QUALITY CONTROLS

Chapter 5
QUALITY CONTROL STANDARDS
 Philippine Standard on Quality Control 1
(PSQC1)
 Quality Control for Firms that Perform Audits and
Reviews of Historical Financial Statements and
Other Assurance and Related Services
Engagements
 Applicable to assurance services and related
services in general
 Philippine Standard on Auditing 220 (Revised)
 Quality
Control for Audits of Historical Financial
Information
PSQC NO. 1
 Establishes standards and provides guidance
regarding the firm’s responsibilities for its
system of quality control for audits and
reviews of historical financial information,
and for other assurance and related services
engagements.
 Read in conjunction with the Code of Ethics
SYSTEM OF QUALITY CONTROL
 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
 Reports issued by the firm or engagement
partners are appropriate in the circumstances.
ELEMENTS OF A SYSTEM OF
QUALITY CONTROL
 Leadership responsibilities for quality within
the firm
 Ethical requirements
 Acceptance and continuance of client
relationships and specific engagements
 Human resources
 Engagement performance
 monitoring
“ each individual (in a firm)
has a personal responsibility
for quality and is expected to
comply with these policies
and procedures.”
LEADERSHIP RESPONSIBILITIES
FOR QUALITY WITHIN THE FIRM
 Promote an internal culture: quality is essential
in performing engagements.
 The firm’s leadership and the examples it sets
significantly influence the internal culture of the
firm.
 All levels of management should emphasize the
firm’s quality control policies and procedures
and the requirement to:
 Perform work that complies with professional
standards and regulatory and legal requirements; and
 Issue reports that are appropriate in the
circumstances
LEADERSHIP RESPONSIBILITIES
FOR QUALITY WITHIN THE FIRM
 Recognize and reward high quality work.
 Communicate actions and messages on quality
control thru training seminars, meetings, formal
or informal dialogue, mission statements,
newsletters, or briefing memoranda.
 Incorporated in internal documentation and
training materials and in partner and staff
appraisal procedures.
 Recognize that the firm’s business strategy is
subject to the overriding requirement for the
firm to achieve quality in all the engagements
that the firm performs.
LEADERSHIP RESPONSIBILITIES
FOR QUALITY WITHIN THE FIRM
 Accordingly,
 The firm assigns its management responsibilities
so that commercial considerations do not
override the quality of work performed;
 The firm’s policies and procedures addressing
performance evaluation, compensation and
promotion with regard to its personnel, are
designed to demonstrate the firm’s overriding
commitment to quality; and
 The firm devotes sufficient resources for the
development, documentation and support of its
quality control policies and procedures
ETHICAL REQUIREMENTS
 There should be policies and procedures
designed to provide reasonable assurance
that the firm and its personnel comply with
relevant ethical requirements.
 Emphasis is made on the fundamental
principles, which are reinforced in particular
by the leadership of the firm, education and
training, monitoring and a process for
dealing with non-compliance.
INDEPENDENCE REQUIREMENTS
 There should be policies and procedures to
provide reasonable assurance that the firm, its
personnel maintain independence where
required.
 Communicate those requirements.
 Identify and evaluate circumstances and
relationships that create threats to
independence and take appropriate actions.
 Be notified of breaches of independence
requirements and take actions.
 Obtain written confirmation of compliance with
independence policies.
FAMILIARITY THREATS
 Occurs when by virtue of a close relationship
with an assurance client, a firm or a member
of the assurance team becomes too
sympathetic to the client’s interests.
 PSQC1 requires setting out criteria for
determining the need for safeguards to
reduce familiarity threats to an acceptable
level.
 Engagement partner should be rotated every
5 years as per the Code of Ethics.
ACCEPTANCE AND
CONTINUANCE PROCEDURES
 A firm should undertake or continue
relationships and engagements where it:
 Has considered the integrity of the client and
does not have information that would lead it to
conclude that the client lacks integrity.
 Is competent to perform the engagement and has
the capabilities, time and resources to do so,
and
 Can comply with ethical requirements
 Where issues have been identified,
documentation of how the issues were
resolved should be made.
CLIENT INTEGRITY
 Considerations regarding the integrity of the
client:
 Identity and business reputation of the client’s
principal owners, key management, related
partied and those charged with its governance.
