Firm personnel have experience with relevant regulatory or reporting requirements, or the
ability to gain the necessary skills and knowledge effectively;
• The firm has sufficient personnel with the necessary capabilities and competence;
• Experts are available, if needed;
• Individuals meeting the criteria and eligibility requirements to perform engagement quality
control review are available, where applicable; and
• The firm would be able to complete the engagement within the reporting deadline.

If there is any conflict of interest between the firm and client, it should be properly resolved before
accepting the engagement. Where the firm obtains information that would have caused it to decline
an engagement if that information had been obtainable earlier, policies and procedures on the
continuance of the engagement and the client relationship should include consideration of:
(a) The professional and legal responsibilities that apply to the circumstances, including whether
there is a requirement for the firm to report to the person or persons who made the
appointment or, in some cases, to regulatory authorities; and
(b) The possibility of withdrawing from the engagement or from both the engagement and the
client relationship.
Policies and procedures on withdrawal from an engagement or from both the engagement
and the client relationship address issues that include the following:
• Discussing with the appropriate level of the client’s management and those charged with its
governance regarding the appropriate action that the firm might take based on the relevant
facts and circumstances.
• If the firm determines that it is appropriate to withdraw, discussing with the appropriate level
of the client’s management and those charged with its governance withdrawal from the
engagement or from both the engagement and the client relationship, and the reasons for the
withdrawal.
• Considering whether there is a professional, regulatory or legal requirement for the firm to
remain in place, or for the firm to report the withdrawal from the engagement, or from both
the engagement and the client relationship, together with the reasons for the withdrawal, to
regulatory authorities.
• Documenting significant issues, consultations, conclusions and the basis for the conclusions.

CA M is introduced to a prospective client in a social function. He assures to visit office of CA M very
soon in relation to professional work. During discussions over a cup of coffee next week, it transpires
that there was a search by the Enforcement Directorate in his premises about a month back resulting
in recovery of huge sum of cash. The income tax department had also searched his premises in
relation to bogus capital gains on penny stocks. Complaining about the poor quality of services
provided by his present auditor, he offers appointment as tax auditor of his five family -owned firms
to CA M in lieu of handsome fees. What are the factors to be evaluated by CA M if he wants to take
up the engagement?

2.1.4. Human Resources

The firm should establish policies and procedures designed to provide it with reasonable assurance
that it has sufficient personnel with the capabilities, competence, and commitment to ethical
principles necessary to perform its engagements in accordance with professional standards and
regulatory and legal requirements and to enable the firm or engagement partners to issue reports
that are appropriate in the circumstances. Such policies and procedures should address relevant
HR issues including recruitment, compensation, training, career development, performance
evaluation etc. There should be emphasis on the continuing professional development of the firm’s
personnel.
The firm should assign responsibility for each engagement to an engagement partner.
The firm should establish policies and procedures requiring that:
(a) The identity and role of the engagement partner are communicated to key members
of the client’s management and those charged with governance;
(b) The engagement partner has the appropriate capabilities, competence, authority and
time to perform the role; and
(c) The responsibilities of the engagement partner are clearly defined and
communicated to that partner.
Each engagement team should be able to carry out its responsibilities with necessary competence
and skill. Therefore, the firm should ensure suitable people are available and groom them for their
role. The firm should assess the performance of their partners and team members keeping in mind
their commitment towards quality.
2.1.5. Engagement Performance
Consistency in quality of engagement performance is achieved through briefing of engagement
teams of their objectives, processes for complying with engagement standards, processes of
engagement supervision and training, methods of reviewing performance of work, appropriate
documentation of work performed.
Consultation in difficult or contentious matters: Consultation should take place in difficult or

contentious matters pertaining to an engagement.
Consultation includes discussion, at the appropriate professional level, with individuals within or
outside the firm who have specialized expertise, to resolve a difficult or contentious matter. It helps
to promote quality and improves the application of professional judgment. Consultation procedures

require consultation with those having appropriate knowledge, seniority and experience within the
firm (or outside the firm) on significant technical, ethical and other matters and appropriate
documentation and implementation of conclusions resulting from consultations.
A firm needing to consult externally, for example, a firm without appropriate internal resources, may
take advantage of advisory services provided by other firms or professional and regulatory bodies.
Complete and proper documentation should be maintained on issues involved and results of
consultation.
Engagement quality control review: Significant judgments made in an engagement should be
reviewed by an engagement quality control reviewer for taking an objective view before the report is
issued.
The extent of the review depends on the complexity of the engagement and the risk that the report
might not be appropriate in the circumstances. The review does not reduce the responsibilities of
the engagement partner.
Engagement quality control review is mandatory for all audits of financial statements of listed
entities. In respect of other engagements, firm should devise criteria to determine cases requiring
performance of engagement quality control review.
An engagement quality control review for audits of financial statements of listed entities
includes considering the following: -
• The engagement team’s evaluation of the firm’s independence in relation to the specific
engagement.
• Significant risks identified during the engagement and the responses to those risks.
• Judgments made, particularly with respect to materiality and significant risks.
• Whether appropriate consultation has taken place on matters involving differences of opinion
or other difficult or contentious matters, and the conclusions arising from those consultations.
• The significance and disposition of corrected and uncorrected misstatements identified during
the engagement.
• The matters to be communicated to management and those charged with governance and,
where applicable, other parties such as regulatory bodies.
• Whether working papers selected for review reflect the work performed in relation to the
significant judgments and support the conclusions reached.
• The appropriateness of the report to be issued.

