Introduction
It is of primary importance to the business world
in general and to the auditing and to the auditing profession in particular
that an audit should be a quality product. Audit should be extremely well done
and yet be completed expeditiously and
in general and to the auditing and to the auditing profession in particular
that an audit should be a quality product. Audit should be extremely well done
and yet be completed expeditiously and
There is an ISA 220 Quality Control for Audits of
Historical Financial Information. This requires that in all firms quality
control procedures should be introduced that are applicable to the individual
audit engagement.
Historical Financial Information. This requires 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.
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 titled
International Standard on Quality control (ISQC 1) ‘Quality Control for Firms
that Perform Audit Reviewed of Historical Financial Information and other
Assurance and Related Services Engagements’. This creates an obligation for the
firm to establish system of quality control to provide reasonable assurance those
professional standards and legal requirements are complied with and that any
reports issued are appropriate.
International Standard on Quality control (ISQC 1) ‘Quality Control for Firms
that Perform Audit Reviewed of Historical Financial Information and other
Assurance and Related Services Engagements’. This creates an obligation for the
firm to establish system of quality control to provide reasonable assurance those
professional standards and legal requirements are complied with and that any
reports issued are appropriate.
All firms issuing reports to clients, whether they
are audit reports or reports on other types of assurance engagements, are
exposed to risk, i.e. 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 lost of reputation and certainly the lost of the
client.
are audit reports or reports on other types of assurance engagements, are
exposed to risk, i.e. 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 lost of reputation and certainly the lost of the
client.
Consequently it is in the interest of the firm to
ensure that there are the highest standards of ethical behavior and full
compliance with reporting standards within it.
ensure that there are the highest standards of ethical behavior and full
compliance with reporting standards within it.
This chapter deals with quality control under three
heads;
heads;
·
Audit
firm organization.
Audit
firm organization.
·
Planning
controlling and recording individual audits.
Planning
controlling and recording individual audits.
·
Review of
audit firms’ procedures in general and of particular audits.
Review of
audit firms’ procedures in general and of particular audits.
AUDIT FIRM ORGANISATION
It is recognized that each firm has its own needs
depending on size, geographical spread, special expertise, etc., but all firms
must organize quality control policy and procedures.
depending on size, geographical spread, special expertise, etc., but all firms
must organize quality control policy and procedures.
These procedures should include:
·
Clear
designation of leadership responsibilities-to ensure that quality is part of
the culture of the firm. This should be the managing or senior partner’s
responsibility.
Clear
designation of leadership responsibilities-to ensure that quality is part of
the culture of the firm. This should be the managing or senior partner’s
responsibility.
·
Ethnical
requirements-ensure that the firm complies with relevant ethical requirement
such as those involving audit independence and involvement with clients.
Ethnical
requirements-ensure that the firm complies with relevant ethical requirement
such as those involving audit independence and involvement with clients.
·
Acceptance
and continuation of relationship; s will clients-considering the integrity of
the clients and whether the firm can continue to supply services at the
appropriate level.
Acceptance
and continuation of relationship; s will clients-considering the integrity of
the clients and whether the firm can continue to supply services at the
appropriate level.
·
Human
resource policies-to ensure that the firm has sufficient staff, of the right
levels of competence and commitment to ethical principles to carry out the work
required and also to ensure a continuing programmer of training and
development. These policies should also include performance evaluation,
promotion and training needs for individual staff member at all levels.
Human
resource policies-to ensure that the firm has sufficient staff, of the right
levels of competence and commitment to ethical principles to carry out the work
required and also to ensure a continuing programmer of training and
development. These policies should also include performance evaluation,
promotion and training needs for individual staff member at all levels.
·
Engagement
partners should be assigned to each client. They are responsible for quality at
the audit or engagement level. Their job is to ensure that there is:
Engagement
partners should be assigned to each client. They are responsible for quality at
the audit or engagement level. Their job is to ensure that there is:
·
A system
of written procedures for engagements; and
A system
of written procedures for engagements; and
·
That
these are complied with;
That
these are complied with;
·
That each
engagement or audit is supervised;
That each
engagement or audit is supervised;
·
All audit
work is reviewed; and
All audit
work is reviewed; and
·
Quality
control review for each assignment is carried out as appropriate.