 Nature of the client’s operations including its
business practices.
 Information concerning the attitude of the
client’s principal owners, key management and
those charged with its governance towards such
matters as aggressive interpretation of accounting
standards and the internal control environment.
CLIENT INTEGRITY
 Considerations regarding the integrity of the
client:
 Whether the client is aggressively concerned
with maintaining the firm’s fees as low as
possible
 Indications of an inappropriate limitation in the
scope of work
 Indications that the client might be involved in
money, laundering or other criminal activities
 The reasons for the proposed appointment of the
firm and non-reappointment of the previous
firm.
CLIENT INTEGRITY
 Information on such matters that the firm
obtains may come from:
 Communications with existing or previous
providers of professional accountancy services to
the client in accordance with the Code of Ethics,
and discussions with other third parties.
 Inquiry of other firm personnel or third parties
such as bankers, legal counsel and industry peers
 Background searches of relevant databases
FIRM CAPABILITY, COMPETENCE,
TIME AND RESOURCES
 Firm personnel have knowledge of relevant
industries or subject matters, and experiences with
relevant regulatory or reporting requirements, or
the ability to gain the necessary skills and
knowledge effectively
 Firm has sufficient personnel with the necessary
capabilities and competence
 Experts are available, if needed
 Individuals meeting the criteria and eligibility
requirements to perform engagement quality
control review are available, where applicable and
 The firm is able to complete the engagement within
the reporting deadline.
FIRM CAPABILITY, COMPETENCE,
TIME AND RESOURCES
 If firm obtains information that would cause
it to decline and engagement, it should
consider:
 Applicable professional and legal responsibilities,
including whether there is a requirement for the
firm to report to the person or persons who
made the appointment or, in some cases, to
regulatory authorities; and
 The possibility of withdrawing from the
engagement or from both the engagement and
the client relationship.
POLICIES AND PROCEDURES ON
AUDITOR WITHDRAWAL
 Discussing with the appropriate level of the
client’s management and those charged with
its governance regarding the appropriate
action that the firm might take based on the
relevant facts and circumstances
 If the firm determines that it is appropriate to
withdraw, discussing with the appropriate
level of the client’s management and those
charged with the governance withdrawal from
the engagement or from both the engagement
and the client relationship, and the reasons
for the withdrawal.
POLICIES AND PROCEDURES ON
AUDITOR WITHDRAWAL
 Considering whether there is a professional,
regulatory or legal requirement for the firm
to remain in place, or for the firm to report
the withdrawal from the engagement, or
from both the engagement and the client
relationship, together with the reasons for
the withdrawal, to regulatory authorities.
 Documenting significant issues,
consultations, conclusions and the basis for
the conclusions.
HUMAN RESOURCES
 There should be policies and
procedures designed to provide firms
with reasonable assurance regarding
efficiency of personnel with the
capabilities, competence, and
commitment to applicable ethical
principles.
HR - RECRUITMENT
 Should include procedures that help the firm
select individuals of integrity with the
capacity to develop the capabilities and
competence necessary to perform the firm’s
work.
 Capabilities and competence developed thru:
 Professionaleducation
 Continuing professional development, including
training
 Work experience
 Coaching by more experienced staff
HR – PERFORMANCE
EVALUATION
 The firm:
 Makes personnel aware of the firm’s
expectations regarding performance and ethical
principles
 Provides personnel with evaluation of, and
counseling on, performance, progress and career
development; and
 Helps personnel understand that advancement to
positions of greater responsibility depends,
among other things, upon performance quality
and adherence to ethical principles, and that
failure to comply with the firm’s policies and
procedures may result in disciplinary action
 ASSIGNMENT OF ENGAGEMENT
TEAMS
 The identity and role of the engagement partner should be
communicated to key members of client management and those
charged with governance
 The engagement partner should have the appropriate capabilities,
competence, authority and time to perform the role
 Responsibilities of the engagement partner should be clearly
defined and communicated to that partner
 Firm should assign appropriate staff with the necessary
capabilities, competence and time to perform 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
 Capabilities and competence are considered when assigning
engagement teams, and in determining the level of supervision
required.
