Chapter 5 - Quality management Flashcards
Why is it important for an audit to be conducted to a high standard of quality?
- It protects the reputation of the audit firm and the wider accounting profession.
- A well-conducted audit provides a strong defense if the auditor is ever accused of negligence.
- High-quality audits serve the public interest by helping users of financial statements—such as investors, creditors, and regulators—make informed and reliable decisions.
- It enhances trust and confidence in financial reporting, which supports the smooth functioning of capital markets.
What are the two main types of systems used to identify failures in audit quality?
Internal Systems:
Designed by the audit firm to ensure high standards and prevent audit failures. Governed by ISQM 1, which sets out firm-level quality management requirements. Auditors must also follow ISA 220 to apply quality measures to individual audits.
External Systems:
Audit Inspection Unit (part of the FRC) reviews audit files of listed companies. ICAEW conducts regulatory reviews of non-listed company audits. Failures identified may result in disciplinary action, including fines or suspension of audit registration.
At a firm level, what are audit firms required to do to ensure audit quality?
ISQM 1 requires a firm to implement a system of quality management system (QMS) designed to provide reasonable assurance that:
* The firm and its personnel fulfil all professional, legal, and regulatory requirements, ensuring compliance with ethical standards and obligations.
* Engagement reports issued (such as audit opinions) are appropriate in the circumstances, meaning they are based on sufficient and appropriate evidence and reflect the true position of the entity being audited.
Who is responsible for the QMS in an audit firm?
Under ISQM 1, the CEO or managing partner of the audit firm holds overall responsibility and accountability for the system of quality management (QMS). This reflects the importance of leadership in driving audit quality across the firm.
However, the standard also recognises that operational responsibility for specific elements of the QMS—such as monitoring or ethical procedures—can and should be delegated to appropriate individuals within the firm.
These individuals must:
* Have sufficient experience, seniority, and influence within the firm.
* Be given adequate time and resources to perform their QMS-related duties effectively.
* Be held accountable for their roles.
In practice, one of these individuals is often referred to as the Quality Partner, who may lead a quality team depending on the firm’s size and structure.
What are the eight elements of the system of quality management under ISQM 1?
- Risk Assessment – Identify and address risks to audit quality.
- Governance & Leadership – Leadership promotes a culture of quality.
- Ethical Requirements – Ensure compliance with ethical principles (e.g. independence).
- Acceptance & Continuance – Evaluate clients before accepting or continuing engagements.
- Engagement Performance – Perform and supervise audits to a consistent high standard.
- Resources – Maintain adequate and skilled staff, tools, and support.
- Information & Communication – Ensure clear, timely info-sharing within the firm.
- Monitoring & Remediation – Review QMS effectiveness and fix issues promptly.
At an engagement level, who is responsible for audit quality?
The engagement partner is responsible for managing and achieving quality on an audit engagement, including emphasising firm culture, the responsibility of all for quality, and the importance of good communication.
What are the relevant ethical requirements in an audit engagement, and what responsibilities does the engagement partner have?
Relevant ethical requirements are the professional standards and principles (e.g. integrity, objectivity, professional competence, confidentiality, and independence) that auditors must comply with throughout the engagement.
The engagement partner must:
* Understand and take responsibility for applying these ethical requirements.
* Ensure the audit team is aware of and understands the ethical obligations.
* Evaluate any ethical threats (e.g. self-interest, familiarity, advocacy) and take appropriate actions to address them.
* Before signing the audit report, confirm that all ethical requirements have been properly met.
What must the engagement partner consider before accepting or continuing an audit client to ensure high audit quality?
The engagement partner is responsible for ensuring that the firm’s client acceptance and continuance procedures are followed. Before accepting a new client—or deciding to continue with an existing one—the following factors must be assessed:
* Client risk level, including any business, reputational, or financial risks.
* Integrity of the client’s management, including whether the firm wants to be associated with them.
* Compliance with anti-money laundering laws, including identity checks.
* Whether the firm has sufficient resources (time, staff, capacity).
* Whether the firm has the technical competence to perform the audit.
* That the firm is independent of the client.
* Professional clearance must be sought from the previous auditor (if applicable).
* The engagement terms must be discussed and agreed upon via an engagement letter.
While this process is most formal when accepting a new client, the engagement partner must periodically reassess the suitability of continuing the relationship and ensure compliance with the firm’s policies.
What must the engagement partner consider regarding engagement resources to ensure high audit quality?
The engagement partner must ensure that sufficient and appropriate resources are assigned or made available to the audit team in a timely manner. This includes:
* Evaluating whether all team members (including internal auditors, where used) have the necessary competence, capabilities, and time to perform their rules effectively.
* Taking appropriate action if resource gaps are identified—such as reallocating staff, seeking expert input, or adjusting timelines.
This responsibility ensures that the engagement is performed to a high standard and in line with professional and regulatory requirements.
Who is responsible for directing the audit at the engagement level, and what key elements must they ensure to maintain high audit quality?
The engagement partner holds ultimate responsibility for the direction and oversight of the audit. However, this responsibility is often delegated to the most senior team member on site, who directs the audit in line with the overall engagement strategy.
The engagement partner must ensure that the audit team:
* Understands what work they are assigned to do.
* Is familiar with the nature of the client’s business.
* Is aware of risks relevant to the engagement.
* Can anticipate and respond to potential problems during the audit.
* Understands the detailed audit approach and strategy to be followed.
