Quality control

Question 1

Role of the FRC

Answer 1

IAASB issues ISAs

FRC adopts and modifies ISAs to be appropriate for UK auditors
Established to promote good financial reporting in the UK through:
- setting of accounting standards
- reviewing published FSs

Consists of the:

• Codes and Standards Committee
• Conduct Committee

Question 2

The need for quality control

Answer 2

USERS
Lack of QC means -> Users can’t rely on audit work performed -> Can’t rely on audit opinion -> undermines the whole audit system

AUDIT FIRM
Audit risk increases -> Potential audit failure -> Potential sanctions by regulators

Question 3

ISQC 1: The 6 key elements of a quality control system

Answer 3

• Leadership responsibilities for quality within the firm
• Ethical requirements
• Acceptance and continuance of client relationships/specific engagements
• Human resources
• Engagement performance
• Monitoring

Question 4

Quality reviews (AQRC and ICAEW)

Answer 4

Audit Quality Review Committee (of the FRC) inspects listed company audit files

ICAEW inspects non-listed audit files under their ‘Practice Assurance’ scheme

Question 5

Benefits of quality control procedures

Answer 5

• Standard of all audit work completed is high and consistent
• Registered auditors are regarded as professionals who follow standards
• Quality of the work completed can be measured against a standard
• Individuals within firms know if the work they have completed is acceptable

Question 6

ISQC: LEADERSHIP

Answer 6

Partners of the firm should be establishing a culture of quality being essential in performing assurance engagements.
They should ensure that:

• commercial considerations do not override the quality of work performed
• the firm’s policies in relation to staff promotion, remuneration and performance review incorporate the importance of quality work
• sufficient resources are allocated to the development, documentation and support of quality control policies and procedures

Question 7

ISQC: ETHICS

Answer 7

The firm should have policies and procedures designed to ensure that ethical requirements are met

Question 8

ISQC: ACCEPTANCE AND CONTINUANCE OF CLIENT RELATIONSHIPS/SPECIFIC ENGAGEMENTS

Answer 8

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

Engagement partner should carry out similar considerations as he did when he accepted the client every year when bearing in mind whether to retain the client

Question 9

ISQC: HUMAN RESOURCES

Answer 9

Firm should have policies and procedures to ensure that it employs and retains staff with the capabilities, competence and commitment to ethical principles necessary to perform the engagements

There should be policies on recruitment, career development, performance evaluation and promotion

Important to allocate staff to assurance engagements appropriately

Question 10

ISQC: HUMAN RESOURCES

Qualities staff need to be allocated to an engagement team (6) :

Answer 10

• Understanding of/practical experience w 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 judgement
• Understanding of the firm’s quality control procedures and policies

Question 11

ISQC: ENGAGEMENT PERFORMANCE

Answer 11

• Supervision
  The partner has overall responsibility for supervising the audit but will delegate supervisory duties to a manager
• Direction
  Largely the responsibility of the engagement partner, but will be delegated to the most senior team member on site, who will direct the engagement in accordance w the overall strategy
• Review
  Purpose of review is to consider whether the work done is in line w the audit strategy
  EP must be satisfied that sufficient appropriate audit evidence has been obtained to support the conclusions in the auditor’s report
• Consultation
  when contentious issues arise, the assurance team must consult properly on the matter and the conclusions drawn must be properly recorded
  any differences of opinion must be resolved prior to the report being issued

Question 12

Engagement quality control review (hot review)

Answer 12

For: listed entities and other entities determined by the firm

Carried out by a partner not involved in the engagement / external consultant BEFORE the auditor’s report is signed

Purpose: to provide an additional safety check about the validity of the firm’s opinion on the FSs

the following must be considered:
• the eval of independence
• whether appropriate consultation has taken place on contentious issues
• whether the documentation selected for review reflects the work performed in relation to the sig. judgements and supports the conclusions reaches

Question 13

ISQC: MONITORING

Answer 13

Firm must have policies in place to ensure that their QC procedures are adequate and relevant, that they’re operating effectively and are complied with

Mgmt of assurance firm (so, the partners) should receive an annual report on the outcome of monitoring activities

Question 14

Getting the audit opinion wrong could lead to:

Answer 14

• being sued for professional negligence
• prosecution and fines
• disciplinary proceedings from ICAEW
• loss of reputation, clients, key staff
• assurance firm collapse

Question 15

You are the audit senior with responsibility for directing, supervising and reviewing the work of the junior members of the engagement team during the external audit of Plain Ltd.
Explain how you would discharge these responsibilities before and during the audit assignment.