CONSIDERATIONS REGARDING
ASSIGNMENT OF ENGAGEMENT TEAMS
 An understanding of, and practical experience with,
engagements of a similar nature and complexity
through appropriate training and participation
 And understanding of professional standards and
regulatory and legal requirements
 Appropriate technical knowledge, including
knowledge of relevant information technology
 Knowledge of relevant industries in which the
clients operate
 Ability to apply professional judgment
 An understanding of the firm’s quality control
policies and procedures
ENGAGEMENT PERFORMANCE

 Consistency in the quality of

engagement performance is
accomplished through written or
electronic manuals, software tools or
other forms of standardized
documentation and industry or subject
matter-specific guidance materials
MATTERS ADDRESSED IN
DOCUMENTATION
 How engagement teams are briefed on the
engagement to obtain an understanding of the
objectives of their work
 Processes for complying with applicable engagement
standards
 Processed of engagement supervision, staff training
and coaching
 Methods of reviewing the work performed, the
significant judgments made and the form of report
being issued
 Appropriate documentation of the work performed
and of the timing and extent of the review
 Processes to keep all policies and procedures current
SUPERVISION AND REVIEW
 Tracking the progress of the engagement
 Considering the capabilities and
competence of individual members of the
engagement team
 Addressing significant issues arising during
the engagement, considering their
significance and modifying the planned
approach appropriately
 Identifying matters for consultation or
consideration by more experienced
engagement team members.
FACTORS CONSIDERED BY
REVIEWERS OF ENGAGEMENT WORK
 The work has been performed in accordance with professional
standards and regulatory and legal requirements
 Significant matters have been raised for further consideration
 Appropriate consultations have taken place and the resulting
conclusions have been documented and implemented
 There is a need to revise the nature, timing and extent of
work performed
 The work performed supports the conclusions reached and is
appropriately documented
 The evidence obtained is sufficient and appropriate to
support the report and
 The objectives of the engagement procedures have been
achieved.
CONSULTATION
 There should be policies and procedures
designed to provide a firm with reasonable
assurance that:
 Appropriate consultation takes place on difficult
or contentious matters
 Sufficient resources are available to enable
appropriate consultation to take place
 The nature and scope of such consultations are
documented and
 Conclusions resulting from consultations are
documented and implemented
EXTERNAL CONSULTANTS
 A firm needing to consult externally, for
example, a firm without appropriate internal
resources, may take advantage of:
 Advisory services provided by other firms
 Professional and regulatory bodies
 Commercial organization that provide relevant quality
control services
 Documentation of consultations should be
sufficiently complete and detailed to enable an
understanding of the issue on which consultation
was sought; results and decisions; basis for
decisions and how they were implemented.
DIFFERENCES OF OPINION
 There should be policies and procedures for
dealing with and resolving differences of
opinion within the engagement team, with
those consulted and, where applicable,
between the engagement partner and the
engagement quality control reviewer.
 Conclusions reached should be documented
and implemented.
 The report should not be issued until the
matter is resolved.
ENGAGEMENT QUALITY
CONTROL REVIEW
 Provides an objective evaluation of the significant
judgments made by the engagement team and the
conclusions reached in formulating the report
 An engagement quality control review for all audits
of financial statements of listed entities is
required.
 Firm policies and procedures should set out criteria
against which all other audits and reviews of
historical financial information and other assurance
and related service engagements should be
evaluated to determine whether an engagement
quality control review should be performed.
WHEN IS A NON-AUDIT ENGAGEMENT
SUBJECT TO QUALITY CONTROL REVIEW?
 The nature of the engagement ,including the
extent to which it involves a matter of public
interest
 Identification of unusual circumstances or
risks in an engagement or class of
engagements
 Whether laws or regulation require an
engagement quality review.
WHEN IS A NON-AUDIT ENGAGEMENT
SUBJECT TO QUALITY CONTROL REVIEW?
 Firms should set out policies and procedures
on:
 The nature, timing and extent of an
engagement quality control review;
 Criteria for the eligibility of engagement quality
control reviewers; and
 Documentation requirements for an engagement
quality review.
NATURE, TIMING & EXTENT OF THE
ENGAGEMENT QUALITY CONTROL REVIEW
 Engagement quality control review involves:
 Discussion with engagement partner;
 Review of financial statements or other subject
matter information and the report (as well as
review of selected working papers); and
 Consideration of whether the report to be issued is
appropriate.