Engagement quality control reviewer is a partner, other person in the firm (who should be member
of ICAI), suitably qualified external person, or a team made up of such individuals. In this regard,
suitably qualified external person refers to an individual outside the firm with the capabilities and
competence to act as an engagement partner, for example a partner or an employee (with
appropriate experience) of another firm. In addition, the engagement quality control reviewer for an
audit of the financial statements of a listed entity is an individual with sufficient and appropriate
experience and authority to act as an audit engagement partner on audits of financial statements of
listed entities. It is necessary to maintain objectivity of such reviewer. Therefore, participation in
engagement or making decisions for engagement team is to be avoided at all costs. However,
engagement partner may consult engagement quality control reviewer during the engagement so as
not to compromise his objectivity and eligibility to perform the role.
Where the nature and extent of the consultations become significant, however, care is taken by both
the engagement team and the reviewer to maintain the reviewer’s objectivity. Where this is not
possible, another individual within the firm or a suitably qualified external person is appointed to take
on the role of either the engagement quality control reviewer or the person to be consulted on the
engagement. The firm’s policies should provide for the replacement of the engagement quality
control reviewer where the ability to perform an objective review may be impaired.
Differences of Opinion: There might be differences of opinion within engagement team, with those
consulted and between engagement partner and engagement quality control reviewer. The report
should only be issued after resolution of such differences. In case, recommendations of engagement
quality control reviewer are not accepted by engagement partner and matter is not resolved to
reviewer’s satisfaction, the matter should be resolved by following established procedures of firm
like by consulting with another practitioner or firm, or a professional or regulatory body.
Engagement documentation: The firm should establish policies and procedures for engagement
teams to complete the assembly of final engagement files on a timely basis after the engagement
reports have been finalized. Engagement files should be completed in not more than 60 days afte r
the date of auditor’s report in case of audit engagements and in other cases within the limits
appropriate to engagements.
Where two or more different reports are issued in respect of the same subject matter information of
an entity, the firm’s policies and procedures relating to time limits for the assembly of final
engagement files should be considered for each report as if it were for a separate engagement. This
may, for example, be the case when the firm issues an auditor’s report on a component’s financial
information for group consolidation purposes and, at a subsequent date, an auditor’s report on the
same financial information for statutory purposes.

Policies and procedures should be designed to maintain the confidentiality, safe custody, integrity,
accessibility and retrievability of engagement documentation.
Care should be taken that policies and procedures on documentation of the engagement quality
control review should require documentation that: -
(a) The procedures required by the firm’s policies on engagement quality control review have
been performed.
(b) The engagement quality control review has been completed before the report is issued and
(c) The reviewer is not aware of any unresolved matters that would cause the reviewer to believe
that the significant judgments the engagement team made and the conclusions they reached
were not appropriate.
Unless otherwise specified by law or regulation, engagement documentation is the property of the
firm. The firm may, at its discretion, make portions of, or extracts from, engagement documentation
available to clients, provided such disclosure does not undermine the validity of the work performed,
or, in the case of assurance engagements, the independence of the firm or its personnel.
Engagement documentation has to be retained for a period of time sufficient to permit those
performing monitoring procedures to evaluate the firm’s compliance with its system of quality control,
or for a longer period if required by law or regulation.
In the specific case of audit engagements, the retention period ordinarily is no shorter than seven
years from the date of the auditor’s report, or, if later, the date of the group auditor’s report.
2.1.6. Monitoring
The firm should ensure that policies and procedures relating to the system of quality control are
relevant, adequate, operating effectively and complied with in practice. Such policies and procedures
should include an ongoing consideration and evaluation of the firm’s system of quality control,
including a periodic inspection of a selection of completed engagements. Quality control of
engagements has to be monitored taking into account following factors:
 Deciding whether the quality control system of the firm has been appropriately designed and
effectively implemented.
 Examining whether new developments in the professional standards, legal and regulatory
requirements have been reflected in the quality control policies.
 Conducting monitoring by entrusting responsibility of monitoring process to a partner or other
persons with sufficient and appropriate experience and authority in the firm.

 Dealing with complaints and allegations against the firm or any employees of it of non-
compliance with professional standards or appropriate regulatory requirements by a person
within or outside the firm.
 Taking appropriate remedial actions against the personnel who did not conform to quality
control policies.
 Taking action when deficiencies in the design or operation of the firm’s quality control policies
and procedures, or non-compliance with the firm’s system of quality control are identified.
3. SA 220 - QUALITY CONTROL FOR AN AUDIT OF

FINANCIAL STATEMENTS:
Based upon quality control system of firm, quality control policies pertaining to audit engagements
are decided by engagement teams. The engagement partner of a team is responsible for quality
control procedures of a particular audit engagement in accordance with SA 220.
Therefore, SA 220 is premised on the basis that the firm is subject to SQC 1. Within the context of
the firm’s system of quality control, engagement teams have a responsibility to implement quality
control procedures that are applicable to the audit engagement and provide the firm with relevant
information to enable the functioning of that part of the firm’s system of quality control relating to
independence. Engagement teams are entitled to rely on the firm’s system of quality control, unless
information provided by the firm or other parties suggests otherwise.
As per SA 220, the objective of the auditor is to implement quality control procedures at
the engagement level that provide the auditor with reasonable assurance that: -
(a) The audit complies with professional standards and regulatory and legal requirements and
(b) The auditor’s report issued is appropriate in the circumstances.
SA 220 is modelled on lines of SQC 1. It describes responsibilities of engagement partner in

relation to following matters: -
(a) Leadership responsibilities for quality on (b) Relevant ethical requirements.

audits.
(c) Acceptance and continuance of client (d) Assignment of engagement teams.

relationships and audit engagements.
(e) Engagement performance. (f) Monitoring.

