3. Quality Management Flashcards
What is audit quality monitored by?
- FRC’s audit quality review team
Only fr public interest entities and certain other entities - ICAEW’s practice assurance scheme
How does the FRC promote audit quality?
- Issuing ISAs, ethical standards and occasional briefing papers
- Monitoring compliance through reviews of audit firms. And making findings public
- Overseeing regulatory activities of professional accounting bodies
- Investigating misconduct. And taking action against firms
Type of approach for quality management?
Risk-based
(Separate for the firm and for specific engagements)
What system provides reasonable assurance that a firm is meeting its quality objectives?
The SOQM
SOQM =
System Of Quality Management
What does a SOQM do?
Shows the way the firm should be structured
So it can perform its work at enough quality
Who is usually responsible for the firm’s SOQM?
Managing Partner
(Though can be delegated)
SOQM: What is the risk-assessment process?
- Establish quality objectives
- Identify risks
- Respond to risks
SOQM: Establishing quality objectives: What areas need to be considered?
- Governance and leadership
- Ethics
- Acceptance and continuance
- Engagement performance
- Resources
- Information and communication
SOQM: What are the mandatory responses?
- Ethical threats and reporting ethical breaches
- Documentation of compliance with ethical requirements
(obtained at least annually) -
Complaints
(regarding failure to comply with standards/regulation and/or SOQM) - Complex client situations
- Communication with audit clients about SOQM
- Engagement quality reviewers’ conduct and ISQM compliance
SOQM: What are the quality objectives for governance and leadership
OBT
SOQM: What is the quality objective for ethical considerations?
Fully understand and fulfill their ethical responsibilities (OBT)
SOQM: What is considered in terms of acceptance and continuance?
Ensure it doesn’t sacrifice quality or ethics (more in OBT)
SOQM: What needs to be considered in terms of engagement performance?
OBT: Engagement teams need to understand and fulfill their responsibilities (including the partner’s overall responsibility for the
work)the nature, timing and extent of direction, supervision and review must be appropriate . Engagement teams exercise appropriate professional judgement/scepticism. Consultation is undertaken on difficult or contentious issues. Differences of opinion (from the engagement team) are brought to the attention of the firm and resolved. Documentation is assembled on a timely basis and retained to comply with relevant standards/laws
SOQM: Who has responsibility for engagement performance?
Engagement partner
But can be passed to most senior team member at engagement location
SOQM: How should supervision be carried out?
Enough mistakes avoided
While allowing staff to show initiative
EQR: who are subject to an EQR? (Aka pre-issuance review or hot review)
Listed entities
Other high-risk clients (Public interest, unusual circumstances risks, laws/regulations require EQR)
EQR: When must it be completed before?
Audit report signed
SOQM: What if the focus of the quality objective: resources
That sufficient resources are available
- Human
- Tech
- Intellectual
(Can be obtained from external service provider)
SOQM: Resources: Human
Must have enough time to create enough quality
SOQM: Resources: Intellectual
Used to enable SOQM (OBT)
e.g. audit programmes
firm methodologies
substripts to guides
SOQM: Information and communication: What factors need to be considered?
- Technical
- Human
SOQM: Monitoring and remediation: Process
- Monitor
- Evaluate deficiencies
- Remediate
- Annual review
Post-issuance (cold) review: Purpose
Ensure procedures implemented
Identify their deficiencies
Post-issuance (cold) review: When?
After auditor’s report signed
Post-issuance (cold) review: For which files?
Selection of completed audit files
Post-issuance (cold) review: Who done by?
Dedicated compliance/quality dept
or
Qualified external consultant
or
Independent partner
Post-issuance (cold) review: Matters considered
- WPs should show sufficient appropriate evidence and resolved before issuing auditor’s report
- WPs on file completed, signed and reviewed
Post-issuance (cold) review: Outcomes
Report of results to partners
Flag deficiencies needing action
e.g.
Additional QRs
Training
Changes to policies/procedures
Disciplinary actions
SOQM: What does the UK CGC require?
Audit committees of listed companies
Review and monitor external auditor’s:
- Independence and objectivity
- Effectiveness
How do audit committees of listed companies review the external auditors?
Questionnaires
Ext Aud rated on e.g. communication, quality of reports. expertise, business understanding and value for money
Is there a criminal offence is an audit report is wrong?
Yes
knowingly or recklessly causing an
auditor’s report on company
accounts to include any matter that
is misleading, false or deceptive
CA misleading audit report penalty
Fine
How do audit firms limit liability?
- Professional indemnity insurance
- LLPs
- Liability caps
Professional indemnity insurance: is it mandatory?
Yes
Professional indemnity insurance: What does it do?
Pay out for settlements in negligence cases
(The firm may still bear significant costs in terms of legal fees, partner time, and the less measurable impact on reputation.)
Liability caps: Who enforces?
CA
Liability caps: When valid?
- Only covers one financial year
- Approved by shareholders
- ‘fair and reasonable’
Liability caps: Can the firm and client agree how to set up?
Yes
E.g.
Based on the auditor’s proportionate share of the responsibility for any loss
Using a monetary amount or agreed formula
By reference to the ‘fair and reasonable’ test
Liability caps: Can an auditor impose unilaterally?
No
Shareholders have to approve it
Liability caps: Is it always possible shareholders can approve?
No
Liability caps: Issue?
Mid-tier firms won’t be able to win large companies because they don’t have enough resources to negotiate a liability cap shareholders will accept