 Extent of review depends on the complexity of
the engagement and risk that the report might
not be appropriate under the circumstances
 Review does not reduce the responsibilities of
the engagement partner
MATTERS CONSIDERED DURING AN
ENGAGEMENT QUALITY CONTROL REVIEW
 The engagement team’s evaluation of the
firm’s independence in relation to the specific
engagement
 Significant risks identified during the
engagement and the responses to those risks
 Judgments made, particularly with respect to
materiality and significant risks
 Whether appropriate consultation has taken
place on matters involving differences of
opinion or other difficult or contentious
matters and the conclusions arising from those
consultations
MATTERS CONSIDERED DURING AN
ENGAGEMENT QUALITY CONTROL REVIEW
 The significance and disposition of corrected
and uncorrected misstatements identified
during the engagement
 The matters to be communicated to
management and those charged with
governance and, where applicable, other
parties such as regulatory bodies
 Whether working papers selected for review
reflect the work performed in relation to the
significant judgments and support the
conclusions reached
 The appropriateness of the report to be issued.
CRITERIA FOR THE ELIGIBILITY OF
ENGAGEMENT QUALITY CONTROL REVIEWERS
 The firm’s policies and procedures should
address the appointment of engagement
quality control reviewers and establish their
eligibility through the:
 Technical qualifications required to perform the
role
 Including the necessary experience
 Authority
 Degree to which an engagement quality control
reviewer can be consulted on the engagement
without compromising the reviewer’s objectivity
SUFFICIENT AND APPROPRIATE
TECHNICAL EXPERTISE
 This depends on the circumstances of the
engagement.
 The reviewer of audit engagements of a
listed entity has:
 Sufficient and appropriate experience; and
 Authority to act as engagement partner for
audits of listed entities
OBJECTIVITY OF THE ENGAGEMENT
QUALITY CONTROL REVIEWER
 Policies and procedures to maintain the
objectivity of the engagement quality control
reviewer:
 Was not selected by the engagement partner
 Does not participate in the engagement during
the period of review
 Does not make decisions for the engagement
team
 Is not subject to other considerations that would
threaten the reviewer’s objectivity
CONSULTATION WITH THE ENGAGEMENT
QUALITY CONTROL REVIEWER
 Engagement partner may consult with the
engagement quality control review during
the engagement without compromising the
reviewer’s ability to perform the role
 If reviewer’s objectivity is not maintained,
another individual within the firm or a
suitably qualified external person (suitable
for sole practitioners and small firms) is
appointed to take on the role of either the
engagement control reviewer or the person
to be consulted.
DOCUMENTATION OF THE ENGAGEMENT
QUALITY CONTROL REVIEW
 PSQC requires documentation that:
 The procedures required by the firm’s policies on
engagement quality control review have been
performed
 The engagement quality control review has been
completed before the report is issued
 The reviewer is not aware of any unresolved
matters that would cause the reviewer to believe
that the significant judgments the engagement
team made and the conclusions they reached
were not appropriate.
COMPLETION OF THE ASSEMBLY
OF FINAL ENGAGEMENT FILES
 Law or regulation may prescribe the time limits
by which the assembly of final engagement files
for specific types of engagement should be
completed.
 Where no such time limits are prescribed, the
firm establishes the time limits appropriate to
the nature of the engagements that reflect the
need to complete the assembly of final
engagement files on a timely basis.
 In case of an audit, such time limit is ordinarily
not more than 60 days after the date of the
auditor’s report.
CONFIDENTIALITY, SAFE CUSTODY, INTEGRITY ,
ACCESSIBILITY AND RETRIEVABILITY OF
ENGAGEMENT DOCUMENTATION
 The firm should establish policies and
procedures designed to maintain the above.
Other notes:
 Firm’s personnel must observe at all times the
confidentiality of information contained in
engagement documentation, unless specific client
authority has been given to disclose information
or there is a legal professional duty to do so
 Specific laws or regulations may impose
additional obligations on the firm’s personnel to
maintain client confidentiality, particularly
where data of a personal nature are concerned.
CONFIDENTIALITY, SAFE CUSTODY, INTEGRITY ,
ACCESSIBILITY AND RETRIEVABILITY OF
ENGAGEMENT DOCUMENTATION
 The firm should establish policies and
procedures designed to maintain the above.