3.1 Leadership Responsibilities for Quality on Audits

Leadership responsibility of an engagement partner is to take responsibility for the overall quality on
each audit engagement. The actions of the engagement partner and appropriate messages to the
other members of the engagement team, in taking responsibility for the overall quality on each audit
engagement, emphasis:
(i) Performing work that complies

with professional standards and
regulatory and legal requirements;
(ii) Complying with the firm’s quality

control policies and procedures as
applicable;
(a) The importance to audit quality of
Leadership responsibilities (iii) Issuing auditor’s reports that are

for quality on audits appropriate in the circumstances and
(b) The fact that quality is essential in

performing audit engagements.
(iv) The engagement team’s ability to
raise concerns without fear of
reprisals.
(a) The importance to audit quality of: -

(i) Performing work that complies with professional standards and regulatory and legal
requirements;
(ii) Complying with the firm’s quality control policies and procedures as applicable.
(iii) Issuing auditor’s reports that are appropriate in the circumstances and
(iv) The engagement team’s ability to raise concerns without fear of reprisals.
(b) The fact that quality is essential in performing audit engagements.
3.2 Relevant Ethical Requirements

The responsibilities of an engagement partner in relation to ethical requirements in an audit
engagement are as under: -.
 Identifying a threat to independence regarding the audit engagement that safeguards may
not be able to eliminate or reduce to an acceptable level.

 Reporting by engagement partner to the relevant persons within the firm to determine
appropriate action, which may include eliminating the activity or interest that creates the
threat, or withdrawing from the audit engagement, where withdrawal is legally p ermitted.
3.3 Acceptance and Continuance of Client Relationships and Audit

Engagements
The responsibility of an engagement partner in this regard in an audit engagement is on lines of
SQC 1 which requires the firm should obtain such information as it considers necessary in the
circumstances before accepting an engagement with a new client, when deciding whether to
continue an existing engagement, and when considering acceptance of a new engagement with an
existing client.
Information like integrity of principal owners, competence of engagement team and consideration of
necessary capabilities including time and resources, compliance with relevant ethical requirements
and significant matters arisen during current or previous audit engagement and their implications
assist the engagement partner in determining whether the conclusions reached regarding the
acceptance and continuance of client relationships and audit engagements are appropriate.
3.4 Assignment of Engagement Teams

It should be ensured by engagement partner that the engagement team and any auditor’s experts
who are not part of the engagement team, collectively have the appropriate competence and
capabilities to perform the engagement in accordance with professional standards and regulatory
and legal requirements.
3.5 Engagement Performance

Engagement partner has the responsibility for direction, supervision and performance of audit
engagement in accordance with professional standards and regulatory and legal requirements. He
is responsible for the auditor’s report being appropriate in circumstances. Further, review of audit
documentation before issue of audit report is his responsibility. It has to be ensured that sufficient
appropriate audit evidence has been obtained to support the conclusions reached and for the
issuance of the auditor’s report.
The engagement partner is also responsible for ensuring undertaking appropriate consultation on
difficult or contentious matters by engagement team not only within the team but also with others at
appropriate level within or outside the firm.

3.6 Engagement Quality Control Review

For audits of financial statements of listed entities, and those other audit engagements, if any, for
which the firm has determined that an engagement quality control review is required, the
engagement partner shall:
(a) Determine that an engagement quality control reviewer has been appointed
(b) Discuss significant matters arising during the audit engagement, including those identified
during the engagement quality control review, with the engagement quality control reviewer
(c) Not date the auditor’s report until the completion of the engagement quality control review.
The engagement quality control reviewer shall perform an objective evaluation of the
significant judgments made by the engagement team, and the conclusions reached in
formulating the auditor’s report. This evaluation shall involve:
(a) Discussion of significant matters with the engagement partner
(b) Review of the financial statements and the proposed auditor’s report
(c) Review of selected audit documentation relating to the significant judgments the
engagement team made and the conclusions it reached and
(d) Evaluation of the conclusions reached in formulating the auditor’s report and
consideration of whether the proposed auditor’s report is appropriate
For audits of financial statements of listed entities, the engagement quality control reviewer, on
performing an engagement quality control review, shall also consider the following:
(a) The engagement team’s evaluation of the firm’s independence in relation to the audit
engagement;
(b) Whether appropriate consultation has taken place on matters involving differences of opinion
or other difficult or contentious matters, and the conclusions arising from those consultations;
(c) Whether audit documentation selected for review reflects the work performed in relation to
the significant judgments made and supports the conclusions reached.
Differences of Opinion
If differences of opinion arise within the engagement team, with those consulted or, where
applicable, between the engagement partner and the engagement quality control reviewer, the
engagement team shall follow the firm’s policies and procedures for dealing with and resolving
differences of opinion.


GVN & Associates are auditors of a listed company involved in “fin-tech” sector. The engagement
team is stuck up with some issues pertaining to a particular Ind AS applicable to the company. They
have framed a query and sent to ICAI for expert opinion on the matter. The issue was resolved upon
receipt of expert opinion. Since expert opinion was provided by ICAI, engagement team was of the
view that appointment of engagement quality control reviewer has lost its relevance. Do you agree?
3.7 Monitoring
An effective system of quality control includes a monitoring process designed to provide the firm
with reasonable assurance that its policies and procedures relating to the system of quality control
are relevant, adequate, and operating effectively. The engagement partner shall consider the results
of the firm’s monitoring process as evidenced in the latest information circulated by the firm and, if
applicable, other network firms and whether deficiencies noted in that information may affect the
audit engagement.
3.8 Documentation
The engagement partner should document following matters pertaining to an audit engagement: -
(a) Issues identified with respect to compliance with relevant ethical requirements and how they were
resolved.
(b) Conclusions on compliance with independence requirements that apply to the audit engagement,
and any relevant discussions with the firm that support these conclusions.
(c) Conclusions reached regarding the acceptance and continuance of client relationships and audit
engagements.
(d) The nature and scope of, and conclusions resulting from, consultations undertaken during the
course of the audit engagement.
Besides, the engagement quality control reviewer shall document, for the audit engagement
reviewed, that:

