Ch5 - quality control Flashcards
Why is quality control needed during an assurance engagement?
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.
Who monitors quality control by auditors?
The Audit Quality Review Committee of the FRC; or the ICAEW under the Practice Assurance Scheme
What does ISA 220 say with regards to an audit firm’s quality control procedures?
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
How does the auditor determine how much work is done during the audit
This is driven by how much work is required to reduce the assurance engagement risk to acceptable levels.
How do assurance firms ensure a level of quality during an audit engagement?
Implementing quality control procedures
What are the benefits of quality control? (i.e. ensuring high level of quality)
- 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.
What is an ICAEW “Practice assurance” scheme and what takes place during this?
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).
What are the key elements of quality control procedures at the level of the audit firm, as per ISQC 1?
- Leadership
- Ethical requirements
- Acceptance and continuance of client relationships / Specific engagements
- Human resources
- Engagement performance
- Monitoring
How does leadership ensure that the correct culture is instilled within the audit firm?
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.
Why is ethics considered a key element of quality control procedures?
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
Why is “Acceptance and continuance of client relationships / Specific engagements” considered a key element of quality control procedures?
The audit firm should have policies and procedures to ensure that only the appropriate clients are accepted in the first place and retained.
What criteria should an audit firm management consider when deciding whether to accept a client?
- Management integrity
- Competence time and resources
- Compliance with ethical standards
- Significant matters arising during past or current audits
Why is “Human resources” considered a key element of quality control procedures?
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.
In relation to the appointment of an engagement partner, what policies are firms required to have?
- 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.
From a quality control perspective, what aspects do the engagement staff members need when carrying out an audit?
- 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
What does ICAEW require from its members in order to facilitate quality control?
Members must carry out CPD in order to renew their membership every year
What are the key issues of “Engagement performance” from a quality control perspective?
- Direction
- Supervision
- Review
- Consultation
- Resolution of disputes
Direction: The engagement partner must ensure the team members know what?
- 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
Supervision: What are the four features of supervision listed by ISA 220?
- 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
Review: What is the objective of this phase from a quality control perspective?
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.
Review: What is an EQCR and what is the purpose of this?
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.
Review: What is a hot review?
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.
Documentation and review: What does ISA 230 state that the audit documentation should include?
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.
Consultation: What happens if there is a difference in opinion during an audit engagement?
The issue/difference must be resolved prior to the assurance report being issued.