Quality
control review for each assignment is carried out as appropriate.
·
A
monitoring system to ensure that quality procedures within the firm are
reviewed and that there is a process for recommending improvements. This will
include such things as evaluation of standard procedures and reviews of
completed assignments (known as ‘cold’ reviews)
A
monitoring system to ensure that quality procedures within the firm are
reviewed and that there is a process for recommending improvements. This will
include such things as evaluation of standard procedures and reviews of
completed assignments (known as ‘cold’ reviews)
In practical terms this will involve:
·
Control
policies and procedures-each 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
instructions and handouts.
Control
policies and procedures-each 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
instructions and handouts.
·
Acceptance
and reappointments as auditor-there should be a procedure for evaluating
prospective client’s when consideration of the firms’ ability to meet the
client’s needs and for making the decision on acceptance which may be made by
an individual partner, or by a committee.
Acceptance
and reappointments as auditor-there should be a procedure for evaluating
prospective client’s when consideration of the firms’ ability to meet the
client’s needs and for making the decision on acceptance which may be made by
an individual partner, or by a committee.
·
Professional
ethics-procedures to ensure all partners and staff are aware of and adhere to
the principles of independence, objectivity, integrity and confidentiality. It
is important to instruct staffs who are not members of professional bodies and
to monitor observance of ethical standards. For example, staff might not be
aware of the prohibition on ownership of shares in client companies or may be
unwilling to sell them if they are so aware,. Consideration should be given to
the auditor’s independence and ability to serve that client properly and to the
integrity of the client’s management.
Professional
ethics-procedures to ensure all partners and staff are aware of and adhere to
the principles of independence, objectivity, integrity and confidentiality. It
is important to instruct staffs who are not members of professional bodies and
to monitor observance of ethical standards. For example, staff might not be
aware of the prohibition on ownership of shares in client companies or may be
unwilling to sell them if they are so aware,. Consideration should be given to
the auditor’s independence and ability to serve that client properly and to the
integrity of the client’s management.
·
Skills
and competence-the object is to have a fully competent and skilled set of
partners and staff. Procedures include:
Skills
and competence-the object is to have a fully competent and skilled set of
partners and staff. Procedures include:
·
Recruitment-only
of suitably qualified and expert staff. Staffing needs should be planned ahead.
Recruitment-only
of suitably qualified and expert staff. Staffing 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 firm could provide literature,
maintains a technical library, send people newsletter at intervals to update
staff with technical developments. All qualified staff should be up to date
with continuing professional development (CPD) requirements.
Technical
training and updating-all partners and staff should be encouraged to learn, and
to keep up-to-date with technical matters. The firm could provide literature,
maintains a technical library, send people newsletter at intervals to update
staff with technical developments. All qualified staff should be up to date
with continuing professional development (CPD) requirements.
·
On-the-job
training and professional development-planning, controlling and recording
emphasizes the importance of relating staff abilities to client needs but
opportunities should also be provided for staff to have adequate experience on
a range of clients as no-the job train. Performance of staff should be
evaluated and discussed with staff concerned.
On-the-job
training and professional development-planning, controlling and recording
emphasizes the importance of relating staff abilities to client needs but
opportunities should also be provided for staff to have adequate experience on
a range of clients as no-the job train. Performance of staff should be
evaluated and discussed with staff concerned.
·
Consultation-individual
members of the firm should not take decisions on problem areas without
consultation with others. Problem areas might be technical (e.g. computer’s
where expecting members of staff should be consulted) or matter of risk
evaluation. Sole practitioners are advised to consult with other firms or with
other firms or with professional advisory services.