(c) The reviewer is not aware

of any unresolved matters that
(a) The procedures required (b) The engagement quality would cause the reviewer to
by the firm’s policies on control review has been believe that the significant
engagement quality control completed on or before the judgments the engagement
review have been performed. date of the auditor’s report. team made and the
conclusions they reached
were not appropriate.
4. SQC 1 VS. SA 220- KEY DIFFERENCES IN NATURE,

SCOPE AND APPLICABILITY
S.N. SQC 1 SA 220
1 It applies to entire firm and fixes the It applies to a particular audit engagement and
responsibility of firm to be assumed by engagement partner takes responsibility of the
CEO or managing partners. same.
2 It is applicable to audits, reviews of It is applicable to audit engagements only.

historical financial Information, and other
assurance and related services
engagements.
3 It relates to setting up of a quality control It deals with responsibilities of engagement

system consisting of policies and teams to implement quality control procedures
procedures for firm as a whole. that are applicable to audit engagements.
4 It pertains to establishing a system of It is premised on the basis that firm is subject

quality control designed to provide firm to SQC 1. Therefore, SQC 1 is a sine qua non
with a reasonable assurance that a firm for applicability of SA 220. It is within overall
and its personnel comply with context of a firm’s system of quality control,
professional standards and regulatory engagement teams implement quality control
and legal requirements so that reports procedures applicable to audit engagements.
issued by firm or engagement partners
are appropriate in circumstances.

RST & Co., a firm of Chartered accountants, are auditors of a listed company engaged in
manufacturing of heavy machinery components. The audit report for the year 2023-24 also included
reports on matters listed in CARO, 2020. While reporting under clause vii(a) of the said order relating
to regularity of undisputed statutory dues by the company, the auditors have commented that
company is “generally regular” in depositing statutory dues to appropriate authorities. Is the above
reporting qualitative and in line with the requirements of SA 220?
5. MECHANISMS FOR REVIEW OF QUALITY CONTROL

5.1 Peer Review Board
Peer Review Board is constituted by Council of ICAI. The main objective of Peer Review Board is to
ensure that, in carrying out assurance assignments: -
 Technical, professional and ethical standards including regulatory requirements are complied
with by members of ICAI.
 Proper systems are in place including documentation thereof which amply demonstrates
quality of assurance services provided by members.
Peer review is meant for the purpose of enhancing the quality of professional work resulting in more
reliable and useful audit reports.
Peer review means an examination and review of the systems and procedures to determine whether
the same have been put in place by the Practice Unit for ensuring the quality of assurance services
as envisaged by the technical, professional and ethical Standards or any other regulatory
requirements.
Once a Practice Unit is subjected to Peer review, its assurance engagement records pertaining to
the Peer review period are subject to examination and review by the Peer Reviewer. On completion
of this exercise, a “peer review certificate” is issued in case of unqualified report issued by Peer
Reviewer. In case of a qualified report, it is informed to the Practice Unit that same cannot be issued
along with the reasons therefor as well as inform about the due date for conducting a follow -on
review as may be decided by the Board.

5.2 Quality Review Board

Quality Review Board has been set up by Central government. It consists of members nominated by
Central govt and Council of ICAI. The functions of QRB are: -
(a) To make recommendations to the Council regarding the quality of services provided by the
members of the Institute;
(b) To review the quality of services provided by the members of the Institute including audit
services and
(c) To guide the members of the Institute to improve the quality of services and adherence to the
various statutory and other regulatory requirements.
The statutory auditors in respect of the companies are identified for their audit quality review based
upon risk-based approach. The review is carried out by technical reviewers who are empanelled by
QRB on engagement basis from across the country.
5.3 National Financial Reporting Authority (NFRA)

NFRA has been constituted in terms of Section 132(1) of the Companies Act, 2013. Duties of NFRA
also include the following: -
Duties of NFRA
Oversee the quality of service of

the professions associated with
Monitor and enforce compliance
ensuring compliance with such
with accounting standards and
standards and suggest measures
auditing standards
for improvement in the quality of
service
It has power to monitor and enforce compliance with accounting standards and auditing standards
and oversee the quality of service under section 132(2) or undertake investigation under

section 132(4) of the auditors of certain class of companies. Such companies include listed
companies, insurance companies, banking companies and other companies as provided for in
Rule 3 of the NFRA Rules, 2018.
Therefore, overseeing quality of audit services of listed companies falls under the purview of NFRA.
QRB can review quality of audit services provided by the members of the Institute only in respect of
entities other than those specified under Rule 3 of the NFRA Rules, 2018 and those referred to QRB
by NFRA under relevant rules.
Key Takeaways
➢ SQC 1 requires that the firm should establish a system of quality control designed to provide
it with reasonable assurance that the firm and its personnel comply with professional
standards and regulatory and legal requirements and that reports issued by the firm or
engagement partners are appropriate in the circumstances.
➢ SQC 1 is applicable to audits, reviews of historical financial Information, and other assurance
and related services engagements. It is applicable to all firms irrespective of their constitution.
➢ Elements of system of quality control envisaged in SQC 1 include establishing leadership
responsibilities for quality within the firm, complying with ethical requirements, acceptance
and continuance of client relationships and specific engagements, establi shing policies and
procedures addressing issues of capabilities, competence, and commitment of human
resources in firm to carry out engagements, engagement performance and monitoring.
➢ In respect of difficult or contentious matters, consultation may be required at the appropriate
professional level, with individuals within or outside the firm who have specialized expertise,
to resolve a difficult or contentious matter.
➢ Significant judgments made in an engagement should be reviewed by an engagement quality
control reviewer for taking an objective view before the report is issued. The review does not
reduce the responsibilities of the engagement partner.
➢ Engagement quality control review is mandatory in respect of listed entities.

