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    8.2- QUALITY CONTROL IN AUDIT FIRMS 1

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    8.2 - Quality Control in Audit Firms 1

    Uploaded by

    Danita

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    © All Rights Reserved
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    of 8
    (CHAPTER 7 QUALITY CONTROL NN ALON INTRODUCTION Itis of primary importance to the business world in general and to the auditing profession in particular that the question of audit quality is addressed by practiconers to ensure that: ‘¢ the firm and its staf comply with professional standards and legal and regulatory requirements; and ‘¢ reports issued by the fr are appropriate, Ic is important to distinguish between procedures designed to ensure that the firm, as a whole, provides 4 high standard product in all professional engagements and procedures to ensure that each individual ‘engagement is properly carried out. A review of an audit may be to sample the effectiveness of the overall procedures or may be to ensue that a particular audit was performed effectively. In both cases it forms part ‘of the Quality System of the audie firm. Drivers of quality include individual responsibilities, collective responsibilities, a quality culture, the col- Iective wisdom of the audit team in resolving difficult or contentious matters, building quality into processes and monitoring the results. ISA 220 ‘Quality control for an audit of financial statements’ requites that, in all firms, quality control procedures should be introduced that are applicable to the individual audit engagement. ISA 220 places the responsibility specifically on the audit or engagement partner, who is in charge of the audit, to ensure that all matters in respect of the audit are dealt with properly In addition to ISA 220 there is the snappily tiled International Standard on Quality Control (ISQC 1) “Quality control for firms that perform audits and reviews of historical financial information and other assurance and related services engagements’ issued by the IAASB. This creates an obligation for the firm to establish a system of quality control to provide reasonable assurance thar professional standards and legal requirements are complied with and that any reports issued are appropriate in the circumstances. All firms issuing reports to clients, whether they are audit reports or reports on other types of assurance engagements, are exposed to risk, ie the risk of giving an incorrect or inappropriate opinion in the report. The result of that could be legal action against the firm for damages, adverse publicity and loss of reputation ‘and certainly the loss of the client. ‘Consequently, it is in the interest of the firm to ensure that there are the highest standards of ethical behaviour and full compliance with reporting standards withia it. ‘This chapter deals with quality control under three headings: © audit frm organization ‘© planning, controting and recording individual aucits ‘¢ reviews of aucit firms’ procedures in general and of particular aucits \UDIT FIRM ORGANIZATION dit firms are, generally, organized on hierarchical rainees at the bottom. Individual firms may vary with ays of describing roles but broadly they are structured as shown in Figure 7.1 lines with a partner or director at the top and audit some having more levels and some firms have different QUALITY Uo OMPTER FIGURE 7.1. Structure of an audit firm ns ——aasenaeael Tesponsible for The final the Audit Report Andie parner Hector” nthe fm i aed Line) (tp sce Chapter 2) co Cn) aa al eon ‘considerations and approving au ce seme bing hey we 0 He anf he Aut Pate {rng ie ca. as tae ie Fle fh a gol como of the ui ogo and ay tie ait “esting ith plannin fo day management of to ting meonoring and evewing audit ves signing off ac tests and Ponrying ut fle reviews od work a he client the audit programime and i of ai trainees einen mana ‘Carrying out secordance with monitoring the wor shirts under the rai senior and the ‘Nadi senior ‘Carrying ou noe som ofthe 3 “Radiance and 3 [ae aoe not all firms have that many levels in their hierarchy tudit partner as qualifications are ik of the one below it to ensure of course, mn from audit trainees to at archy will review the wot imized. fe, geographical spread, special expertiss “There many seem to be a lorof levels and, bur there is designed to be a steady progression but eved and experince gained. Each level in the hier: ein he chances of errors of mistakes in the audit process af* Ot Te recognized that each firm has its own needs depending on 1 ce., but all firms must organize quality control policy and procedures. “These procedures should include: ‘lear designation of leadership esponstaities- to ensure that cualtyf pan Of