PRACTICE MANAGEMENT
The role performed by auditors represents an activity of significant public interest. Quality
independent audit is crucial, both to users and to the audit profession as a whole.
Poor audit quality damages the reputation of the firm and may lead to loss of clients and thus
fees, as well as an increased risk of litigation and concomitant professional insurance costs.
Two standards deal with quality at a general level.
i. ISQC 1: Quality control for firms that perform audits and reviews of financial
statements, and other assurance and related services engagements,
ii. ISA 220: Quality control for an audit of financial statements.
Principles and purpose
Although each stakeholder in the audit will give a different meaning to audit quality, at its heart
it is about delivering an appropriate professional opinion supported by the necessary evidence
and judgements.
Principles that contribute to audit quality
- good leadership,
- experienced judgement,
- technical competence,
- ethical values and appropriate client relationships,
- proper working practices and
- effective quality control and monitoring review processes.
QUALITY CONTROL AT A FIRM LEVEL
The International Standard on Quality Control (ISQC 1) helps audit firms establish quality
standards for their business.
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Purpose of ISQC 1
The objective of the firm is to establish and maintain a system of quality control to provide it
with reasonable assurance that:
i. The firm and its personnel comply with professional standards and applicable legal
and regulatory requirements
ii. Reports issued by the firm or engagement partners are appropriate in the
circumstances.
Firm and leadership responsibilities for quality within the firm
- Firms are required to ensure that the appropriate training is provided to ensure there is
complete understanding of the objectives and procedures under ISQC 1.
- The standard stipulates further that some firms may need to apply additional procedures
(beyond those of the standard) to ensure that the objectives are met.
- The standard requires that the firm implements policies such that the internal culture of
the firm is one where quality is considered to be essential. Such a culture must be
inspired by the leaders of the firm, who must promote this culture by the example of their
actions and messages.
- The firm may appoint an individual or group of individuals to oversee quality in the firm.
Such individuals must have:
Sufficient and appropriate experience
The ability to carry out the job
The necessary authority to carry out the job
a. Human resources
- The firm's overriding desire for quality will necessitate policies and procedures on
ensuring excellence in its staff, to provide the firm with 'reasonable assurance that it has
sufficient personnel with the capabilities, competence, and commitment to ethical
principles necessary to perform its engagements in accordance with professional
standards and regulatory and legal requirements, and to enable the firm or engagement
partners to issue reports that are appropriate in the circumstances'.
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These will cover the following issues; Recruitment, Performance evaluation,
Capabilities, Competence, Career development, Promotion, Compensation, The
estimation of personnel needs
- The firm is responsible for the ongoing excellence of its staff, through continuing
professional development, education, work experience and coaching by more
experienced staff.
b. Assignment of engagement teams
The assignment of engagement teams is an important matter in ensuring the quality of an
individual assignment. This responsibility is given to the audit engagement partner. The firm
should have policies and procedures in place to ensure that:
- Key members of client staff and those charged with governance are aware of the identity
of the audit engagement partner
- The engagement partner has appropriate capabilities, competence, authority and time to
perform the role
- The engagement partner is aware of his responsibilities as engagement partner
The engagement partner should ensure that he/she assigns staff of sufficient capabilities,
competence and time to individual assignments so that he will be able to issue an appropriate
report.
c. Engagement performance
- The firm should take steps to ensure that engagements are performed correctly, that is, in
accordance with standards and guidance. Firms often produce a manual of standard
engagement procedures to give to all staff so that they know the standards they are
working towards.
- Ensuring good engagement performance involves a number of issues:
i. Direction
ii. Consultation
iii. Supervision
iv. Resolution of disputes
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v. Review
ISQC 1.34
The firm shall establish policies and procedures designed to provide it with reasonable
assurance that:
i. Appropriate consultation takes place on difficult or contentious matters
ii. Sufficient resources are available to enable appropriate consultation to take place
iii. The nature and scope of, and conclusions resulting from, such consultations are
documented and are agreed by both the individual seeking consultation and the
individual consulted
iv. Conclusions resulting from consultations are implemented
Quality Control Reviewer
When there are differences of opinion on an engagement team, a report should not be issued
until the dispute has been resolved. This may involve the intervention of the quality control
reviewer.
Types of reviews;
i. A peer review is a review of an audit file carried out by another partner in the
assurance firm.
ii. A hot review is a peer review carried out before the audit report is signed.
iii. A cold review is a peer review carried out after the audit report is signed.
The firm should have policies and procedures to determine when a quality control reviewer
will be necessary for an engagement.
d. Monitoring
The standard states that firms must have policies in place to ensure that their quality control
procedures are:
- Relevant
- Operating effectively
- Adequate
- Complied with
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There are two types of monitoring activity;
i. An ongoing evaluation might include such questions as, 'have we kept up to date with
regulatory requirements
ii. A periodic inspection cycle would usually fall over a period such as three years, in
which time at least one engagement per engagement partner would be reviewed
When evidence is gathered that an inappropriate report might have been issued, the audit firm
may want to take legal advice.