➢ The firm should establish policies and procedures for engagement teams to complete the
assembly of final engagement files on a timely basis after the engagement reports have been
finalized. Engagement files should be completed in not more than 60 days afte r date of
auditor’s report in case of audit engagements and in other cases within the limits appropriate
to engagements.

➢ Engagement documentation has to be retained for a period of time sufficient to permit those
performing monitoring procedures to evaluate the firm’s compliance with its system of quality
control, or for a longer period if required by law or regulation.
➢ In the specific case of audit engagements, the retention period ordinarily is no shorter than
seven years from the date of the auditor’s report, or, if later, the date of the group auditor’s
report.
➢ SA 220 is applicable to audit engagements only. It deals with responsibilities of engagement
teams to implement quality control procedures that are applicable to audit engagements.
➢ SA 220 is premised on the basis that firm is subject to SQC 1. It is within the overall context
of a firm’s system of quality control, engagement teams implement quality control procedures
applicable to audit engagements.
➢ Besides SQC 1 and SA 220, other Standards on Auditing, Code of Ethics issued by ICAI and
certain provisions in the Companies Act, 2013 facilitate quality control process. There also
exists mechanism for review of quality control through Peer Review Board, Quality Review
Board and NFRA (National Financial Reporting Authority).
FOR SHORTCUT TO ENGAGEMENT & QUALITY CONTROLS STANDARDS WISDOM: SCAN ME !
TEST YOUR KNOWLEDGE
Theoretical Questions
1. PQR & Associates are statutory auditors of a listed company. There arose an issue during
the course of audit relating to related party transactions. The engagement partner wants to
consult an engagement quality control reviewer on this matter during the course of audit
process itself. Can he consult with engagement quality control reviewer? Discuss.

2. Beta Private Limited has approached a firm of Chartered accountants to assist them in
preparation of financial statements and issue a compilation report in this regard. Does CA
firm have responsibility in relation to quality control for above said engagement? Discuss with
reasons.
3. Ramanujan, a CA final student, feels that engagement file in audit engagement should be
ready prior to issue of audit report. Discuss whether Ramanujan’s view is in order.
4. BNE & Co. are in midst of audit process of a listed company. During the audit, an issue arose
relating to revenues from contracts with customers in terms of Ind AS 115. The engagement
partner took a certain stand. However, engagement quality control reviewer recommended
otherwise after review. The engagement partner is not willing to accept recommendations of
reviewer. How can this conflict be resolved?
5. MB & Associates is a partnership firm of Chartered Accountants which was established seven
years back. The firm is getting new clients and has also been offered new engagement
services with existing clients. The firm is concerned about obtaining such information as it
considers necessary in the circumstances before accepting an engagement with a new client
and acceptance of a new engagement with an existing client. The firm is looking to work with
only select clients to adhere to the Quality Control Standards. Guide MB & Associates about
the matters to be considered with regard to the integrity of a client, as per the requirements
of SQC 1.
6. SPS & Associates, Chartered Accountants, are statutory auditors of Grec Limited for
the last two years. Grec Limited is engaged in the manufacturing and marketing of
pharmaceutical goods in India. During the year 2023-24, the company has diversified
and commenced providing software solutions in "e-commerce" in India as well as in
certain African countries. SPS & Associates, while carrying out the audit, noticed that
the company has expanded its operations into a new segment as well as in a new
country. SPS & Associates does not possess the necessary expertise and
infrastructure to carry out the audit of these diversified business activities and
accordingly wishes to withdraw from the engagement and client relationship. Discuss
the issues that need to be addressed before deciding to withdraw.
7. PQR Associates are the statutory auditors of a large un-listed company, which is
engaged in manufacturing of auto components. Subsequent to reappointment of
auditors in the Annual General Meeting, the Company shared the appointment letter
with PQR Associates, seeking acknowledgement and acceptance letter. CA R is the

engagement partner and is planning to issue the acceptance letter. During the current
financial year, there was a search by the Income-tax Authorities on the company, and
certain accounting records were seized for verification. Based on the information
available on social media, CA R noted that the promoters’ brother is contemplating to
contest in the ensuing elections, under the banner of a political party. One of the
current senior engagement team manager, who has been doing the audit engagement
till last year, has left PQR Associates and is planning to provide some accounting
services to one of the associate companies. PQR Associates are yet to recruit another
senior manager having adequate experience in the audits of clients engaged in the
automotive sector. Elaborate the matters to be considered by PQR Associates with
respect to acceptance & continuance of client relationships considering the above
issues.
8. CA Giri is a senior partner of M/s TSV Associates. M/s TSV Associates is a reputed firm
of Chartered Accountants which has been in practice for more than five decades. The
firm undertakes statutory audits of large listed companies across various industry
sectors and has more than fifty qualified experienced professionals. CA Giri has been
assigned as an Engagement Quality Control Reviewer for an audit engagement of a
listed company. What are the aspects which would be looked into by CA Giri as an
EQCR in relation to the engagement?
Upon completion of the review, CA Giri has identified certain issues with respect to
revenue recognition and adequacy of provisions relating to onerous contracts. The
views of CA Giri are not accepted by the Engagement Partner. Suggest ways of
resolving the differences of opinion between CA Giri and the engagement partner.
9. TPX & Co., Chartered Accountants, is a large audit firm. It maintains audit
documentation both electronically and in physical form (hard files). The physical files
are neither scanned and incorporated into electronic files nor cross-referenced to the
electronic files. Further, there are many instances where audit working papers do not
contain details as to whether information was obtained from client or prepared by
engagement team. How do you view the above situation from the point of view of
quality control system in audit firm? Analyse.
10. Pine & Associates is the statutory auditor of BB Ltd., a listed company and started its
operations 6 years ago. The fieldwork during the audit of the financial statements of
the company for the year ended 31st March, 2024 was completed on 1st May, 2024. The
auditor’s report was dated 15th May, 2024. During the documentation review of the