Ccuture of the firm, This shoud ne oe agng or soir pariner’sresponsbilly and partners should ge clear leadership in this area. «ethical requirements to ensure that the fa complies wih leva ical requirements particularly those involved cir ndopendence and iwolvement wih clants, Fms may appoint an Ethics Partner fo this effect. ‘Acceptance and continuation of reationships with cents = considering the integrity of individual clients and wether . the frm can continue to supply services atthe appropriate level sn resource poles —1o ensure that te fm has sucent staf ofthe right ves of compelonce and com ment tail rcs 0 don the work required and aso fo ensure a continuing programme of tari’ rrrfovelopment. These potcies should also include performance evaluation, promotion and Wain 5 0° individual staff members at all levels. eee spesigned engegoment pariners ~ engagement pariners should be assigned to each cent. They ave Aaah al the audit or engagement ove. Ther ob is fo ensure that there is a system of written Dros toc ermenis and that these ae comple ith, that each engagement or aut is superizad, af auct ogee and tat qualty contol eviews foreach assignment are carried out as appropriate. the firm are reviewed an¢ Montano a procedures ~ a monitoring system to ensuite that quality procedures within iat there s a process for recommending Improvements. This will include such things as nad 9 is wil ings as evaluation of sta a gd courts hrown esc ovows) proces must bo GEC responsi dures 1" work S (CHAPTER 7 QUALITY CONTROL IN AUDIT FRMS or Every firm should establish and monitor control policies and procedures and communicate these to all partners and staff. Larger firms employ printed manuals but smaller firms may have to rely on verbal instruc- tions and handouts. There should be a procedure for evaluating prospective clients with consideration of the firm's abi to meet the client's needs and for making the decision on acceptance which may be made by an indi partner, oF by a committee. Procedures should exist to ensure all partners and staff are aware of, and adhere to, the principles of objectivity, integrity, confidentiality and professional competence. Itis important to instruct staff who are not members of professional bodies in ethical principles and to monitor the observance of ethical standards on a firm-wide basis. For example, staff might not be aware ofthe prohibition on ownership of shares in client companies or may be unwilling to sell them if they are so aware Capability and competence of staff should be monitored ~ the objective is to have a fully competent and skilled set of partners and staff. Procedures include ‘© Recruitment - only of sutably qualifed and expert staf, Stating needs should be planned ahead, ‘¢ Technical training and updating ~ all partners and staff should be encouraged to learn and to keep up-to-date with technical matters. The frm could provide iterature, maintain a technical brary, send people on courses and hold courses themselves. Some frms produce a special newsletter at intervals to update staff with technical devel- ‘opments. Al qualified staf should be up-to-date with Continuing Professional Development (CPO) requrements (On-the-Job training and professional development - planning, controling and recording emphasizes the impor tance of relating staf abies to cient needs but opportunites should also be provided fr staff to have adequato ‘experience on a range of clents 8s on-the-job traning. Performance of staff should be evaluated and discussed with staff concerned, Individual members ofthe firm, including engagement partners, should not take decisions on problem areas ‘without consultation with others. Problem areas might be technical (eg. IT issues where expert members of staff should be consulted) or matters of risk evaluation. Sole practitioners are advised to consult with other firms or with professional advisory services Finally, suitable procedures should be introduced to ensure that all procedures are working adequately. ‘This is dealt with in the review section. PLANNING, CONTROLLING AND RECORDING INDIVIDUAL AUDITS ISA 220 deals with quality issues in respect of individual audits. Its purpose i to ensure audit procedures take into account many of the firm-wide points mentioned above, “The engagement partner is responsible for quality atthe audit level and for ensuring that the audit engage- tment is subject to a form of quality control review. All audits should be led from the top. Tt is important that procedures are in place to ensure that the audit firm does not breach any ethical requirements by acting for the client and audit firms should accept only those clients where it can be sure it ‘can deliver a service to the required standard. Existing client relationships should be reviewed to ensure their