Answer 15

Before:
Assess juniors’ skills and set out their areas of responsibility
Brief juniors on the nature of the audit client, audit risks and issues which may arise
Explain the detailed approach to the engagement including relevant timings
Hold a meeting to enable the jurors to discuss the assignment and ask questions
Introduce team members to client staff

During:
Review pieces of juniors work to ensure that:
- sufficient and appropriate audit evidence is being obtained
- the audit work supports the conclusions reached
- appropriate consultations have been made and that the results of these have been documented

Check that juniors are carrying out their work per the audit plan and that they understand the instructions given
Provide feedback to juniors on the work reviewed
Track the overall progress of the audit work against the audit plan and that they understand the instructions given
Address matters arising during the audit engagement and answer Qs raised by juniors
Consider need to consult upwards on any issues raised during the engagement

Question 16

In respect of quality control procedures, distinguish between:
• an engagement quality control review (hot review);
• a review as part of the firm’s monitoring procedures (cold review).

Answer 16

EQCR (HOT REVIEW)
• Only for audits of listed clients and for those the firm has determined an EQCR is required
• Objective/independent evaluation of the significant judgements the team has made and the conclusions it reached in forming the opinion
• Takes place on or before the date of auditor’s report
• Not a review of all working papers

• Evaluation involves:
• > Discussion of sig. matters with EP
• > Review of FSs and proposed auditor’s report
• > Review of selected documentation
• > Eval of proposed auditor’s report
• > Re: listed entities, consideration of:
  (a) the team’s evaluation of firm’s independence
  (b) whether appropriate consultation regarding differences of opinion

MONITORING (COLD REVIEW)
• Takes place after the date of the AR
•On a sample of files

• Ensure compliance w/ firm’s procedures and:

• ISAs
• Ethical Standard
• legislative reqs
• UK Audit regs
• Identify areas requiring improvement
• Take remedial action/training

Question 17

Consequences of an inappropriate audit opinion

Answer 17

Sued for negligence by clients creditors e.g. if client goes bankrupt
Action by the FRC
Disciplinary action by ICAEW : Membership revoked, impose fines
Possible criminal offence 
Loss of reputation
Legal costs
Time
Personal cost
Audit firm collapse

Question 18

Joint and several liability

Answer 18

Joint and several liability leads to:
increasing audit fees
increasing insurance premium
barriers to entry to audit large listed companies
risk of 'big 4' firm collapse?

Question 19

Limitation of liability (Companies Act)

Answer 19

Allows auditors and their clients to agree a limit on the auditor’s liability

Does not specify what kind of limitation e.g. - monetary cap + proportionate liability

Must be approved by members’ resolution

Only covers one year at a time - must be-approved annually

Must be disclosed in the annual accounts

Only binding to the extent that the agreement is ‘fair and reasonable’ in the circumstances

Question 20

A qualified senior and yourself are due to start work on an assignment. He will review your work before the file is passed on to the manager.
What aspects will he be considering when he is reviewing your work?

Answer 20

Work properly conducted in accordance with the audit plan
Conclusions are valid
Working papers are headed, initialled and dated
Matters identified for further consideration

Question 21

Objectives of quality control within an audit firm

Answer 21

To ensure the auditor performs the right work to a high standard and adequately records the work done
-> involved: selecting the appropriate team, supervising staff, consulting sufficiently with colleagues and outside experts and reviewing the work carried out by the team w/ sufficient care

Ensure the auditor draws the correct conclusions and forms the appropriate audit opinion, and deals adequately with issues raised

Protect auditor from risks rising as a result of incompetence or negligence of the client’s staff and will protect from the risk of litigation