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Clarified Auditing Standards: Quality Control—the Essential Points

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Feb 17th 2015
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System of Quality Control and the Role of Engagement Teams. QC Section 10, A Firm’s System of Quality Control, contains quality systems, policies, and procedures that are the responsibilities of entities performing attest engagements. Engagement teams have the responsibility to implement quality control procedures relevant to attest engagements. Under this statement, audit engagement teams must comply with independence requirements, among others, in a firm’s quality control system.

Leadership Responsibilities. An engagement leader (partner, sole practitioner, shareholder, etc.) has overall responsibility for audit engagement quality. Other members of the engagement team may be relied upon to carry out aspects of a firm’s quality control system.

Relevant Ethical Requirements. Throughout an engagement, the engagement leader and other members of the engagement team must remain alert for potential non-compliance with relevant ethical requirements and take appropriate action if non-compliance occurs.

The engagement leader should identify and evaluate information for the firm and any network firms that create threats to independence. In such cases, appropriate safeguards should be applied or, if safeguards do not eliminate the threat, the auditor should withdraw from the engagement.

Acceptance and Continuance of Clients and Engagements. The engagement leader is responsible for determining proper quality control procedures have been performed when accepting new clients or performing new engagements for existing clients. A client evaluation (a quality control system requirement for many years) can be a first line of defense against serving clients with less-than-acceptable integrity. In fact, this evaluation should provide information that will affect the assessed level of risk at the financial statement level. Information gathered during this evaluation regarding the integrity of management, potential going-concern problems, and the use of the financial statements, among other matters, is referred to as “business risk” in the statement.

Assignment of Engagement Teams. All members of the team should have appropriate competence and capabilities to properly conduct and report on the engagement. A practical rule is to assign team members to an engagement and specific responsibilities when they have experience commensurate with assessed levels of risk. When this rule can’t be followed, the engagement leader will be required to provide more, and more frequent, supervision throughout the engagement.

Engagement Performance. The engagement leader has responsibility for the direction, supervision, performance, and review of the engagement. The leader should be actively involved from the beginning of the engagement and throughout its performance and completion. Engagement documentation should contain evidence of this involvement. This documentation may consist of an engagement review checklist, evidence on electronic file trees and/or individual working papers, or clear description of time charges entered into a firm’s time and billing system.

Consultation. The engagement leader is responsible for appropriate consultation the engagement team performs regarding difficult or contentious matters.

Engagement Quality Control Review. When firm policies indicate a quality control review is required, the engagement leader should appoint a reviewer, discuss significant findings or issues with the reviewer and release the auditor’s report only when the review is completed. The reviewer should perform an evaluation of significant judgments made and conclusions the engagement team reaches. A reviewer will discuss findings or issues with the engagement leader, read the financial statements and report, review selected documentation, and determine the auditor’s report is appropriate.

The results of the quality control review, and the results of the firm’s most recent monitoring process, should be considered by the engagement leader in completing the engagement.

Documentation. Specific audit engagement documentation should include:

  • Identification and resolution of relevant ethical requirements.
  • Client acceptance and continuance evaluations.
  • The nature of consultations and conclusions reached.
  • The procedures performed and the results of the engagement quality control review.

Practical Note. A major impact of this pronouncement relates to SQCS No. 8 (QC 10). This standard emphasizes the importance of integrating quality control policies and procedures into engagement performance. Such quality control elements as leadership involvement, client acceptance and continuance decision-making and consultations must be documented in engagement files. The AICPA’s practice aid, Establishing and Maintaining a System of Quality Control for a CPA Firm’s Accounting and Auditing Practice, contains illustrative policies and procedures for various size firms, including sole practitioners.

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