This ensures a coordinated, focused, and high-quality audit execution.
Who is responsible for supervising the audit at the engagement level, and what must be ensured during the review to maintain high audit quality?
The engagement partner has ultimate responsibility for supervising the audit, but this is typically delegated through the audit team hierarchy:
- A manager or supervisor oversees the engagement.
- Day-to-day supervision is often handled by the senior auditor.
Key elements of effective supervision include:
* Monitoring progress of the audit against timelines.
* Ensuring adherence to the audit plan and strategy.
* Addressing and escalating issues or risks that arise during the engagement.
* Providing guidance and feedback to junior team members as needed.
Proper supervision helps maintain consistency, quality, and timely completion of audit procedures.
Who is responsible for reviewing audit work at the engagement level, and what must be ensured during the review to maintain high audit quality?
More senior team members or the engagement partner review the work performed by junior staff. The review aims to ensure:
- Compliance with professional, legal, and regulatory standards.
- Significant issues are identified and addressed properly.
- Consultations (where needed) are documented and followed through.
- Audit objectives have been met.
- Audit evidence is sufficient and appropriate and supports conclusions, is clear, complete, and consistent.
- Audit approach remains suitable—revise if necessary.
What are the two main types of audit file reviews and how do they differ?
-
Hot Review
🔥 Conducted during the audit
✅ Ensures quality and compliance in real-time
🛠 Allows immediate corrections
👀 Done before the audit opinion is issued -
Cold Review
❄️ Conducted after the audit
📊 Used for learning, monitoring, and improvement
🚫 No changes can be made to the issued report
📅 Done periodically for quality control
What are the documentation requirements in an audit engagement, and why are they important for ensuring high audit quality?
Audit documentation must be sufficiently detailed to allow an experienced auditor with no prior involvement to understand:
- The nature, timing, and extent of audit procedures performed
- The results of those procedures
- The audit evidence obtained
- Any significant matters identified and the conclusions reached
Why might an audit engagement require third-party consultation, and who is responsible for obtaining it?
Audit engagements may require additional consultation when dealing with:
- Complex, technical, or unusual transactions
- Difficult or contentious issues, such as going concern uncertainties or valuation of complex financial instruments
- Situations requiring specialist knowledge (e.g. tax, legal, IT, or actuarial)
These consultations help ensure that sound, well-informed judgments are made and that the audit remains compliant with professional standards.
The engagement partner is responsible for:
- Initiating and obtaining appropriate consultations
- Documenting the issues, advice received, and any actions or conclusions taken as a result
This supports audit quality, enhances professional scepticism, and provides a defensive record if challenged later.
What should the engagement partner do if differences of opinion arise during the audit?
The engagement partner must:
- Follow the firm’s procedures for resolving differences of opinion
- Take responsibility for managing and resolving the disagreement
- Not sign the auditor’s report until the issue is resolved
- Likely seek consultation to help reach a conclusion
This ensures that audit conclusions are robust and supported by consensus and/or expert input.
What is the engagement partner’s responsibility regarding issues identified through the firm’s monitoring and remediation process?
The engagement partner is responsible for:
- Addressing quality issues flagged by the monitoring team as they apply to the current audit
- Ensuring such issues are dealt with promptly and effectively
- Recognising that this is a continual process, especially if a general quality issue is identified mid-audit
This helps maintain and embed quality improvements in real time during the engagement.
With regards to audit quality, what are the main responsibilities of the audit commitee?
The audit committee is responsible for overseeing both the external auditor and the audit process to ensure a high-quality, objective, and effective audit. Their key responsibilities include:
* Appointing, reappointing, or removing the auditor - Ensures the company is served by a competent and independent auditor suited to its needs.
* Approving audit fees -Helps maintain auditor independence—fees should be fair and not create dependence or bias.
- Agreeing on the terms of engagement - Ensures clarity on responsibilities, scope, and objectives, which prevents misunderstandings.
- Putting the audit out to tender every 10 years - Introduces fresh perspectives and helps avoid over-familiarity, supporting independence and scepticism.
- Annually assessing the auditor’s independence, objectivity, and effectiveness - Reinforces accountability and ensures the auditor is performing with professional scepticism and due care.
- Seeking assurance of no conflicts of interest (e.g. financial, business, personal relationships) - Maintains independence and objectivity, both of which are core to audit quality.
- Obtaining info from the audit firm about independence policies - Helps the committee monitor ongoing compliance with ethical standards.
What responsibilities does the audit committee have in overseeing the audit process?
At the planning stage
Reviewing the audit strategy, materiality thresholds, and resource allocation (time and expertise of team) - Ensures the audit focuses on high-risk areas and has suitably qualified and sufficient staff to carry out a thorough audit.
During the Audit
Reviewing major findings, key accounting judgements, and identified errors - Allows the committee to challenge the auditor’s assumptions, push for deeper investigation, and verify that issues are appropriately addressed.
On Completion
Evaluating the audit’s effectiveness by assessing:
- Whether the audit was performed as planned and understand the reasons for any changes
- The level of professional scepticism shown by the auditors in their handling of the key accounting and audit judgements identified
- Feedback from key personnel on auditor conduct
- The quality and insightfulness of the management letter and whether it is based on a good understanding of the company
- Whether the audit provided value for money
These steps promote accountability, support continuous improvement, and demonstrate to stakeholders that the audit committee is actively upholding audit quality.
