Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao
Since 1977
AT.3222
Professional Standards, Quality Control and
Professional Liabilities
References:
1. Preface to the Philippine Standards on Quality Control, Auditing, Review, Other Assurance and Related Services
2. PSA 220, Quality Control for an Audit of Financial Statements
3. PSQC 1, Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and
Related Services Engagements
LECTURE NOTES
Quality Control
Introduction
For a CPA firm, quality control comprises the methods used
to ensure that the firm meets its professional
responsibilities to clients and others. These methods
include the organizational structure of the CPA firm and the
policies and procedures the firm establishes.
Relevant Quality Control Standards
PSQC 1 deals with a firm’s responsibilities for its system of
quality control and applies to all firms of professional
accountants in respect of:
• Audits of historical financial information
• Reviews of historical financial information
• Other assurance engagements
• Related services engagements
PSA 220 deals with the specific responsibilities of the auditor
regarding quality control procedures and engagement
quality control reviewer (EQCR) for an audit of historical
financial information.
Objectives of Quality Control
The objectives of the firm is to establish and maintain a
system of quality control to provide it with reasonable
assurance (not guarantee) that:
• the firm and its personnel comply with professional
standards and regulatory and legal requirements; and
• reports issued by the firm or engagement partners are
appropriate in the circumstances.
The nature and extent of the policies and procedures
developed by an individual firm will depend on various
factors, such as its size, operating characteristics and
whether it is part of a network.
Elements of a System of Quality Control
The system of quality control should include policies and
procedures that address each of the following six elements
(LEAHEM):
a. Leadership responsibilities for quality within the firm
b. Ethical requirements
c. Acceptance and continuance of client relationships and
specific engagements
d. Human resources
e. Engagement performance
f. Monitoring
The firm shall document its policies and procedures and
communicate them to the firm’s personnel.
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a. Leadership Responsibilities for Quality within the Firm
This element requires the firm to establish policies and
procedures designed to promote an internal culture based
on the recognition that quality is essential in performing
engagements.
This element is the ultimate responsibility of the firm’s CEO
or managing board of partners. In an audit engagement,
the engagement partner shall take responsibility for the
overall quality on each audit engagement to which that
partner is assigned. Nonetheless, audit engagement teams
have a responsibility to implement quality control
procedures that are applicable to the audit engagement.
The firm’s leadership and the examples it sets significantly
influence the internal culture of the firm.
b. Ethical Requirements
This element requires the firm to establish policies and
procedures designed to provide reasonable assurance that
the firm and its personnel comply with relevant ethical
requirements, including independence.
At least annually, the firm should obtain written
confirmation of compliance with its policies and procedures
on independence from all firm personnel required to be
independent by the relevant ethical requirement.
c. Acceptance and Continuance of Client Relationships
This element requires the firm to establish policies and
procedures designed to provide reasonable assurance that
the firm will only undertake or continue relationships and
engagements where the firm:
• is competent to perform the engagement and has the
capabilities, time and resources to do so;
• can comply with relevant ethical requirements; and
• has considered the integrity of the client, and does not
have information that would lead it to conclude that the
client lacks integrity.
Competence, Capabilities, and Resources
Consideration of whether the firm has the competence,
capabilities, and resources to undertake a new engagement
from a new or an existing client involves reviewing the
specific requirements of the engagement and the existing
partner and staff profiles at all relevant levels, and including
whether:
• Firm personnel have knowledge of relevant industries or
subject matters;
• Firm personnel have experience with relevant
regulatory or reporting requirements, or the ability to
gain the necessary skills and knowledge effectively;
• The firm has sufficient personnel with the necessary
competence and capabilities;
• Experts are available, if needed;
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• Individuals meeting the criteria and eligibility
requirements to perform engagement quality control
review are available, where applicable; and
• The firm is able to complete the engagement within the
reporting deadline.
Integrity of Client
With regard to the integrity of a client, matters to consider
include, for example:
• The identity and business reputation of the client’s
principal owners, key management, and TCWG.