continuing integrit "The Engagement Partner must ensure thatthe audit has been planned and performed property, all proce- dures documented, al work reviewed, staff properly supervized, etc. and that sufficient appropriate evidence has been obtained to support the audit opinion, cnr daputes shoul be resolved and al cussions wth the client mus be properly documented and any decisions or conclusions reached must be explained and justified. "The Engagement partner must have made sure that consultation on technical issues has been carried out and that any ‘hot? reviews needed have been undertaken (see below). a ‘The control procedures to be applied to individual audits oF assignments include: © Atocation of staff ~stft shou have appropiate traning, experiance, proeiency and, required, Special site (€9.in computing). ° CHAPTER 7 QUALITY CONTROL Fi ALOMT FIRMS informed on shoud bo propery ‘© Proper briefing of staf! - betore the assignment commences staf should © the nature ofthe cent, ts industry and the cent’ place © objectives of the audit © tring © the overall plan ofthe aucht ‘significant accounting and auditing risk areas, including fraud risk areas ‘elated parties (ee Chapter 21) manager oF aud partner © _tenoed to bing probes anc ent stuaton ta ew experienced staf the auc rarooe i, ‘Aut completion checkists with sections fr completion by a and reporing pane ‘hat, in the rush to complete an audit on time, matters of mpartance can be overt erent © Contentious matters ~ a problems, special dicts and potenti Auct Report qualia recorded and tse byte reporing pater with coleagues or even ance ratlon er © Documentation - al aut work and conclusions reached must be ful recorded in he working papers 18 Ps ¢ always fits not documented it doesnt ent. Recording canbe ater by paper-based records or compuler-bass auc softwar (see Chapter 18), (© Reviews ~ ll uct work must be fuy rovewod. Ths ls dat within the next section. © Signed of - a auct work and reviow action should be agioMledged in wing bythe performer by inating or ssarng the working pape, or ecaring the sign of on the aust worksheo! inthe computerized We. ‘© Supervision = personne! with supervisory responsibiiies should monitor the progress of the audit fo consider ‘whether: ‘© assistants have the necessary skils and competenes {© carry out their assigned tasks © assistants understand the audt directions and Ee © the works cared out in accordance with the ove plan end the audit programme. REVIEWS OF AUDIT FIRMS! PRO RES IN GENERAL AND OF PARTICULAR AUDITS, We have already mentioned above the cold review, whi procedures but more pertinently there is another form audit in progress. lit completion review of processes and review, which is conducted whilst the Hot reviews Firms should ensure that an independent ceview is undert audit is particularly large or complex. This type of review is kno carried out during the course of the engagement or audit thence th with the auditor assignment and should be applied to all audits of i assignments. In addition, firms should establish policies setting out the circumstak should be performed for other audits or assignments, whether on the ticular audit risk “The independent review should take place before the audit report iss independent assessment of the quality of the audit. The policies should set ou the review is to be performed. ‘The independent review involves consideration of the following matters in ord the audit the cbjctvty ofthe aut engagement partner and key at sta and the independence 1 the igour ofthe panning process including ho analy ofthe key comporenie ate ‘team and the adequacy ofthe planned responses to those risks Of audit isk CHAPTER 7 QUALITY CONTROL IN ALDIT FMS ry @ trerosuts of aut work andthe appropriateness ofthe Key judgements made, partcuary nigh ik reas © the sgnicance of any potential changes tothe franca statements hat he frm is avere of tu which the man fgomort ofthe audited ety has delet Yo make «wheter all matters which may reasonably be judged by the auditors tobe important and relevant othe inpotant rectors, ‘enitfled dung the course othe audt, have een considered for eporing tothe Board of rectors andor audit committee (or their equivalents) bd ae tne appropriateness of he cra autor’ epot Monitoring Firms should appoint a senior audit partner to take responsibility for monitoring the quality of audits carried ‘out by the firm by means of cold reviews, These take place after the audit work has been completed and are primarily designed ro ensure that the firm’s policies and procedures have been complied with. Of particular felevance will be the issue of continuing independence from the client and the quality of decision making in connection with audit issues. fice independent reviews by persons unconnected with the detail of an