Other notes:
 Accessibility
or retrievability of the underlying
data may be compromised if the documentation
could be altered, added to or deleted without
the firm’s knowledge, or if it could be
permanently lost or damaged.
CONFIDENTIALITY, SAFE CUSTODY, INTEGRITY ,
ACCESSIBILITY AND RETRIEVABILITY OF
ENGAGEMENT DOCUMENTATION
 The firm should establish policies and procedures
designed to maintain the above. Other notes:
 Appropriate
controls must be designed and
implemented for engagement documentation to:
 Enable the determination of when and by whom
engagement documented was created, changed or reviewed;
 Protect the integrity of the information at all stages of the
engagement, especially when the information is shared
within the engagement team or transmitted to other parties
via the internet;
 Prevent unauthorized changes to the engagement
documentation
 Allow access to the engagement documentation by the
engagement team and other authorized parties as necessary
to properly discharge their responsibilities
EXAMPLES OF CONTROLS OVER
ENGAGEMENT DOCUMENTATION
 Use of a password among engagement team
members to restrict access to electronic
engagement documentation to authorized users
 Appropriate back up routines for electronic
engagement documentation at appropriate stages
during the engagement
 Procedures for properly distributing engagement
documentation to the team members at the start of
the engagement, processing it during engagement,
and collating it at the end of engagement
 Procedures for restricting access to, and enabling
proper distribution and confidential storage of
hardcopy engagement documentation.
ORIGINAL PAPER
DOCUMENTATION
 Engagement teams are required to:
 Generate scanned copies that reflect the entire
content of the original paper documentation,
including manual signatures, cross references
and annotations
 Integrate the scanned copies into the
engagement files, including indexing and signing
off on the scanned copies as necessary and
 Enable the scanned copies to be retrieved and
printed as necessary
RETENTION OF ENGAGEMENT
DOCUMENTATION
 Depends on:
 Nature of the engagement and the firm’s
circumstances
 Whether local law or regulation prescribes
specific retention periods for certain types of
engagements
 Whether there are specific legal or regulatory
requirements.
 For audit engagements, retention period is no shorter
than 7 yrs from the date of the auditor’s report, or, if
later, the date of the group auditor’s report.
PROCEDURES FOR RETENTION OF
ENGAGEMENT DOCUMENTATION
 Enable the retrieval of, and access to, the
engagement documentation during the
retention period, particularly in the case of
electronic documentation since the underlying
technology may be upgraded or changed over
time
 Provide where necessary a record of changes
made to engagement documentation after the
engagement files have been completed
 Enable authorized external parties to access
and review specific engagement documentation
for quality control or other purposes.
OWNERSHIP OF ENGAGEMENT
DOCUMENTATION
 The firm may, at its discretion, make portions of, or
extract from, engagement documentation available to
clients, provided such disclosure does not undermine
the validity of the work performed, or, in the case of
assurance engagements, the independence of the firm
or its personnel.
 All documentation, except reports submitted by a CPA
to a client shall be treated confidential and privileged
and remain the property of such CPA in the absence of
a written agreement between the CPA and the client,
to the contrary, unless such documents are required to
be produced through subpoena issued by any court,
tribunal or government regulatory or administrative
body.
MONITORING OF QUALITY
CONTROLS
 Purpose is to provide an evaluation of:
 Adherence to professional standards and
regulatory and legal requirements
 Whether the quality control system has been
appropriately designed and effectively
implemented, and
 Whether the firm’s quality control policies and
procedures are appropriate in the circumstances.
 Entrusted to partner or partners or other
persons with sufficient and appropriate
experience and authority in the firm to
assume that responsibility.
MONITORING OF QUALITY
CONTROLS
 Ongoing consideration and evaluation of the
system of quality control includes:
 Analysis of:
 New developments in professional standards and
regulatory and legal requirements and how they are
reflected in the firm’s policies and procedures where
appropriate;
 Written confirmation of compliance with policies and
procedures on independence.