• The nature of the client’s operations, including its
business practices.
• 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.
• Whether the client is aggressively concerned with
maintaining the firm’s fees as low as possible.
• Indications of an inappropriate limitation in the scope of
work.
• Indications that the client might be involved in money
laundering or other criminal activities.
• The reasons for the proposed appointment of the firm
and non-reappointment of the previous firm.
• The identity and business reputation of related parties.
Sources of information on such matters obtained by the firm
may include the following:
• Communications with existing or previous providers of
professional accountancy services to the client in
accordance with relevant ethical requirements, and
discussions with other third parties.
• Inquiry of other firm personnel or third parties such as
bankers, legal counsel and industry peers.
• Background searches of relevant databases.
Continuance of Client Relationship
Deciding whether to continue a client relationship includes
consideration of significant matters that have arisen during
the current or previous engagements, and their implications
for continuing the relationship. For example, a client may
have started to expand its business operations into an area
where the firm does not possess the necessary expertise.
Declining an Engagement (Withdrawal)
The firm’s policies and procedures on auditor withdrawal
may include the following:
• Discuss with appropriate level of client’s management
and TCWG regarding appropriate action to take
• If appropriate, determine and discuss reasons for
withdrawal from engagement or from both engagement
and client relationships
• Consider professional, regulatory or legal requirements
for the firm
• Document significant issues, consultations, conclusions
and basis
d. Human Resources
This element requires the firm to establish policies and
procedures designed to provide reasonable assurance that
the firm has sufficient personnel with the competence,
capabilities, and commitment to ethical principles necessary
to:
• perform engagements in accordance with professional
standards and regulatory and legal requirements; and
• enable the firm or engagement partners to issue
appropriate reports.
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Personnel issues relevant to the firm’s policies and
procedures related to human resources include:
• Recruitment.
• Performance evaluation.
• Capabilities, including time to perform assignments.
• Competence.
• Career development.
• Promotion.
• Compensation.
• The estimation of personnel needs.
Capabilities and competence are developed through:
• Professional education.
• Continuing professional development, including
training.
• Work experience.
• Coaching by more experienced staff for example, other
members of the engagement team.
• Independence education for personnel who are required
to be independent.
The continuing competence of the firm’s personnel depends
to a significant extent on an appropriate level of continuing
professional development so that personnel maintain their
knowledge and capabilities.
The firm may use a suitably qualified external person, for
example, when internal technical and training resources are
unavailable. Suitably qualified external person is an
individual outside the firm with the competence and
capabilities to act as an engagement partner, for example a
partner of another firm, or an employee (with appropriate
experience) of either a professional accountancy body
whose members may perform audits of historical financial
information or of an organization that provides relevant
quality control services.
The firm shall assign responsibility for each engagement to
an engagement partner and shall establish policies and
procedures requiring that:
a) The identity and role of the engagement partner are
communicated to key members of client management
and TCWG;
b) The engagement partner has the appropriate
competence, capabilities, and authority to perform the
role; and
c) The responsibilities of the engagement partner are
clearly defined and communicated to that partner.
The firm shall also establish policies and procedures to
assign appropriate personnel with the necessary
competence, and capabilities to:
a) Perform engagements in accordance with professional
standards and applicable legal and regulatory
requirements; and
b) Enable the firm or engagement partners to issue reports
that are appropriate in the circumstances.
e. Engagement Performance
This element requires the firm to establish policies and
procedures designed to provide reasonable assurance that
engagements are performed in:
• accordance with professional standards and regulatory
and legal requirements,
• the firm or the engagement partner issue reports that
are appropriate in the circumstances.
Examples of policies and procedures on engagement
performance are:
• Promotion of consistency in the quality of engagement
performance
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• Supervision responsibilities
• Review responsibilities
• Consultation
• Engagement quality control review (EQCR)
• Differences of opinion
• Engagement documentation
Consistency in the Quality of Engagement Performance