audit can lead to the discovery that ‘e_The firms procedures are not always flowed fe There are gaps inthe procedures. fe There re technical matters of gona interest which need investigation, ‘@There are deficiencies in the quality ofthe staf or in their taining Findings from both hot and cold reviews may well result in changes to firms’ procedures and the identifica tion of training requirements for staff and thus form an important part of the quality process within the firm, Documentation Iis an important principle that all processes and procedures carried out are properly documented and audi- tors use a variety of checklists and programmes which we will refer to in the relevant chapters. As stated above the rule is always ‘if i’ not documented it doesn’t exist. However, its important to emphasize that one of the most important facets of auditing, the exercise of judgement, must also be documented and in sufficient detail chat succeeding auditors, including those carrying but cold reviews, clearly understand the rationale and methodology of why judgements were made and the process of arriving at a decision. Tn particular, routine decisions about the level of aut work, the audie strategy, materiality levels, ete. must be properly documented. Clearly, where there have been discussions with management or disputes about particular audit items this too must be recorded. In addition to audit matters the standards stress the importance of communication within the audit team itself Team briefings and discussions should also be documented or minuted so that there is evidence in the ‘udit working papers that attention was paid to key audic matters such asthe need for professional scepticism or the likelihood of significant misstatements oF fraud. Inthe case of Public Interest Entities (basically listed entities, banks and insurance companies) there has to be a more detailed independent review. ‘The reviewer must consider such factors as: «© the independence ofthe fem from the cient © the evaluation of audt sk (see Chapter 10) the rationale forthe matey level and signfeant decison making regarding risks ‘© thenature and materiality of corrected and uncorrected erors f¢ subjects discussed with the Aucit Committee and management This follows fairly closely che processes for evaluating the quality of non PIE auclts but has in every case and with some rigour to be applied On TROL N ALOMT FIR 80 HAPTER 7 QUALITY CONTROL NY SUMMARY hat con amor sue fr ut os . repro recon ac sik ean uly ns Procedures matten paseo me contrung pendence te clot anda aa consideration have been reviewed. These must be fully documented (Clents should be assessed to ensure they retain their integnity and are suitable clients ofthe fr. Alta mut be anare of uty brocade andthose ot member ofan SB mus cove sulabe Vang, ‘© Each engagement shouldbe headed by an engagement partner who is responsible for the conduct of the aut, ‘© The frm should recrul, employ and train capable and competent staf ‘© Al aut work should be carried out ethical © Allaucit work and decisions made must be properly documented, ‘© Quaity contrl shouic be molt n an aud fim's systems and procedures for carrying out auckts. ‘© Aucit work must be eubject to review before the report Is signed where the audit is large or complex and in the case of isted clients, (© Hot reviews are carried out by partners not connected with the audit cent © Reviewers must be independent and objective, © Cold reviews are aiming o ensure consistency of practice and the maintenance of quality standards, '* All matters relevant tothe audit including decisions and team briefings should be documented. POINTS TO NOTE © Auditors are under pressure to ensure that aucit standards are high because: Publicly aired falure is bad for business, ‘© Fale to lve up to standards can lead to expensive itigation © Inefciency is unoroftabie ‘© Quality control can be seen in several stages: ‘Proper organization ofthe frm and its procedures planning for each auctt ‘control of each audit working papers review of work done ‘© review of organization and procedures © In order to ensure that all that needed to be done on an audit was done, any review should be conducted on the basis ofa checklist. In Newtown there are thy 120 than Rave mest of he ge usnet® Wales ao rey have heard a rur oe, wugna aves mer tarces ar a AS a defensive m 10 set a S 5 Clents, aden “ye bey decide to aman othe. 20 an oie te admnistrative staff and systems, pon ™=OINg the and ut OPO thet oc Set Up as one fr unr Angela Goodbody is one ofthe ge" ¥S C2” BS dane eh? 28 naw boudng end ata ate the new frm. Previously as they negro art siabad they had an ethical dlemma they nage Doe” 8 Now they fea they have tinea ted Discussion S330 ook th uty nan

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