Corrective action
Remedial action with an individual
Communication of findings with the training department
Changes in the quality control policies and procedures
Disciplinary action, if necessary
QUALITY CONTROL ON AN INDIVIDUAL AUDIT
The requirements concerning quality control on individual audits are found in ISA 220 Quality
control for an audit of financial statements
ISA 220.6
The objective of the auditor is to implement quality control procedures at the engagement level
that provide the auditor with reasonable assurance that:
(a) The audit complies with professional standards and applicable legal and regulatory
requirements
(b) The auditor's report issued is appropriate in the circumstances
The burden of this falls on the audit engagement partner, who is responsible for the audit and the
ultimate conclusion.
1. Leadership responsibilities
ISA 220.8
The engagement partner shall take responsibility for the overall quality on each audit
engagement to which that partner is assigned.
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2. Ethical requirements
ISA 220.9
Throughout the audit engagement, the engagement partner shall remain alert, through
observation and making enquiries as necessary, for evidence of non-compliance with relevant
ethical requirements by members of the engagement team.
ISA 220.11
The engagement partner shall form a conclusion on compliance with independence requirements
that apply to the audit engagement. In doing so, the engagement partner shall:
a. Obtain relevant information from the firm and, where applicable, network firms, to
identify and evaluate circumstances and relationships that create threats to
independence.
b. Evaluate information on identified breaches, if any, of the firm's independence policies
and procedures to determine whether they create a threat to independence for the audit
engagement
c. Take appropriate action to eliminate such threats or reduce them to an acceptable level
by applying safeguards, or, if considered appropriate, to withdraw from the audit
engagement, where withdrawal is possible under applicable law and regulation. The
engagement partner shall promptly report to the firm any inability to resolve the matter
for appropriate action.
ISA 220.24
The auditor shall include in the audit documentation… conclusions on compliance with
independence requirements that apply to the audit engagement, and any relevant discussions
with the firm that support these conclusions.
Acceptance/continuance of client relationships and specific audit engagements
The partner is required to ensure that the requirements of ISQC 1 in respect of accepting and
continuing with the audit are followed.
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If the engagement partner obtains information that would have caused him to decline the audit in
the first place he should communicate that information to the firm so that swift action may be
taken.
Engagement performance
Several factors are involved in engagement performance,
1. Direction
The partner directs the audit. He is required by other auditing standards to hold a meeting
with the audit team to discuss the audit, in particular the risks associated with the audit.
This ISA suggests that direction includes 'informing members of the engagement team of:
a. Their responsibilities (including objectivity of mind and professional scepticism)
b. Responsibilities of respective partners where more than one partner is involved in
the conduct of the audit engagement
c. The objectives of the work to be performed
d. The nature of the entity's business
e. Risk-related issues
f. Problems that may arise
g. The detailed approach to the performance of the engagement
2. Supervision
The audit is supervised overall by the engagement partner, but more practical supervision
is given within the audit team by senior staff to more junior staff, as is also the case with
review.
It includes:
a. Tracking the progress of the audit engagement.
b. Considering the capabilities and competence of individual members of the team, and
whether they have sufficient time and understanding to carry out their work
c. Addressing significant issues arising during the audit engagement and modifying the
planned approach appropriately
d. Identifying matters for consultation or consideration by more experienced
engagement team members during the audit engagement.
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3. Review
Review includes consideration of whether:
i. The work has been performed in accordance with professional standards and
regulatory and legal requirements
ii. Significant matters have been raised for further consideration
iii. Appropriate consultations have taken place and the resulting conclusions have
been documented and implemented
iv. There is a need to revise the nature, timing and extent of work performed
v. The work performed supports the conclusions reached and is appropriately
documented
vi. The evidence obtained is sufficient and appropriate to support the auditor's report
vii. The objectives of the engagement procedures have been achieved
4. Consultation
The partner is also responsible for ensuring that if difficult or contentious matters arise
the team takes appropriate consultation on the matter and that such matters and
conclusions are properly recorded.
If differences of opinion arise between the engagement partner and the team, or between
the engagement partner and the quality control reviewer, these differences should be
resolved according to the firm's policy for such differences of opinion.
5. Quality control review
The audit engagement partner is responsible for appointing a reviewer, if one is required.
He is then responsible for discussing significant matters arising with the reviewer and for
not issuing the audit report until the quality control review has been completed.
A quality control review should include:
- An evaluation of the significant judgements made by the engagement team.
- An evaluation of the conclusions reached in formulating the auditor's report.