engagement, it was observed that the engagement quality control review was
completed on 18th May, 2024. The engagement partner had completed his reviews in
entirety by 12th May, 2024. Comment.
Answers to Test your Understanding
1. The given situation indicates that proposed client is a new one whose promoter is close
associate and family friend of managing partner of M/s ABC & Associates. However, the
previous auditor of proposed client has resigned and company is offering hike in audit fees
in comparison to audit fees paid to previous auditor. Besides, there are also regulatory
inquires against the company. In spite of all this, managing partner of firm Mr. A has
recommended for acceptance of offered audit of the company.
It reflects poorly regarding functioning at the top of the firm as regards quality control.
SQC 1 requires that the firm establish a system of quality control designed to provide it with
reasonable assurance that firm and its personnel comply with professional standards and
legal and regulatory requirements. It further requires that the firm’s business strategy is
subject to overriding the requirement of firm to achieve quality in all engagements. However,
in the given situation, commercial considerations seem to be an overriding factor.
The managing partner of firm is close associate and family friend of promoter. The matter
should have been brought to knowledge of firm in accordance with requirements of SQC 1 as
it involves issue of independence of managing partner of the firm with respe ct to proposed
audit engagement. Further, matters of inquiries from regulators and resignation of previous
auditor raise question about integrity of the proposed client. SQC 1 further requires firm to
consider before acceptance of an engagement that client does not lack integrity. All these
factors need to be taken into consideration before accepting engagement.
Overall, such a situation reflects lack of proper establishment of quality control framework at
top of the firm. Following considerations should be taken into account while upholding quality
of firm: -
(i) The firm assigns its management responsibilities so that commercial considerations
do not override quality of work performed
(ii) The firm’s policies and procedures in relation to its personnel are designed to
demonstrate its overriding commitment to quality.
(iii) The firm devotes sufficient resources for development and documentation of its quality
control policies and procedures

(iv) A firm before accepting an engagement should acquire vital information about the
client. Such an information should help firm to decide about integrity of Client,
promoters and key managerial personnel, competence (including capabilities, time
and resources) to perform engagement and compliance with ethical requirements.
2. Approach of Sudhanshu is not proper. Such practices clearly violate Code of Ethics and its
spirit. It reflects poorly upon the quality control system of firm envisaged in SQC 1 which
requires that quality control policies and procedures should be documented and
communicated to the firm’s personnel. It shows that firm’s personnel are not properly
sensitized regarding requirements of SQC 1.
3. As per SQC 1, before accepting a new engagement, integrity of client should be considered
including matters that indicate involvement in money laundering or criminal activities. There
has been search of ED on the said party leading to recovery of huge amou nt of cash. The
above coupled with actions of income tax department relating to bogus capital gains on penny
stocks indicates that client might be involved in money laundering activities. Therefore, offer
should not be accepted.
4. Engagement quality control review in listed entities is a mandatory requirement. Expert
opinion of ICAI pertains to the issue of interpretation. The appointment of reviewer is a
separate and mandatory requirement in audits of listed companies.
5. Such type of reporting is not qualitative. It is not in accordance with SA 220. One of the
objectives of the auditor, as per SA 220, is to implement quality control procedures at the
engagement level that provide the auditor with reasonable assurance that the audit complies
with professional standards and regulatory and legal requirements. The reporting under
CARO, 2020 is not proper. Hence, the audit does not comply with regulatory and legal
requirements.
Hints /Answers to Theoretical Questions

1. It is necessary to maintain objectivity of reviewer. Therefore, participation in engagement or
making decisions for engagement team is to be avoided at all costs. However, engagement
partner may consult engagement quality control reviewer during the engagement so as not
to compromise his objectivity and eligibility to perform the role.
2. Such kind of services fall in category of “related services”. SQC 1 is applicable to all type of
engagements including engagement pertaining to “related services”.

3. The firm should establish policies and procedures for engagement teams to complete the
assembly of final engagement files on a timely basis after the engagement reports have been
finalized. Engagement files should be completed in not more than 60 days afte r date of
auditor’s report in case of audit engagements. Thus, view of Ramanujan is not in order.
4. In case, recommendations of engagement quality control reviewer are not accepted by
engagement partner and matter is not resolved to reviewer’s satisfaction, the matter should
be resolved by following established procedures of firm like by consulting with another
practitioner or firm, or a professional or regulatory body. The audit report should be issued
only after resolution of the matter.
5. As per SQC 1, the firm should obtain such information as it considers necessary in the
circumstances before accepting an engagement with a new client, when deciding whether to
continue an existing engagement, and when considering acceptance of a new engage ment
with an existing client. Where issues have been identified, and the firm decides to accept or
continue the client relationship or a specific engagement, it should document how the issues
were resolved.
With regard to the integrity of a client, matters that the firm considers include, for example:
• The identity and business reputation of the client’s principal owners, key management,
related parties and those charged with its governance.
• The nature of the client’s operations, including its business practices.
• Information concerning the attitude of the client’s principal owners, key management
and those charged with its governance towards such matters as aggressive
interpretation of accounting standards and the internal control environment.
• Whether the client is aggressively concerned with maintaining the firm’s fees as low
as possible.
• Indications of an inappropriate limitation in the scope of work.
• Indications that the client might be involved in money laundering or other criminal
activities.
• The reasons for the proposed appointment of the firm and non-reappointment of the
previous firm.
The extent of knowledge a firm will have regarding the integrity of a client will generally grow
within the context of an ongoing relationship with that client.

