Ch5 - quality control

Question 1

Why is quality control needed during an assurance engagement?

Answer 1

To ensure an acceptable job is carried out by an assurance firm and ensure the engagement risk is reduced to an acceptable level. During an audit, only reasonable assurance may be given by the auditor at best (not absolute), and hence it’s important for the audit firm to have a defense against any potential complaint against the auditor

i.e. You need to reduce the risk of making a wrong decision during an audit. This is why firms pay a fee for an assurance report from audit firms.

Question 2

Who monitors quality control by auditors?

Answer 2

The Audit Quality Review Committee of the FRC; or the ICAEW under the Practice Assurance Scheme

Question 3

What does ISA 220 say with regards to an audit firm’s quality control procedures?

Answer 3

ISA (UK) 220 Quality Control for an Audit of Financial Statements requires that those procedures should provide reasonable assurance that:

• Professional standards and legal and regulatory requirements have been met; and
• The auditor’s report is appropriate

Question 4

How does the auditor determine how much work is done during the audit

Answer 4

This is driven by how much work is required to reduce the assurance engagement risk to acceptable levels.

Question 5

How do assurance firms ensure a level of quality during an audit engagement?

Answer 5

Implementing quality control procedures

Question 6

What are the benefits of quality control? (i.e. ensuring high level of quality)

Answer 6

• The client receives acceptable level of service
• Firm reduces the audit risk to an acceptable level and therefore reduces the risk of: (i) legal claims against the audit firm; (ii) discplinary action by FRC or ICAEW; (iii) reputational damage of the audit firm.

Question 7

What is an ICAEW “Practice assurance” scheme and what takes place during this?

Answer 7

This is a scheme involving the periodic review of all aspects of a firm’s work, meant to be constructive as opposed to disciplinary.

The following takes place during this review:

• ICAEW consultants examine all files related to the audit firm
• They compare findings against the ICAEW standards and where necessary make suggestions for improvement
• If audit firms working practices are inadequate, issue disciplinary action against the audit firm (including potential suspension of audit firms’ ability to carry out audits).

Question 8

What are the key elements of quality control procedures at the level of the audit firm, as per ISQC 1?

Answer 8

• Leadership
• Ethical requirements
• Acceptance and continuance of client relationships / Specific engagements
• Human resources
• Engagement performance
• Monitoring

Question 9

How does leadership ensure that the correct culture is instilled within the audit firm?

Answer 9

By ensuring:

• commercial considerations do not override the quality of the work performed
• firm policies in relation to promotions/staff reviews and performance are reflective of the importance of quality work
• Sufficient resources are assigned to the development, documentation, and support of quality control policies and procedures.

Question 10

Why is ethics considered a key element of quality control procedures?

Answer 10

Without having high ethics it will be difficult for assurance providers to underpin the public trust to make assurance services viable.

e.g. of a ethical QC is PwC asking employees to disclose all their shareholdings every year

Question 11

Why is “Acceptance and continuance of client relationships / Specific engagements” considered a key element of quality control procedures?

Answer 11

The audit firm should have policies and procedures to ensure that only the appropriate clients are accepted in the first place and retained.

Question 12

What criteria should an audit firm management consider when deciding whether to accept a client?

Answer 12

• Management integrity
• Competence time and resources
• Compliance with ethical standards
• Significant matters arising during past or current audits

Question 13

Why is “Human resources” considered a key element of quality control procedures?

Answer 13

Firms should ensure they have the necessary policies and procedures to ensure that a firm employs and retains staff with the capabilities, competence and commitment to ethical principles necessary to perform
engagements.

Question 14

In relation to the appointment of an engagement partner, what policies are firms required to have?

Answer 14

• Clients are informed of the identity and role of the engagement partner.
• The engagement partner has the required capabilities, competence, authority, and time.
• The responsibilities of the partner in respect of the engagement are clearly defined and
  communicated to that partner.

Question 15

From a quality control perspective, what aspects do the engagement staff members need when carrying out an audit?

Answer 15

• Understanding of/practical experience with similar engagements
• Understanding of relevant professional and legal requirements in relation to the client
• Appropriate technical knowledge
• Knowledge of the relevant industry
• Ability to apply professional judgment
• Understanding of the firm’s quality control procedures and policies

Question 16

What does ICAEW require from its members in order to facilitate quality control?

Answer 16

Members must carry out CPD in order to renew their membership every year

Question 17

What are the key issues of “Engagement performance” from a quality control perspective?