The firm promotes consistency in the quality of engagement
performance through its policies and procedures.
Appropriate teamwork and training assist less experienced
members of the engagement team to clearly understand the
objectives of the assigned work.
Supervision
Engagement supervision includes the following:
• Tracking the progress of the engagement;
• Considering the competence and capabilities of
individual members of the engagement team, whether
they have sufficient time to carry out their work,
whether they understand their instructions and whether
the work is being carried out in accordance with the
planned approach to the engagement;
• Addressing significant matters arising during the
engagement, considering their significance and
modifying the planned approach appropriately; and
• Identifying matters for consultation or consideration by
more experienced engagement team members during
the engagement.
Review
A review consists of consideration of whether:
• The work has been performed in accordance with
professional standards and applicable legal and
regulatory requirements;
• Significant matters have been raised for further
consideration;
• Appropriate consultations have taken place and the
resulting conclusions have been documented and
implemented;
• There is a need to revise the nature, timing and extent
of work performed;
• The work performed supports the conclusions reached
and is appropriately documented;
• The evidence obtained is sufficient and appropriate to
support the report; and
• The objectives of the engagement procedures have
been achieved.
The work of less experienced team members is reviewed by
more experienced engagement team members.
Consultation
The firm shall establish policies and procedures designed to
provide it with reasonable assurance that:
a) Appropriate consultation takes place on difficult or
contentious matters;
b) Sufficient resources are available to enable appropriate
consultation to take place;
c) 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; and
d) Conclusions resulting from consultations are
implemented.
Consultation includes discussion at the appropriate
professional level, with individuals within or outside the firm
who have specialized expertise.
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Engagement Quality Control Review (EQCR)
Engagement quality control review is a process designed to
provide an objective evaluation, on or before the date of the
report, of the significant judgments the engagement team
made and the conclusions it reached in formulating the
report.
Engagements requiring EQCR normally include:
a) Audits of financial statements of listed entities; and
b) Other engagements for which the firm has determined
an EQCR is required. Criteria for determining which
other engagements are to be subject to an EQCR may
include, for example:
• The nature of the engagement, including the extent
to which it involves a matter of public interest.
• The identification of unusual circumstances or risks
in an engagement or class of engagements.
• Whether laws or regulations require an EQCR
The engagement report is not dated until the completion of
the EQCR.
Engagement quality control reviewer is a partner, other
person in the firm, suitably qualified external person, or a
team made up of such individuals, none of whom is part of
the engagement team, with sufficient and appropriate
experience and authority to objectively evaluate the
significant judgments the engagement team made and the
conclusions it reached in formulating the report.
The firm shall establish policies and procedures designed to
maintain the objectivity of the engagement quality control
reviewer.
The firm shall establish policies and procedures on
documentation of the engagement quality control review
which require documentation that:
a) The procedures required by the firm’s policies on
engagement quality control review have been
performed;
b) The engagement quality control review has been
completed on or before the date of the report; and
c) The reviewer is not aware of any unresolved matters
that would cause the reviewer to believe that the
significant judgments the engagement team made and
the conclusions it reached were not appropriate.
Differences of Opinion
The firm shall establish policies and procedures for dealing
with and resolving differences of opinion within the
engagement team, with those consulted and, where
applicable, between the engagement partner and the
engagement quality control reviewer.
Such policies and procedures shall require that:
a) Conclusions reached be documented and implemented;
and
b) The report not be dated until the matter is resolved.
Engagement Documentation
Policies and procedures on documentation should include:
• Completion of the assembly of final engagement files.
In the case of an audit a time limit to assemble final
engagement files would ordinarily not be more than 60
days after the date of the auditor’s report.
• Retention of engagement documentation. In the specific
case of audit engagements, the retention period would
ordinarily be no shorter than seven years from the date
of the auditor’s report, or, if later, the date of the group
auditor’s report.
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• Ownership of engagement documentation. Unless