6. As per SQC 1, “Quality Control for Firms that Perform Audits and Reviews of Historical
Financial Information, and Other Assurance and Related Services Engagements”, the
firm should establish policies and procedures for the acceptance and continuance of
client relationships and specific engagements, designed to provide it with reasonable
assurance that it will undertake or continue relationships and engagements only where
it is competent to perform the engagement and has the capabilities, time and resources
to do so.
In the given case, SPS & Associates, Chartered Accountants, statutory auditors of Grec
Limited for the last two years, came to know that the company has expanded its
operations into a new segment as well as in new country. SPS & Associates does not
possess the necessary expertise for the same, therefore, SPS & Associates wish to
withdraw from the engagement and client relationship. Policies and procedures on
withdrawal from an engagement or from both the engagement and the client
relationship address issues that include the following:
Discussing with the appropriate level of the client’s management and those charged
with its governance regarding the appropriate action that the firm might take based on
the relevant facts and circumstances.
If the firm determines that it is appropriate to withdraw, discussing with the appropriate
level of the client’s management and those charged with governance withdrawal from
the engagement or from both the engagement and the client relationship, and the
reasons for the withdrawal.
Considering whether there is a professional, regulatory, or legal requirement for the
firm to remain in place, or for the firm to report the withdrawal from the engagement,
or from both the engagement and the client relationship, together with the reasons for
the withdrawal, to regulatory authorities.
Documenting significant issues, consultations, conclusions, and the basis for the
conclusions.
SPS & Associates should address the above issues before deciding to withdraw.
7. Acceptance and Continuance of Client Relationships: As per SQC 1, “Quality Control
for Firms that Perform Audits and Reviews of Historical Financial Information, and
Other Assurance and Related Services Engagements,” a firm before accepting an
engagement should acquire vital information about the client. Such an information
should help firm to decide about: -

 Integrity of Client, promoters, and key managerial personnel.

 Competence (including capabilities, time, and resources) to perform
engagement.
 Compliance with ethical requirements.
The firm should obtain such information as it considers necessary in the circumstances
before accepting an engagement with a new client, when deciding whether to continue
an existing engagement, and when considering acceptance of a new engagement with
an existing client. Where issues have been identified, and the firm decides to accept or
continue the client relationship or a specific engagement, it should document how the
issues were resolved.
Further, as per SA 220, “Quality Control for an Audit of Financial Statements”, the
engagement partner shall form a conclusion on compliance with independence
requirements that apply to the audit engagement. In doing so, the engagement partner
shall obtain relevant information from the firm and, where applicable, network firms, to
identify and evaluate circumstances and relationships that create threats to
independence.
In view of the above, PQR Associates should:
✓ follow their firm's policies and procedures for client acceptance and
continuance. This includes evaluating the integrity of the client, assessing
potential risks associated with the engagement, and ensuring the firm has the
necessary resources and expertise to perform the engagement effectively. The
engagement team, should assess, whether the company is involved in any
funding activities, to the political parties, and if so enquire and assess the risks
related to such transactions.
✓ communicate clearly with the client regarding the scope of the engagement, the
responsibilities of both parties, and any limitations on the services to be
provided. This helps manage expectations and ensures alignment between the
firm and the client.
✓ independence and objectivity throughout the engagement. Any potential threats
to independence, such as relationships with the client's affiliates or involvement
in political activities by related parties, should be evaluated and mitigated
appropriately. Since the senior manager who was on this engagement is
providing certain accounting services, to one of the group companies, the
engagement partner, should assess, whether it would have any impact on the
audit and examine the relevant ethical/independence requirements.

✓ continually monitor the client relationship for any changes or developments that
may impact the firm's ability to provide services effectively. This includes
staying informed about significant events such as the income-tax search,
changes in client management, or potential conflicts of interest. Since there was
an income-tax raid on the organisation, the engagement partner should evaluate
the risks of material misstatements, and non-disclosure of tax disputes and
liabilities.
✓ ensure that their engagement team possesses the necessary competence and
capabilities to perform the audit effectively. The departure of a senior manager
and the need to recruit a replacement with specific industry experience should
be addressed promptly to maintain audit quality. Since one of the senior
engagement team members has left PQR Associates, the engagement partner
should assess, whether he would be in a position to devote adequate time on
the engagement or whether to recruit another resource, before commencement
of the audit.
8. As per SA 220, “Quality Control for an Audit of Financial Statements”, for audits of
financial statements of listed entities, CA Giri, the engagement quality control reviewer,
on performing an engagement quality control review, shall also consider the following:
(i) The engagement team’s evaluation of the firm’s independence in relation to the
audit engagement;
(ii) Whether appropriate consultation has taken place on matters involving

differences of opinion or other difficult or contentious matters, and the
conclusions arising from those consultations;
(iii) Whether audit documentation selected for review reflects the work performed in
relation to the significant judgments made and supports the conclusions
reached.
As per SQC 1, “Quality Control for Firms that Perform Audits and Reviews of Historical
Financial Information, and Other Assurance and Related Services Engagements,”,
there might be difference of opinion within engagement team, with those consulted and
between engagement partner and engagement quality control reviewer. The report
should only be issued after resolution of such differences. In case, recommendations
of engagement quality control reviewer are not accepted by engagement partner and
matter is not resolved to reviewer’s satisfaction, the matter should be resolved by
following established procedures of firm like by consulting with another practitioner
or firm, or a professional or regulatory body.