Answer 17

• Direction
• Supervision
• Review
• Consultation
• Resolution of disputes

Question 18

Direction: The engagement partner must ensure the team members know what?

Answer 18

• What work the team is supposed to be doing
• The nature of the clients business
• Any audit risks relevant to the engagement
• Problems that might arise during the engagement
• The detailed approach to the engagement

This is usually delegated to the most senior team member on the engagement

Question 19

Supervision: What are the four features of supervision listed by ISA 220?

Answer 19

• Progress tracking
• Considering the competence and capabilities of individual members of the audit team
• Addressing significant matters arising during the audit
• Identifying matters for consultation or consideration by more experienced engagement team members during the audit engagement

This is usually delegated to the most senior team member on the engagement

Question 20

Review: What is the objective of this phase from a quality control perspective?

Answer 20

The work performed during the audit will be reviewed by the audit partner. The engagement partner must be satisfied that sufficient appropriate evidence has been obtained to support the conclusion in the auditor’s report.

Question 21

Review: What is an EQCR and what is the purpose of this?

Answer 21

This is when a review of the audit engagement is undertaken by an independent partner not involved in the engagement, or by an external consultant.

The purpose of this is to prevent an inappropriate audit opinion from being issued.

Question 22

Review: What is a hot review?

Answer 22

A Hot review is a review carried out by a partner not otherwise involved in the engagement or an external consultant before the auditor’s report is signed. It is not necessarily the same as an engagement quality control review, although the terms are sometimes used interchangeably.

Question 23

Documentation and review: What does ISA 230 state that the audit documentation should include?

Answer 23

What would be necessary to provide an experienced auditor, with no previous connection with the audit, with an understanding of the nature, timing, and extent of
audit procedures, the results of audit procedures, and the audit evidence obtained, and significant matters arising during the audit and conclusions reached thereon.

The purpose of documentation is to allow for the EQCR and hot reviews to be carried out.

Question 24

Consultation: What happens if there is a difference in opinion during an audit engagement?

Answer 24

The issue/difference must be resolved prior to the assurance report being issued.

Question 25

Why is “Monitoring” considered a key element of quality control procedures?

Answer 25

To ensure that the quality control procedures are adequate and relevant, that they are operated effectively, and that they are complied with

Question 26

What are two ways in which monitoring of quality controls can take place?

Answer 26

• Undertaking an evaluation of the quality control system

- Periodic review of selected engagments

Question 27

When monitoring an engagement, what happens if a problem with an individual is identified?

Answer 27

Remedial action should be taken such as additional quality control reviews on their work

Question 28

What is a cold review? How are they conducted?

Answer 28

These are reviews that take place after the assurance assignment has been completed.

They are usually conducted either:
- as a process, whereby partners in a firm review each other’s work;
- by a team specifically constituted to conduct such reviews – usually under the direction of a
partner, but the work is usually carried out by suitably qualified and experienced managers; or
- by a suitably qualified external consultant.

Question 29

How does the UK Corp gov code require audit committees to contribute to quality control?

Answer 29

It requires audit committees of listed entities to review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit
process.

Many firms discharge this responsibility using questionnaires conducted with members of the audit
committee, executive directors, senior management, and internal audit

Question 30

What are the consequences of an auditor getting the audit opinion wrong

Answer 30

• High legal defense costs
• Cost of settlement (if there is one)
• Reputational damage, which can lead to the loss of other clients and key members of staff
• The liability on the other partners in the firm, even if they were not involved in the engagement which produced the wrong assurance opinion (this ramification pertains to partnerships whose partners have unlimited and joint and several liability) (Limited Liability Partnerships (LLPs) protect partners in this scenario)
• Criminal prosecution under the Companies Act 2006 for causing an auditor’s report to include misleading, false or deceptive matter.
• Fines/disciplinary action imposed by ICAEW

Question 31

What are the methods used by audit firms for limiting their liability during an audit engagement?

Answer 31

• Professional indemnity insurance - firms required to have this in order to pay for settlement during any negligence cases (if req’d) (if they can prove you owed them a duty of care)
• Limited Liability partnerships - to protect individual partnerships from being held liable for fines/penalties incurred by other partners in the firm. There is limited liability
• Bannerman paragraphs - These clauses are in the audit reports / EL to protect the audit firm against any liability for the use of the audit report by anyone other than the shareholder of the client
• Liability caps - CA 2006 requires auditors to agree limit on their liability for statutory audits.