otherwise specified by law or regulation, engagement In general, communication of quality control policies and
documentation is the property of the firm. procedures to firm personnel includes a description of the
quality control policies and procedures and the objectives
f. Monitoring they are designed to achieve, and the message that each
individual has a personal responsibility for quality and is
Monitoring is a process comprising an ongoing consideration
expected to comply with these policies and procedures.
and evaluation of the firm’s system of quality control,
Encouraging firm personnel to communicate their views or
including a periodic inspection of a selection of completed
concerns on quality control matters recognizes the
engagements, designed to provide the firm with reasonable
importance of obtaining feedback on the firm’s system of
assurance that its system of quality control is operating
quality control.
effectively. This element requires the firm to establish
policies and procedures designed to provide reasonable
Professional Liabilities
assurance that the policies and procedures relating to the
system of quality control are: relevant, adequate, and In general, CPAs would not have legal liabilities as long as
operating effectively. they acted appropriately in accordance with applicable
professional standards, relevant laws and regulations.
The firm must establish policies and procedures on the Failure on the part of the CPA to adhere this principle may
following: result in the following:
• Evaluation, communication and remediation of a. Ordinary negligence—failure to exercise the standard of
identified deficiencies. care that a reasonable person would exercise in like
• Complaints and allegations. circumstances. These elements must be present: (a)
• Monitoring and evaluation include, on a cyclical basis, Duty of care; (b) Breach of that duty; (c) Causation;
inspection of at least one completed engagement for and (d) Damages.
each engagement partner over an inspection cycle of b. Gross negligence (aka, constructive fraud)—lack of
three years. Inspection refers to, in relation to even slight care; reckless behavior. These elements
completed audit engagements, procedures designed to must be present: (a) Duty of care; (b) Breach of that
provide evidence of compliance by engagement teams duty (more egregious than ordinary negligence); (c)
with the firm’s quality control policies and procedures. Causation; and (d) Damages.
c. Fraud—A false, material misrepresentation of fact
The purpose of monitoring compliance with quality control knowing it to be false, or reckless disregard for the
policies and procedures is to provide evaluation of: truth. These elements must be present: (a)
• Adherence to professional standards and regulatory and Misrepresentation of material facts; (b) Intent to
legal requirements defraud—Scienter; (c) Reliance on the information; and
• Whether the quality control system has been (d) Damages.
appropriately designed and effectively implemented
• Whether the firm’s quality control policies and Summary of CPAs Potential Liability
procedures implemented by engagement partners are
appropriate in the circumstances Plaintiff Minimum Basis Burden of Proof upon
for Liability Plaintiff
Documentation of the System of Quality Control Client (Privity Ordinary Damage or loss
of contract) negligence
Each firm should document its quality control policies and Third party:
procedures. This documentation provides evidence of the Primary Ordinary Misstated FSs or
operation of each element of its system of quality control. beneficiary negligence erroneous advice
Foreseen Gross negligence Reliance upon financial
Procedures should depend on such things as the size of the beneficiary statements or advice
firm, the number of practice offices, and the nature of the Foreseeable Gross negligence Deficient auditor
practice. The quality control procedures of an international third parties conduct
firm with many complex multinational clients should differ
considerably from those of a five-person firm specializing in Defenses against negligence and gross negligence:
small audits in one or two industries. For example, large • Lack of a duty of care
firms may use electronic databases to document matters • Performance was not negligent
such as independence confirmations, performance • Contributory negligence
evaluations and the results of monitoring inspections. • Absence of cause

