SQC 1 - Quality Control for Firms that Perform Audits & Reviews of Historical Financial Information & Other Assurance & Related Service Engagements Flashcards
M/s Chandra & Co., Chartered Accountants were appointed as Statutory Auditors of Green
Essence Limited for the F.Y 2021-2022. The previous year’s audit was conducted by M/s. Nath &
Associates. After the audit was completed and report submitted, it was found that closing balances
of last financial year i.e., 2020-21 were incorrectly brought forward. It was found that M/s Chandra
& Co. did not apply any audit procedures to ensure that correct opening balances have been
brought forward to the current period. Accordingly, a complaint was filed against Chandra & Co. in
relation to this matter.
You are required to inform what policies are required to be implemented by Chandra & Co. for
dealing with such complaints and allegations as required by Standard on Quality Control (SQC).
Complaints and Allegations:
In the given question, C & Co did not apply audit procedures to ensure that opening balances had been correctly brought forward. A complaint was filed against the auditors in this context.
• As required by SQC-1 “Quality Control for Firms that Perform Audits & Reviews of Historical
Financial Information, and Other Assurance & Related Services Engagements” the firm should
establish policies and procedures designed to provide it with reasonable assurance that it deals
appropriately with:
(a) Complaints and allegations that the work performed by the firm fails to comply with
professional standards and regulatory and legal requirements; and
(b) Allegations of non-compliance with the firm’s system of quality control.
• Complaints and allegations (which do not include those that are clearly frivolous) may originate
from within or outside the firm. They may be made by firm personnel, clients or other third parties.
They may be received by engagement team members or other firm personnel.
• As part of this process, the firm establishes clearly defined channels for firm personnel to raise any
concerns in a manner that enables them to come forward without fear of reprisals.
• The firm investigates such complaints and allegations in accordance with established policies and
procedures. The investigation is supervised by a partner with sufficient and appropriate experience
and authority within the firm but who is not otherwise involved in the engagement, and includes
involving legal counsel as necessary. Small firms and sole practitioners may use the services of a
suitably qualified external person or another firm to carry out the investigation. Complaints,
allegations and the responses to them are documented.
• Where the results of the investigations indicate deficiencies in the design or operation of the firm’s
quality control policies and procedures, or non-compliance with the firm’s system of quality control
by an individual or individuals, the firm shall take appropriate action.
MB & Associates is a partnership firm of Chartered Accountants which was established
seven years back. The firm is getting new clients and has also, been offered new
engagement services with existing clients. The firm is concerned about obtaining such
information as it considers necessary in the circumstances before accepting an
engagement with a new client and acceptance of a new engagement with an existing client.
The firm is looking to work with only select clients to adhere to the Quality Control
Standards. Guide MB & Associates about the matters to be considered with regard to the
integrity of a client, as per the requirements of SOC 1.
As per SQC 1, the firm should obtain such information as it considers necessary in the
circumstances before accepting an engagement with a new client, when deciding whether
to continue an existing engagement, and when considering acceptance of a new
engagement with an existing client. Where issues have been identified, and the firm
decides to accept or continue the client relationship or a specific engagement, it should
document how the issues were resolved.
With regard to the integrity of a client, matters that the firm considers include, for
example:
(i) The identity and business reputation of the client’s principal owners, key management,
related parties and those charged with its governance.
(ii) The nature of the client’s operations, including its business practices.
(iii) Information concerning the attitude of the client’s principal owners, key management
and those charged with its governance towards such matters as aggressive
interpretation of accounting standards and the internal control environment.
(iv) Whether the client is aggressively concerned with maintaining the firm’s fees as low
as possible.
(v) Indications of an inappropriate limitation in the scope of work.
(vi) Indications that the client might be involved in money laundering or other criminal
activities.
(vii) The reasons for the proposed appointment of the firm and non-reappointment of the
previous firm.
The extent of knowledge a firm will have regarding the integrity of a client will generally
grow within the context of an ongoing relationship with that client.
