Increasing Audit Profits Series No. 7--On-the-Job Quality Control Maximizes Efficiency

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While state requirements for peer reviews may differ from the AICPA program, SQCS No. 7, A Firm’s System of Quality Control, (Redrafted SQCS No. 8 effective in 2012) underpins all peer reviews (governmental and regulatory requirements will apply to the specified industries).  Here are the basic elements of the required system of quality control with a few indications of how they may be applied on audit, review and compilation engagements:

•    Leadership Involvement.  Quality control standards are supported by audit risk assessment standards that make clear the involvement of the person designated as the top line authority should participate in the engagement planning meeting, supervise engagement performance and make final conclusions about the accomplishment of engagement objectives.  The quality control standards apply to all attest engagements.  Leaders should be involved throughout all engagements, from beginning to end.  Detailed time slip documentation, a Partner’s Participation Memo, an Engagement Review Checklist and/or other documentation should be prepared to evidence compliance with this element.
•    Ethical Requirements.  Accountants are required to be independent on all attest engagements.  While an audit or review report can’t be issued when the accountant is not independent, a compilation report may be issued with disclosure of the accountant’s lack of independence.  SSARS No. 19 provides the option to state the reasons independence is impaired.  When exercising this option, the accountant must generally describe all reasons for the impairment.  In addition to the customary annual statements of independence a firm obtains from it’s members covered by the AICPA Code of Professional Conduct, some firms are also including documentation of the independence of assigned personnel in engagement planning documents, particularly when non-attest services are being provided.  Engagement letters should also discuss management’s oversight responsibilities for non-attest services.
•    Acceptance and Continuance of Clients.  A practice aid designed to demonstrate consideration of the character of client personnel, and the related affect on engagement procedures should be prepared for all levels of service.
•    Human Resources.  The objective of this element is for a firm to have reasonable assurance it has sufficient, qualified personnel to perform and report on engagements in accordance with applicable professional, regulatory and legal standards.  While the firm’s quality control document will set forth policies for this element, planning documents for audits and reviews should discuss the experience of assigned personnel.  When the experience of assigned personnel isn’t commensurate with the risks any engagement, professional standards require increased supervision by the engagement leader.  Such involvement can be documented as described under the leadership element above.
•    Engagement Performance. The purpose of this element is to establish policies and procedures sufficient to provide reasonable assurance engagements have been performed in accordance with applicable standards.  Engagement planning, performance and completion should be guided by practice aids that ensure this purpose is accomplished.  
•    Monitoring. The objective of this element is to monitor practice applications of other elements.  Inspections of engagement files by firm leaders in years between peer reviews are the most common method of compliance.  For sole practitioners, reviews of the prior year’s engagement files, and/or self-review during engagement completion can satisfy this element.  All such monitoring procedures should be documented in firm administrative and/or engagement files.

A major change resulting from SQCS No. 7 is the requirement to document compliance with the elements of a quality control system.  Such documentation can include a firm’s quality control document, administrative files and engagement files.  Because of increasing scrutiny of compliance with all applicable professional standards by peer reviewers, this author recommends documentation of compliance with quality control standards in a firm’s engagement files in addition to a quality control document and/or applicable administrative files.  A Practice Aid prepared by a task force of the AICPA entitled, Establishing and Maintaining a System of Quality Control for a CPA Firm’s Accounting and Auditing Practice, illustrates quality control systems for different sizes of CPA firms.  

Quality control standards were issued to enable practitioners to improve both the quality and the efficiency of attest services.  Integrating the requirements of the quality control standards with engagement performance as described above will result in significant increases in engagement profits!

For more information on this opportunity to increase profits, live and on-demand webcasts entitled Saving Time with Quality Control are available through the applicable link on the home page of our website, A small book resource with the same title is also available by clicking on the Products tab.

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