DISCUSSION QUESTIONS
Quality Control
2. Statement 1: PSQC 1 deals with a firm’s responsibilities
1. A basic objective of a CPA firm is to provide professional for its system of quality control and applies to all firms
services that conform or comply with professional of professional accountants in respect of audit of
standards and regulatory and legal requirements so that historical financial information only.
the reports issued by the firm are appropriate in the
Statement 2: PSA 220 deals with the specific
circumstances. Reasonable assurance of achieving this
responsibilities of the auditor regarding quality control
basic objective is provided through policies and
procedures and engagement quality control reviewer
procedures on:
(EQCR) for all assurance engagements and related
a. continuing professional education.
services.
b. compliance with generally accepted reporting
a. True, true
standards.
b. True, false
c. a system of quality control.
c. False, true
d. a system of peer review.

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EXCEL PROFESSIONAL SERVICES, INC.

d. False, false d. Expert contracted by the firm in connection with the

audit engagement
3. The nature and extent of a CPA firm’s quality control
policies and procedures depend on 10. In pursuing a CPA firm’s quality objectives, a CPA firm
The CPA The nature of the Cost-benefit should adopt policies and procedures to enable it to
firm’s size CPA firm’s practice considerations identify and evaluate circumstances and relationships
a. Yes Yes Yes that create threats to independence, and to take
b. Yes Yes No appropriate action to eliminate those threats or reduce
c. Yes No Yes them to an acceptable level by applying safeguards, or,
d. No No Yes if considered appropriate, to withdraw from the
engagement. Which quality control element would this
4. Control policies and procedures designed to ensure that be most likely to satisfy?
all audits are conducted in accordance with PSA’s or a. Ethical requirements
relevant national standards or practices. These policies b. Monitoring
and procedures should be implemented. c. Human resources
a. At the audit firm level only. d. Leadership responsibilities for quality within the firm
b. On individual audits only.
c. Either at the audit firm level or on individual audits. 11. In pursuing a CPA firm's quality control objectives, a
d. Both at the audit firm level and on individual audits. CPA firm may maintain records indicating which
partners or employees of the CPA firm were previously
Elements of a System of Quality Control employed by the CPA firm's clients. Which quality
control objective would this be most likely to satisfy?
5. Which of the following is not an element of quality a. Acceptance and continuance of clients and
control as defined by Philippine Standards on Quality engagements.
Control 1? b. Monitoring.
a. Leadership responsibility for quality c. Personnel management.
b. Independence d. Relevant ethical requirements.
c. Human resources
d. Acceptance and continuance of engagement and 12. At least ________, the firm should obtain written
client relationship confirmation, in paper or electronic, of compliance with
its policies and procedures on independence from all
6. Which of the following is not an essential component or firm personnel required to be independent by the
element of a system of quality control? relevant ethical requirement.
a. Policies and procedures to ensure that the work a. Monthly
performed by firm personnel meet applicable b. Semi-annually
professional standards. c. Annually
b. Policies to ensure that personnel maintain their d. Three years
independence in fact and in appearance.
c. Policies that ensure that monitoring activities are 13. The engagement partner should be satisfied that
effectively applied. appropriate procedures regarding the acceptance and
d. Policies and procedures to ensure that firm continuance of client relationships and specific audit
personnel are actively engaged in marketing engagements have been followed, and that conclusions
strategies. reached in this regard are appropriate and have been
documented. Acceptance and continuance of client
7. The firm should establish policies and procedures relationships and specific audit engagements include
designed to promote an internal culture based on the considering:
recognition that quality is essential in performing I. The integrity of the principal owners, key
engagements. Such policies and procedures should management, and those changed with governance
require the firm’s chief executive officer (or equivalent) of the entity.
or, if appropriate, the firm’s managing board of partners II. Whether the engagement team is competent to
(or equivalent), to assume ultimate responsibility for perform the audit engagement and has the
the firm’s system of quality control. necessary time and resources.
a. Ethical requirements III.Whether the firm and the engagement team can
b. Monitoring comply with ethical requirements.
c. Human resources IV. Significant matters that have arisen during the
d. Leadership responsibilities for quality within the firm current or previous audit engagement and the
implications for continuing the relationship
8. Who should take responsibility for the overall quality on a. I only
each audit engagement? b. I and II only
a. Engagement quality control review c. I, II and IV only
b. Engagement partner d. I, II, III and IV
c. Engagement team
d. CEO of the firm or managing board of partners 14. Quality control policies for the acceptance and
continuance of clients are established to:
9. The implementation of quality control procedures that a. Enable the auditor to report on management’s
are applicable to the individual audit engagement is the integrity
responsibility of the b. Comply with standards established by regulatory
a. CPA firm bodies
b. Engagement quality control review c. Minimize the likelihood of associating with
c. Engagement team management that lack integrity
d. Reduce exposure to litigation from failing to detect
fraud

