Chapter 3 - Quality control Flashcards
What are the UNDESIRABLE outcomes of POOR quality control?
- Financial effects
- Damaged reputation
Which standards focus on quality control? (2 of them)
ISQC 1 - any assurance engagement
ISA 220 - audit
What are the BENEFITS of good quality control?
- for client
- for audit firm
- Client receives acceptable level of service
- Reduce risk of negligence claims
- Reduce risk of disciplinary
- Maintain strong reputation
Audit quality is monitored by ____________ and ____________
FRC Audit Quality Review Committee
ICAEW’s Practice Assurance scheme
What steps do FRC take to promote audit quality?
- 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
List the SIX PILLARS of quality control.
- Leadership
- Ethical requirements
- Acceptance and Continuance Considerations
- Human Resources
- Engagement Performance
- Monitoring
Pillar: Leadership
How should an ENGAGEMENT PARTNER maintain audit quality?
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
Pillar: Acceptance and Continuance Considerations
What should the AUDITOR consider?
- Management Integrity
- Competence/Time/Resources
- Compliance with Ethical Standard
- Significant matters from previous engagements
Pillar: Human Resources
What should ENGAGEMENT PARTNER ensure?
Appropriate members of staff in team
- Relevant knowledge/experience/can apply professional judgement
Pillar: Human Resources
ISQ1 sets out policies to ensure firm employs appropriate staff which cover:
- Recruitment
- Performance Evaluation
- Career development/Promotion (for good work, not fast work)
- Compensation
Pillar: Human Resources
ICAEW members need to carry out appropriate continuing professional development when renewing membership every year.
TRUE/FALSE
TRUE
Pillar: Engagement Performance
How should the AUDIT PARTNER ensure direction/supervision/review of the team?
- 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
Why is Documentation important for quality control?
Allows the firm/FRC/ICAEW to monitor the quality control procedures.
Firms need to MONITOR that quality control procedures are: (3 THINGS)
- relevant
- adequate
- operating effectively
Engagement Quality Control reviews:
HOT/COLD REVIEW
HOT REVIEW
Monitoring:
HOT/COLD REVIEW
COLD REVIEW
Engagement Quality Control reviews PURPOSE/AIM:
Independent evaluation (another partner) of independence/significance/judgement/conclusion of audit opinion. (2 opinions all together)
Aim: Prevents inappropriate opinion BEFORE issuing.
Engagement Quality Control reviews:
When?
BEFORE opinion is issued
Engagement Quality Control reviews:
Which clients?
Listed/High risk
Pillar: Monitoring
- PURPOSE
- AIM
- Ensure compliance with firm’s procedure/ISA/Ethical standards/ other regulation.
- Identify areas for improvement.
Pillar: Monitoring
When?
On-going basis/ AFTER opinion is issued
Pillar: Monitoring
Which clients?
ALL/sample of audit files
Which reporting framework requires Audit Committees to review and monitor their external auditor?
UK Corporate Governance Code
How does the UK Corporate Governance code facilitate monitoring of external auditors?
Questionnaires sent to Audit Committee/Directors/Senior Management/Internal Audit
The external auditor is rated by the audit committee, on factors such as:
- Communication
- Quality of reports
- Expertise
- Business understanding
- Value for money £££££
If someone was to be the Engagement Quality Control Reviewer, what ATTRIBUTES must they have:
- Technically Competent (Partner)
- Expertise in Industry of that entity
- Expertise in listed clients
- Independent of both engagement team and client
What are the ICAEW CONSEQUENCES of poor quality control?
- Fines £££
- Disciplinary action
- Withdrawal of firm from carrying out anymore Audit work
What are the OTHER CONSEQUENCES of poor quality control?
- Sued for negligence
- Loss of reputation, clients, staff
- Collapse of firm
- Prosecuted for criminal offence under Companies Act 2006 (misleading, false, deceptive). Penalty = Fine
What is Professional Indemnity Insurance?
Insurance that pays out settlements in Negligence claims.
How are firms not completely covered by Professional Indemnity Insurance?
They still have to bear legal fees, partner time and impact on reputation.
Since 2001, individual partners in LLPs do not face unlimited liability for claims against the firms.
TRUE/FALSE
TRUE
What is a LIABILITY CAP?
A provision that allows auditors to agree a limit to their liability to the entity, requiring a statutory audit.
A LIABILITY CAP is only valid when it:
1.
2.
3.
- Only covers ONE financial year
- Approved by the company shareholder
- FAIR and REASONABLE so a court cannot override the agreement.
How do the Auditor and Client set the liability cap?
- The auditor’s proportionate share of the responsibility for the loss.
- Use a monetary amount or agreed formula.
What concerns would mid-tier audit firms have when setting liability caps?
Smaller resources push them to negotiate a low liability cap - which shareholders may not find acceptable.
How does ICAEW promote improvements in quality?
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
