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AA > Chapter 3 - Quality control > Flashcards

Chapter 3 - Quality control Flashcards

1
Q

What are the UNDESIRABLE outcomes of POOR quality control?

A
  • Financial effects

- Damaged reputation

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2
Q

Which standards focus on quality control? (2 of them)

A

ISQC 1 - any assurance engagement

ISA 220 - audit

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3
Q

What are the BENEFITS of good quality control?

  • for client
  • for audit firm
A
  • Client receives acceptable level of service
  • Reduce risk of negligence claims
  • Reduce risk of disciplinary
  • Maintain strong reputation
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4
Q

Audit quality is monitored by ____________ and ____________

A

FRC Audit Quality Review Committee

ICAEW’s Practice Assurance scheme

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5
Q

What steps do FRC take to promote audit quality?

A
  • Issue ISAs, ethical standards, briefing papers (eg: on professional scepticism )
  • Monitor compliance by reviews of audit firms –> make those reviews public
  • Oversee regulatory activities
  • Investigate misconduct and take action
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6
Q

List the SIX PILLARS of quality control.

A
  1. Leadership
  2. Ethical requirements
  3. Acceptance and Continuance Considerations
  4. Human Resources
  5. Engagement Performance
  6. Monitoring
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7
Q

Pillar: Leadership

How should an ENGAGEMENT PARTNER maintain audit quality?

A

Commercial consideration should NOT override quality.

  • if they need more staff
  • if they need to allocate more time
  • if they need a third party because not enough competence themselves
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8
Q

Pillar: Acceptance and Continuance Considerations

What should the AUDITOR consider?

A
  • Management Integrity
  • Competence/Time/Resources
  • Compliance with Ethical Standard
  • Significant matters from previous engagements
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9
Q

Pillar: Human Resources

What should ENGAGEMENT PARTNER ensure?

A

Appropriate members of staff in team

  • Relevant knowledge/experience/can apply professional judgement
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10
Q

Pillar: Human Resources

ISQ1 sets out policies to ensure firm employs appropriate staff which cover:

A
  • Recruitment
  • Performance Evaluation
  • Career development/Promotion (for good work, not fast work)
  • Compensation
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11
Q

Pillar: Human Resources

ICAEW members need to carry out appropriate continuing professional development when renewing membership every year.

TRUE/FALSE

A

TRUE

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12
Q

Pillar: Engagement Performance

How should the AUDIT PARTNER ensure direction/supervision/review of the team?

A
  • Inform them of their responsibilities, nature of the business, audit risk/approach
  • Appropriate teamwork
  • Supervise individual members
  • Address significant issues
  • Train less experienced members and review work
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13
Q

Why is Documentation important for quality control?

A

Allows the firm/FRC/ICAEW to monitor the quality control procedures.

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14
Q

Firms need to MONITOR that quality control procedures are: (3 THINGS)

A
  • relevant
  • adequate
  • operating effectively
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15
Q

Engagement Quality Control reviews:

HOT/COLD REVIEW

A

HOT REVIEW

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16
Q

Monitoring:

HOT/COLD REVIEW

A

COLD REVIEW

17
Q

Engagement Quality Control reviews PURPOSE/AIM:

A

Independent evaluation (another partner) of independence/significance/judgement/conclusion of audit opinion. (2 opinions all together)

Aim: Prevents inappropriate opinion BEFORE issuing.

18
Q

Engagement Quality Control reviews:

When?

A

BEFORE opinion is issued

19
Q

Engagement Quality Control reviews:

Which clients?

A

Listed/High risk

20
Q

Pillar: Monitoring

  1. PURPOSE
  2. AIM
A
  1. Ensure compliance with firm’s procedure/ISA/Ethical standards/ other regulation.
  2. Identify areas for improvement.
21
Q

Pillar: Monitoring

When?

A

On-going basis/ AFTER opinion is issued

22
Q

Pillar: Monitoring

Which clients?

A

ALL/sample of audit files

23
Q

Which reporting framework requires Audit Committees to review and monitor their external auditor?

A

UK Corporate Governance Code

24
Q

How does the UK Corporate Governance code facilitate monitoring of external auditors?

A

Questionnaires sent to Audit Committee/Directors/Senior Management/Internal Audit

25
Q

The external auditor is rated by the audit committee, on factors such as:

A
  • Communication
  • Quality of reports
  • Expertise
  • Business understanding
  • Value for money £££££
26
Q

If someone was to be the Engagement Quality Control Reviewer, what ATTRIBUTES must they have:

A
  • Technically Competent (Partner)
  • Expertise in Industry of that entity
  • Expertise in listed clients
  • Independent of both engagement team and client
27
Q

What are the ICAEW CONSEQUENCES of poor quality control?

A
  • Fines £££
  • Disciplinary action
  • Withdrawal of firm from carrying out anymore Audit work
28
Q

What are the OTHER CONSEQUENCES of poor quality control?

A
  • Sued for negligence
  • Loss of reputation, clients, staff
  • Collapse of firm
  • Prosecuted for criminal offence under Companies Act 2006 (misleading, false, deceptive). Penalty = Fine
29
Q

What is Professional Indemnity Insurance?

A

Insurance that pays out settlements in Negligence claims.

30
Q

How are firms not completely covered by Professional Indemnity Insurance?

A

They still have to bear legal fees, partner time and impact on reputation.

31
Q

Since 2001, individual partners in LLPs do not face unlimited liability for claims against the firms.

TRUE/FALSE

A

TRUE

32
Q

What is a LIABILITY CAP?

A

A provision that allows auditors to agree a limit to their liability to the entity, requiring a statutory audit.

33
Q

A LIABILITY CAP is only valid when it:

1.

2.

3.

A
  1. Only covers ONE financial year
  2. Approved by the company shareholder
  3. FAIR and REASONABLE so a court cannot override the agreement.
34
Q

How do the Auditor and Client set the liability cap?

A
  • The auditor’s proportionate share of the responsibility for the loss.
  • Use a monetary amount or agreed formula.
35
Q

What concerns would mid-tier audit firms have when setting liability caps?

A

Smaller resources push them to negotiate a low liability cap - which shareholders may not find acceptable.

36
Q

How does ICAEW promote improvements in quality?

A

Trainees need to pass rigorous exams

Qualified members need to complete CPD

ICAEW helpline available for advice

ICAEW code of ethics

Monitors compliance with standards

Investigate misconduct/discipline of individual members

AA (21 decks)

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