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EXCEL PROFESSIONAL SERVICES, INC.
15. With regard to the integrity of a client, matters to
consider least likely include which one of the following?
a. The identity and business reputation of the client’s
principal owners, key management, and those
charged with its governance.
b. The nature of the client’s operations, including its
business practices.
c. 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.
d. The identity and business reputation of unrelated
parties.
16. The firm’s policies and procedures on auditor withdrawal
may include the following, except:
a. Discuss with appropriate level of client’s
management and those charged with governance
regarding appropriate action to take.
b. Always determine and discuss reasons for
withdrawal from engagement or from both
engagement and client relationships.
c. Consider professional, regulatory or legal
requirements for the firm.
d. Document significant issues, consultations,
conclusions and basis.
17. The firm should establish policies and procedures
designed to provide it 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.
a. Ethical requirements
b. Engagement performance
c. Monitoring
d. Human resources
18. In pursuing its quality control objective with respect to
assigning personnel to engagements, a CPA firm may
use policies and procedures such as
a. Rotating employees from assignment to assignment
on a random basis to aid in the staff training effort
b. Allowing staff to select the assignments of their
choice to promote better client relationship
c. Assigning a number of employees to each
engagement in excess of the number required so as
not to overburden the staff and interfere with the
quality of the audit work performed
d. Requiring timely identification of the staffing
requirements of specific engagements so that
enough qualified personnel can be made available
19. The objective of quality control mandates that a public
accounting firm should establish policies and procedures
for professional development that provide reasonable
assurance that all entry-level personnel
a. Prepare working papers that are standardized in
form and content
b. Have the knowledge required to enable them to
fulfill responsibilities assigned
c. Will advance within the organization
d. Develop specialties in specific areas of public
accounting
20. This quality control element requires a CPA firm to
establish policies and procedures to provide it with
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reasonable assurance that engagements are performed
in accordance with professional standards and
regulatory and legal requirements, and that the firm or
the engagement partner issue reports that are
appropriate in the circumstances.
a. Ethical requirements c. Human resource
b. Engagement performance d. Monitoring
21. Engagement supervision includes the following, except:
a. Tracking the progress of the engagement.
b. Considering the competence and capabilities of
individual members of the engagement team.
c. Addressing significant matters arising during the
engagement, considering their significance and
modifying the planned approach appropriately.
d. Discussion at the appropriate professional level,
with individuals within or outside the firm who have
specialized expertise.
22. Review responsibilities are determined on the basis that
more experienced team members review the work of
less experienced team members. Engagement review
process includes the following, except:
a. Considering whether the work has been performed
in accordance with professional standards and
applicable legal and regulatory requirements.
b. Determining if there is a need to revise the nature,
timing and extent of work performed.
c. Contemplating if the work performed supports the
conclusions reached and is appropriately
documented.
d. Identifying matters for consultation or consideration
by more experienced engagement team members
during the engagement.
23. The following statements relate to the engagement
partner’s responsibility to conduct timely reviews of the
audit documentation to be satisfied that sufficient
appropriate evidence has been obtained to support the
conclusions reached and for the auditor’s report to be
issued. Which is false?
a. The engagement partner’s review of the audit
documentation allows significant matters to be
resolved on a timely basis to his/her satisfaction
before the auditor’s report is issued.
b. The engagement partner should document the
extent and timing of the reviews.
c. The reviews cover critical areas of judgment,
especially those relating to difficult or contentious
matters identified during the course of the
engagement, significant risks, and other areas the
engagement partner considers important.
d. The engagement partner should review all audit
documentation.
24. Statement 1: The firm shall promote consistency in the
quality of engagement performance through its policies
and procedures, such as: appropriate teamwork and
training assist less experienced members of the
engagement team to clearly understand the objectives
of the assigned work.
Statement 2: The firm shall establish policies and
procedures for dealing with and resolving differences of
opinion within the engagement team, with those
consulted and, where applicable, between the
engagement partner and the engagement quality
control reviewer. Hence, the report shall not be issued
until the matter is resolved.
a. True, true
b. True, false
c. False, true
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d. False, false a. Engagement quality control review

