Quality Control
Table of content:
High audit quality is central to auditing profession. It helps in creating trust in users of financial information. Industry, government and public at large who are the stake holders who relies upon assurance given by auditors. It, is, therefore, necessary to ensure high audit quality throughout the audit process. Audit quality involves application of a rigorous audit process by auditors and quality control procedures that comply with laws, regulations and applicable professional standards.
SQC 1- Quality Control for firms that perform audits and reviews of historical financial information, and other assurance and related services engagements and SA-220- Quality Control for an audit of financial statements deal with issue of establishing quality control systems and responsibilities of auditors in this regard. Both the standards deal with framework of audit quality. SQC 1 applies to all engagements and deals with quality at level of firm. SA-220 deals with audit quality at individual audit engagement level.
FOR FIRMS THAT PERFORM AUDITS AND REVIEWS OF HISTORICAL FINANCIAL INFORMATION, AND OTHER ASSURANCE AND RELATED SERVICES ENGAGEMENTS
SQC 1 requires that the firm should establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with professional standards and regulatory and legal requirements and that reports issued by the firm or engagement partners are appropriate in the circumstances. Firm’s system of quality control should consist of policies designed to achieve these objectives. This quality control standard applies to all firms irrespective of their constitution.
The firm’s system of quality control should include policies and procedures addressing each of the following elements: -
(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
A firm before accepting an engagement should acquire vital information about the client. Such an information should help firm to decide about: -
♦ Integrity of Client, promoters and key managerial personnel.
♦ Competence (including capabilities, time and resources) to perform engagement.
♦ Compliance with ethical requirements.
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.
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. Such policies and procedures should address relevant HR issues including recruitment, compensation, training, career development, performance evaluation etc. There should be emphasis on the continuing professional development of firm’s personnel.
The firm should assign responsibility for each engagement to an engagement partner.
Each engagement team should be able to carry out its responsibilities with necessary competence and skill. Therefore, the firm should ensure suitable people are available and also groom them for their role. The firm should assess performance of their partners and team members keeping in mind their commitment towards quality.
Consistency in quality of engagement performance is achieved through briefing of engagement teams of their objectives, processes for complying with engagement standards, processes of engagement supervision and training, methods of reviewing performance of work, appropriate documentation of work performed.
Consultation in difficult or contentious matters: Consultation should take place in difficult or contentious matters pertaining to an engagement. Consultation includes discussion, at the appropriate professional level, with individuals within or outside the firm who have specialized expertise, to resolve a difficult or contentious matter. It helps to promote quality and improves the application of professional judgment. Consultation procedures require consultation with those having appropriate knowledge, seniority and experience within the firm (or outside the firm) on significant technical, ethical and other matters and appropriate documentation and implementation of conclusions resulting from consultations.
Engagement quality control review: Significant judgments made in an engagement should be reviewed by an engagement quality control reviewer for taking an objective view before the report is issued.
The extent of the review depends on the complexity of the engagement and the risk that the report might not be appropriate in the circumstances. The review does not reduce the responsibilities of the engagement partner.
Engagement quality control review is mandatory for all audits of financial statements of listed entities. In respect of other engagements, firm should devise criteria to determine cases requiring performance of engagement quality control review.
Differences of Opinion: There might be difference of opinion within engagement team, with those consulted and between engagement partner and engagement quality control reviewer. The report should only be issued after resolution of such differences. In case, recommendations of engagement quality control reviewer are not accepted by engagement partner and matter is not resolved to reviewer’s satisfaction, the matter should be resolved by following established procedures of firm like by consulting with another practitioner or firm, or a professional or regulatory body.
Engagement documentation: The firm should establish policies and procedures for engagement teams to complete the assembly of final engagement files on a timely basis after the engagement reports have been finalized. Engagement files should be completed in not more than 60 days after date of auditor’s report in case of audit engagements and in other cases within the limits appropriate to engagements.
Based upon quality control system of firm, quality control policies pertaining to audit engagements are decided by engagement teams. Engagement partner of a team is responsible for quality control procedures of a particular audit engagement in accordance with SA-220.
Therefore, SA-220 is premised on the basis that the firm is subject to SQC 1. Within the context of the firm’s system of quality control, engagement teams have a responsibility to implement quality control procedures that are applicable to the audit engagement and provide the firm with relevant information to enable the functioning of that part of the firm’s system of quality control relating to independence. Engagement teams are entitled to rely on the firm’s system of quality control, unless information provided by the firm or other parties suggests otherwise.
SA-220 is modelled on lines of SQC 1. It describes responsibilities of engagement partner in relation to following matters: -
(a) Leadership responsibilities for quality on audits.
(b) Relevant ethical requirements.
(c) Acceptance and continuance of client relationships and audit engagements.
(d) Assignment of engagement teams.
(e) Engagement performance.
(f) Monitoring.
NFRA has been constituted in terms of Section 132(1) of Companies Act,2013. Duties of NFRA also include the following: -
♦ Monitor and enforce compliance with accounting standards and auditing standards
♦ Oversee the quality of service of the professions associated with ensuring compliance with such standards and suggest measures for improvement in the quality of service
It has power to monitor and enforce compliance with accounting standards and auditing standards and oversee the quality of service under section 132(2) or undertake investigation under section 132(4) of the auditors of certain class of companies. Such companies include listed companies, insurance companies, banking companies and other companies as provided for in rule 3 of NFRA Rules,2018.
Therefore, overseeing quality of audit services of listed companies falls under the purview of NFRA. QRB can review quality of audit services provided by the members of the Institute only in respect of entities other than those specified under Rule 3 of NFRA Rules, 2018 and those referred to QRB by NFRA under relevant rules.
In conclusion, quality control in auditing, as outlined by standards like SQC 1 and SA-220, is paramount for maintaining trust and reliability in financial reporting. These standards ensure that audit firms establish robust systems for compliance with professional standards and regulatory requirements, promoting transparency and accountability. With clear guidelines on leadership responsibilities, ethical requirements, client relationships, and engagement performance, auditors can uphold audit quality at both firm and engagement levels. Moreover, the role of regulatory bodies like the National Financial Reporting Authority (NFRA) in overseeing audit quality underscores the commitment to upholding standards and safeguarding stakeholders' interests. By adhering to these standards and regulatory oversight, auditors can enhance the credibility and integrity of financial information, fostering trust among users and stakeholders.
Ruchika Saboo
An All India Ranker (AIR 7 - CA Finals, AIR 43 - CA Inter), she is one of those teachers who just loved studying as a student. Aims to bring the same drive in her students.
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