Improving Your Audit Process, Part 2: Applying Quality Control Policies on Engagementsby
This 10-part series of articles will focus on ways to improve the audit process, reduce audit costs, and enable CPA firms to make some money on audit engagements. Part 2 of this series contains guidance for developing a quality control system and the required documentation for various sizes of CPA firms. All audit engagement personnel must be familiar with a CPA firm’s quality control policies and procedures and their applicability to engagements.
A task force of the American Institute of CPAs has issued a Practice Aid entitled, Establishing and Maintaining a System of Quality Control for a CPA Firm’s Accounting and Auditing Practice (SQCS No. 8; QC Section 10 is included in Appendix A of this Practice Aid).
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, audits, reviews, and compilations. Under this Statement, among other requirements, audit engagement teams must comply with independence requirements in a firm’s quality control system.
In the early years of implementation, most of us thought of a system of quality control as just a compliance function requiring more policies, more documentation, and more work. Actually, a quality control system that is uniquely designed for the nature and size of a CPA firm’s practice, and that is integrated into its accounting and auditing engagements, can actually save time, reduce costs, and improve the audit process!
To illustrate, let’s consider some of the policies for one of the most important elements of a quality control system: leadership involvement. The engagement leader is the pinnacle of a quality control system. The leader’s involvement on an engagement during the planning, performance, and completion phases not only assures compliance with the auditing standards, it can ensure the engagement is completed in the most efficient manner. Here are some examples of a leader’s involvement on an audit engagement and the related benefits:
1. Delivering the engagement letter. The engagement leader should deliver the engagement letter before the in-charge accountant begins work. The contents of the letter, changes in operating and accounting methods, any fraud issues, and going-concern problems are a few of the items that should be discussed with the client. Information obtained by the leader should be documented for use by the in-charge accountant while planning the engagement.
2. Preplanning meeting. During the leader’s meeting with the in-charge accountant before engagement planning begins, the leader should discuss current client events, information obtained when delivering the engagement letter, and anticipated audit strategies. This communication will enable the in-charge accountant to plan the engagement with current information and an understanding of the leader’s expectations.
3. Brainstorming/planning meeting. This meeting should be attended by all engagement personnel, including the leader. The leader should guide the meeting, the risk evaluation, the formulation of the audit strategy, and the design of the audit plan. As the engagement team begins fieldwork, each person can complete their assignments in the ways expected by the leader without extensive review notes and redo time.
In each of these circumstances, the leader is carrying out quality control policies and procedures. The leader has obtained first-hand information from the client, has provided supervision of the in-charge accountant, and controlled the engagement planning process. Without this involvement, considerable time may be wasted by ineffective planning activities, performing unnecessary fieldwork, and preparing improper audit documentation. On top of all this, ineffective leader involvement throughout the engagement will cause review and wrap-up time to skyrocket!
SQCS No. 8 states that a firm should establish policies and procedures that will provide staff personnel with reasonable assurance that engagements are performed in accordance with applicable professional standards, regulatory requirements, and the firm’s standards of quality.
Among numerous other policies and procedures in the Practice Aid, the following are a few (not inclusive) illustrative policies:
Policy No. 1: Engagement planning complies with the requirements of professional, regulatory, and CPA firm policies. Audit strategies and plans are designed in the most efficient manner considering engagement risks.
Policy No. 2: Engagement performance, supervision, and reports preparation are in accordance with the requirements of professional standards and the firm. Engagement files contain adequate documentation of these activities.
Policy No. 3: Qualified engagement team members review work performed by other team members on a timely basis. Evidence of such reviews is clearly documented in engagement files.
Policy No. 4: The confidentiality, safe custody, integrity, and accessibility of engagement documentation is maintained by the firm.
Policy No. 5: The firm requires a consultation take place when appropriate and the nature, scope, and conclusions of such consultations are documented and implemented.
Policy No. 6: The firm does not release reports until the engagement leader and engagement personnel address, resolve, and document any differences of opinion.
While a CPA firm’s quality control system doesn’t produce substantive evidence, it is the foundation of the audit process. Integrating a firm’s quality control policies and procedures into engagement performance will ensure that the minimum amount of sufficient, competent evidence is collected, evaluated, and documented on each engagement. This is a major way in which auditors can improve their audit process!