Consultation-individual
members of the firm should not take decisions on problem areas without
consultation with others. Problem areas might be technical (e.g. computer’s
where expecting members of staff should be consulted) or matter of risk
evaluation. Sole practitioners are advised to consult with other firms or with
other firms or with professional advisory services.
·
Monitoring
the firm’s quality control procedures-suitable procedures should be introduced
to ensure that all procedures are working adequately. This is dealt with in the
review section.
Monitoring
the firm’s quality control procedures-suitable procedures should be introduced
to ensure that all procedures are working adequately. This is dealt with in the
review section.
INDIVIDUAL AUDITS
Isa220 deals with quality issues in respect of
individual audits. Its purpose is to ensure audit procedures take into account
many of the firm-wide points mentioned above such as:
individual audits. Its purpose is to ensure audit procedures take into account
many of the firm-wide points mentioned above such as:
·
Leadership-the
audit partner is responsible for quality at the audit level.
Leadership-the
audit partner is responsible for quality at the audit level.
·
Ethical
requirements are met.
Ethical
requirements are met.
·
That the
client has been reviewed to ensure its integrity.
That the
client has been reviewed to ensure its integrity.
·
That the
audit has been planned and performed properly, all procedures documented, all
work reviewed, staff properly supervised, etc. and that sufficient appropriate
evidence has been obtained to support the audit opinion.
That the
audit has been planned and performed properly, all procedures documented, all
work reviewed, staff properly supervised, etc. and that sufficient appropriate
evidence has been obtained to support the audit opinion.
·
That any
disputes with the client have been resolved.
That any
disputes with the client have been resolved.
·
That any
consultation on technical issues has been carried out.
That any
consultation on technical issues has been carried out.
·
That any
consultation on technical issues has been carried out
That any
consultation on technical issues has been carried out
·
That any ‘hot’
reviews needed have been carried out. (see below).
That any ‘hot’
reviews needed have been carried out. (see below).
The control procedures to be applied to individual
audits or assignments include:
audits or assignments include:
·
Allocation
of staff-staff should have appropriate training, experience, proficiency and,
if required, special skills (e.g. in computing)
Allocation
of staff-staff should have appropriate training, experience, proficiency and,
if required, special skills (e.g. in computing)
·
Proper
briefing of staff-staff should be properly informed on:
Proper
briefing of staff-staff should be properly informed on:
·
The
nature of the client, its industry and the client’s place in it;
The
nature of the client, its industry and the client’s place in it;
·
Objectivities
of the audit;
Objectivities
of the audit;
·
Timing
Timing
·
The
overall plan of the audit;
The
overall plan of the audit;
·
Significant
accounting and auditing risk areas;
Significant
accounting and auditing risk areas;
·
Related
parties (see chapter 21);
Related
parties (see chapter 21);
·
The need
to bring problems and enquiry situations to more experienced staff, the audit
manager or audit partner.
The need
to bring problems and enquiry situations to more experienced staff, the audit
manager or audit partner.
·
Audit
completion checklists-with sections for completion by staff and reporting partner.
It is a common experience that, in the rush to complete an audit on time,
matters of importance can be overlooked.
Audit
completion checklists-with sections for completion by staff and reporting partner.
It is a common experience that, in the rush to complete an audit on time,
matters of importance can be overlooked.
·
Contentious
matters-all problems, special difficulties, and potential qualifications must
be identified, recorded and discussed by the reporting partner with colleagues
or even another practitioner.
Contentious
matters-all problems, special difficulties, and potential qualifications must
be identified, recorded and discussed by the reporting partner with colleagues
or even another practitioner.
·
Documentation-all
audit work and conclusions reached must be fully recorded in the working
papers-the rule is always ‘if it’s not documented it doesn’t exist’. Recording
can be either paper-based records or, of course computer files 9see chapter
18).
Documentation-all
audit work and conclusions reached must be fully recorded in the working
papers-the rule is always ‘if it’s not documented it doesn’t exist’. Recording
can be either paper-based records or, of course computer files 9see chapter
18).