In the given situation, under completion of review, CA Giri, Engagement Quality Control
Reviewer has identified certain issues. However, the view of CA Giri, the EQCR are not
accepted by the Engagement Partner. This difference of opinion among the CA Giri and
Engagement Partner should be resolved with abovementioned manner as per SQC 1.
9. In accordance with SQC 1,” Quality Control for Firms that Perform Audits and Reviews
of Historical Financial Information and Other Assurance and Related Services
Engagements” the firm should establish policies and procedures designed to maintain
confidentiality, safe custody, integrity, accessibility and retrievability of engagement
documentation.
In the given situation, the physical files are neither scanned and incorporated in the
electronic files nor cross-referenced to the electronic files. Inability to do so shows
that firm has not established policies and procedures to maintain integrity of
engagement documentation. Lack of ensuring the same makes it difficult to
demonstrate completeness of audit files and whether these were assembled within 60
days timeframe stipulated in SQC 1.
Where engagement documentation is in paper, electronic, or other media, the integrity,
accessibility or retrievability of the underlying data may be compromised if the
documentation could be altered, added to or deleted without the firm’s knowledge, or
if it could be permanently lost or damaged. One of the reasons for designing and
implementing appropriate controls for engagement documentation in this regard is the
protection of the integrity of information at all stages of engagement.
For the practical reasons, original paper documentation may be electronically scanned
for inclusion in engagement files. In that case, the firm implements appropriate
procedures requiring engagement teams to:
(a) Generate scanned copies that reflect the entire content of the original paper
documentation, including manual signatures, cross-references and
annotations;
(b) Integrate the scanned copies into the engagement files, including indexing and
signing off on the scanned copies as necessary; and
(c) Enable the scanned copies to be retrieved and printed as necessary.
It has also been stated that there are many instances where audit working papers do
not contain details as to whether information was obtained from the client or prepared
by the engagement team. It is important to identify the source of the document and the

information used as audit evidence to ensure its reliability. It could have potential
risks of non-compliance with Standards on Auditing.
10. As per SA 220, “Quality Control for an Audit of Financial Statement”, the engagement
partner shall take responsibility for reviews being performed in accordance with the
firm’s review policies and procedures.
For audits of financial statements of listed entities, the engagement partner shall:
• Determine that an engagement quality control reviewer has been appointed;
• Discuss significant matters arising during the audit engagement, including
those identified during the engagement quality control review, with the
engagement quality control reviewer; and
• Not date the auditor’s report until the completion of the engagement quality
control review.
Further, SA 700,” Forming an Opinion and Reporting on Financial Statements”,
requires the auditor’s report to be dated not earlier than the date on which the auditor
has obtained sufficient appropriate evidence on which to base the auditor’s opinion on
the financial statements. In cases of an audit of financial statements of listed entities
where the engagement meets the criteria for an engagement quality control review,
such a review assists the auditor in determining whether sufficient appropriate
evidence has been obtained.
Conducting the engagement quality control review in a timely manner at appropriate
stages during the engagement allows significant matters to be promptly resolved to
the engagement quality control reviewer’s satisfaction on or before the date of the
auditor’s report.
In this case, the audit of BB Ltd. for the year ending on 31st March 2024 was conducted
by Pine & Associates and was completed on 1st May, 2024. Subsequently, the
engagement partner reviewed the audit by 12th May, 2024. The audit report issued by
Pine and Associates was dated 15th May, 2024. However, the engagement quality
control review was finalized on 18th May, 2024, which is later than the date of the audit
report. In view of above, the date of auditors’ report before the completion of the
engagement quality control review, is not correct.


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CHAPTER a 1

© The Institute of Chartered Accountants of India

Quality Control for firms that

© The Institute of Chartered Accountants of India

2. SQC 1 - QUALITY CONTROL FOR FIRMS THAT

2.1 Elements of System of Quality Control

© The Institute of Chartered Accountants of India

(b) Ethical requirements

2.1.1 Leadership Responsibilities for Quality within the Firm

© The Institute of Chartered Accountants of India

TEST YOUR UNDERSTANDING 1

© The Institute of Chartered Accountants of India

2.1.2. Ethical Requirements

(a) Communicate its independence requirements to its personnel

© The Institute of Chartered Accountants of India

TEST YOUR UNDERSTANDING 2

2.1.3. Acceptance and Continuance of Client Relationships and Specific Engagements

Integrity of Client, promoters and key managerial personnel.

Competence (including capabilities, time and resources) to perform

Compliance with ethical requirements.

© The Institute of Chartered Accountants of India

• Firm personnel have knowledge of relevant industries or subject matters;

© The Institute of Chartered Accountants of India

TEST YOUR UNDERSTANDING 3

© The Institute of Chartered Accountants of India

2.1.4. Human Resources

The firm should establish policies and procedures requiring that:

Consultation in difficult or contentious matters: Consultation should take place in difficult or

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

3. SA 220 - QUALITY CONTROL FOR AN AUDIT OF

(b) The auditor’s report issued is appropriate in the circumstances.

SA 220 is modelled on lines of SQC 1. It describes responsibilities of engagement partner in

(a) Leadership responsibilities for quality on (b) Relevant ethical requirements.

(c) Acceptance and continuance of client (d) Assignment of engagement teams.

(e) Engagement performance. (f) Monitoring.

© The Institute of Chartered Accountants of India

3.1 Leadership Responsibilities for Quality on Audits

(i) Performing work that complies

(ii) Complying with the firm’s quality

Leadership responsibilities (iii) Issuing auditor’s reports that are

(b) The fact that quality is essential in

(a) The importance to audit quality of: -

3.2 Relevant Ethical Requirements

© The Institute of Chartered Accountants of India

3.3 Acceptance and Continuance of Client Relationships and Audit

3.4 Assignment of Engagement Teams

3.5 Engagement Performance

© The Institute of Chartered Accountants of India

3.6 Engagement Quality Control Review

(a) Discussion of significant matters with the engagement partner

© The Institute of Chartered Accountants of India

TEST YOUR UNDERSTANDING 4

© The Institute of Chartered Accountants of India

(c) The reviewer is not aware

4. SQC 1 VS. SA 220- KEY DIFFERENCES IN NATURE,

2 It is applicable to audits, reviews of It is applicable to audit engagements only.

3 It relates to setting up of a quality control It deals with responsibilities of engagement