b. Inspection
25. A difference of opinion over accounting and auditing c. Monitoring
matters relative to a particular phase of the audit arises d. Quality control
between an assistant auditor and the auditor
responsible for the engagement. After appropriate 31. Inspection cycle is normally done over how many
consultation, the assistant auditor asks to be year(s) for each partner of the firm on one completed
disassociated from the resolution of the matter. The audit engagement?
working papers would probably be a. One year
a. Silent on the matter since it is an internal matter of b. Two years
the firm. c. Three years
b. Expanded to note that the assistant auditor is d. Four years
completely disassociated from responsibility for the
auditor's opinion. Documentation and Communication of the System of
c. Expanded to document the additional work required Quality Control
since all disagreements of this type will require
expanded substantive testing. 32. A CPA firm may communicate its quality control policies
d. Expanded to document the assistant auditor's and procedures to its personnel in which manner(s):
position and how the difference of opinion was Orally Written
resolved. a. No No
b. No Yes
26. Engagement quality control review is a process c. Yes No
designed to provide an objective evaluation, before the d. Yes Yes
auditor’s report is issued, of the significant judgments
the engagement team made and the conclusions they 33. At least _______, the firm should communicate the
reached in formulating the auditor’s report. It is results of the monitoring of its quality control system to
performed to which of the following engagements? engagement partners and other appropriate individuals
a. Audit of financial statements listed entities within the firm:
b. Other audit engagements deemed necessary by the a. Monthly
firm b. Semi-annually
c. Non-audit engagements deemed necessary by the c. Annually
firm d. Three years
d. All of the above
Professional Liabilities
27. A partner, other person in the firm, suitably qualified
external person, or a team made up of such individuals, 34. While performing service for their clients, professionals
none of whom is part of the engagement team, with have always had a duty to provide a level of care which
sufficient and appropriate experience and authority to is
objectively evaluate the significant judgments the a. reasonable.
engagement team made and the conclusions it reached b. greater than average.
in formulating the auditor’s report. c. superior.
a. Engagement partner d. guaranteed to be free from error.
b. Engagement quality control reviewer
c. Staff 35. The principal issue to be resolved in cases involving
d. Personnel alleged negligence is usually
a. the amount of the damages suffered by the users
28. The engagement report is not dated until the completion of the financial statements.
of the engagement quality control review. However, b. whether to impose punitive damages on defendant.
documentation of the engagement quality control c. the level of care required to be exercised.
review may be completed after the date of the report. d. whether defendant was involved in fraud.

Technical qualifications and objectivity are the most 36. “Absence of reasonable care that can be expected of a
important aspects for the eligibility for appointment of person in a set of circumstances" is the description of
engagement quality control reviewers. a. Ordinary negligence
a. True, true b. Constructive fraud
b. True, false c. Gross negligence
c. False, true d. Fraud
d. False, false
37. The existence of extreme or unusual negligence
29. This quality control element is concerned with providing (reckless disregard), even though there was no intent
reasonable assurance that policies and procedures to deceive or do harm, is a(n)
related to the other elements are suitably designed and a. fraud.
being effectively implemented. b. gross fraud.
a. Monitoring c. constructive fraud.
b. Engagement performance d. ordinary fraud.
c. Human resources
d. Ethical requirements 38. In rare cases auditors have been held liable for criminal
acts. A criminal conviction against an auditor can result
30. In relation to completed engagements, these are only when it is demonstrated that the auditor
procedures designed to provide evidence of compliance a. was negligent.
by engagement teams with the firm’s quality control b. was grossly negligent.
policies and procedures. c. intended to deceive or harm others.

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d. caused financial loss to an innocent third party.

39. Privity of contract exists between the

a. Auditor and client.
b. Auditor and third parties.
c. Auditor and the Securities and Exchange
Commission.
d. All of these

40. The auditor’s best defense when material

misstatements are not uncovered is to have conducted
the audit:
a. in accordance with auditing standards.
b. as effectively as reasonably possible.
c. in a timely manner.
d. only after an adequate investigation of the
management team.

End of AT.3222

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