·
Reviews-all
audit work must be fully reviewed. This is dealt with in the next section.
Reviews-all
audit work must be fully reviewed. This is dealt with in the next section.
·
Sign-all
audit work must be fully reviewed action should be acknowledged in writing by
the performer by initialing or signing the working paper.
Sign-all
audit work must be fully reviewed action should be acknowledged in writing by
the performer by initialing or signing the working paper.
·
Supervision-personnel
with supervisory responsibilities should monitor the progress of the audit to
consider whether:
Supervision-personnel
with supervisory responsibilities should monitor the progress of the audit to
consider whether:
·
Assistants
have the necessary skills and competence to carry out their assigned tasks;
Assistants
have the necessary skills and competence to carry out their assigned tasks;
·
Assistants
understand the audit directors; and
Assistants
understand the audit directors; and
·
The work
is carried out in accordance with the overall audit plan and the audit programmed.
The work
is carried out in accordance with the overall audit plan and the audit programmed.
REVIEWS
Hot reviews
Firms should ensure that an independence review (by
a partner who is not the engagement partner) is undertaken for all listed
company audits. These are known as ‘hot’ reviews. A hot review should be
carried out during the course of the engagement or audit (hence the use of
‘hot’) by a second partner not connected with the audits or assignment and
should be applied to all audits of listed companies and a selection of other
assignments.
a partner who is not the engagement partner) is undertaken for all listed
company audits. These are known as ‘hot’ reviews. A hot review should be
carried out during the course of the engagement or audit (hence the use of
‘hot’) by a second partner not connected with the audits or assignment and
should be applied to all audits of listed companies and a selection of other
assignments.
In addition, firms should establish policies setting
out the circumstances in which an independent review should be performed for
other audits or assignments, whether on the grounds of the public interest or
particular audit risk.
out the circumstances in which an independent review should be performed for
other audits or assignments, whether on the grounds of the public interest or
particular audit risk.
The independence review should take place before
the audit report the audit report is signed so as to provide an objective,
independence assessment of the quality of the audit. The policies should set
out in detail the manner in which the review is to be performed.
the audit report the audit report is signed so as to provide an objective,
independence assessment of the quality of the audit. The policies should set
out in detail the manner in which the review is to be performed.
The independence review involves consideration of
the following matter in order to assess the quality of the audit.
the following matter in order to assess the quality of the audit.
·
The
objectivity of the audit engagement partner and key audit staff and the
independence of the firm;
The
objectivity of the audit engagement partner and key audit staff and the
independence of the firm;
·
The rigor
of the planning process including the analysis of the key components of audit
risk identified by the audit team and the adequacy of the planned response to
those risk;
The rigor
of the planning process including the analysis of the key components of audit
risk identified by the audit team and the adequacy of the planned response to
those risk;
·
The
results of audit work and the appropriateness of the key judgments made,
particularly in high-risk areas;
The
results of audit work and the appropriateness of the key judgments made,
particularly in high-risk areas;
·
The significance
of any potential changes to the financial statements that the firm is aware of
but which the management of the audited entity has declined to make;
The significance
of any potential changes to the financial statements that the firm is aware of
but which the management of the audited entity has declined to make;
·
Whether
all matters which may reasonably be judged by the auditors to be important and
relevant to the directors, identified during the course of the audit, have
consider for reporting to the board of directors and/or the audit committee (or
their equivalents); and
Whether
all matters which may reasonably be judged by the auditors to be important and
relevant to the directors, identified during the course of the audit, have
consider for reporting to the board of directors and/or the audit committee (or
their equivalents); and
·
The
appropriateness of the draft auditor’s report.
The
appropriateness of the draft auditor’s report.
Monitoring
Firms should appoint a senior partner to take
responsibility for monitoring the quality of audits carried out by the firm by
means of ‘cold reviews’ as referred to earlier.
responsibility for monitoring the quality of audits carried out by the firm by
means of ‘cold reviews’ as referred to earlier.