 Continuing professional development, including
training and
 Decisions related to acceptance and continuance of
client relationships and specific engagements
MONITORING OF QUALITY
CONTROLS
 Ongoing consideration and evaluation of the
system of quality control includes:
 Determination of corrective actions to be taken
and improvements to be made in the system,
including the provision of feedback into the firm’s
policies and procedures relating to education and
training
 Communication to appropriate firm personnel of
weaknesses identified in the system, in the level of
understanding of the system, or compliance with it
 Follow-up by appropriate firm personnel so that
necessary modifications are promptly made to the
quality control policies and procedures
INSPECTIONS
 Provide evidence of compliance by
engagement teams with the firm’s quality
control policies and procedures.
 Inspection of selected completed
engagements is ordinarily performed on a
cyclical basis.
 Engagements selected include at least one
engagement for each engagement partner
over and inspection cycle, which ordinarily
spans no more than 3 yrs.
FACTORS TO CONSIDER IN DETERMINING THE
MANNER AND TIMING OF SELECTION OF
INDIVIDUAL ENGAGEMENTS FOR INSPECTION
 Size of the firm
 Number and geographical location of offices
 Results of previous monitoring procedures
 Degree of authority both personnel and
offices have
 Nature and complexity of the firm’s
practice and organization
 Risks associated with the firm’s clients and
specific engagements
DISPOSITION OF DEFICIENCIES
NOTED
 The firm should evaluate whether
deficiencies are either:
 Instances that do not necessarily indicate that
the firm’s system of quality control in
insufficient to provide it with reasonable
assurance that it complies with professional
standards and regulatory and legal requirements,
and that the reports issued by the firm or
engagement partners are appropriate in the
circumstances
 Systemic, repetitive or other significant
deficiencies that require prompt corrective
action
POSSIBLE RECOMMENDATIONS RESULTING
FROM THE EVALUATION OF DEFICIENCIES
 Taking appropriate remedial action in relation
to an individual engagement or member of
personnel
 The communication of the findings to those
responsible for training and professional
development
 Changes to the quality control policies and
procedures
 Disciplinary action against those who fail to
comply with the policies and procedures of the
firm, especially those who do so repeatedly
COMMUNICATION OF THE
RESULTS OF MONITORING

 At least annually, the firm should

communicate results of the monitoring of
its quality control system to engagement
partners and other appropriate
individuals within the firm, including the
firm’s managing board of partners.
COMMUNICATION OF THE
RESULTS OF MONITORING
 Description of the monitoring procedures
performed
 Conclusions drawn from the monitoring
procedures
 Where relevant, a description of systemic,
repetitive or other significant deficiencies
and of the actions taken to resolve or amend
those deficiencies.
NETWORK FIRMS
 At least annually, the network communicates the
overall scope, extent and results of the monitoring
process to appropriate individuals within the
network firms
 The network communicates promptly any
identified deficiencies in the quality control system
to appropriate individuals within the relevant
network firm or firms so that the necessary actions
can be taken
 Engagement partners in the network firms are
entitled to rely on the results of the monitoring
process implemented within the network, unless
the firms or the network advises otherwise.
DOCUMENTATION RELATING TO
MONITORING
 Sets out monitoring procedures, including the
procedure for selecting completed engagements to be
inspected.
 Records the evaluation of:
 Adherence to professional standards and regulatory and legal
requirements
 Whether the quality control system has been appropriately
designed and effectively implemented
 Whether the firm’s quality control policies and procedures
have been appropriately applied , so that reports that are
issued by the firm or engagement partners are appropriate in
the circumstances
 Identifies the deficiencies noted, evaluates their effect
and sets out the basis for determining whether and what
further action is necessary.
COMPLAINTS AND
ALLEGATIONS
 The firm should establish policies and
procedures designed to provide it with
reasonable assurance that it deals
appropriately with:
 Complaints and allegations that the work
performed by the firm fails to comply with
professional standards and regulatory and legal
requirements
 Allegations of non-compliance with the firm’s
system of quality control
DOCUMENTATION OF SYSTEM
OF QUALITY CONTROL
 There should be appropriate documentation
to provide evidence of each element of its
system of quality control
 Factors in considering form and content of
documentation:
 Size of the firm and the number of offices
 Degree of authority both personnel and offices
have
 Nature and complexity of the firm’s practice
and organization
 PHILIPPINE
STANDARD ON
AUDITING NO. 220
INTRODUCTION

 PSA 220 establishes standards and

provide guidance on specific
responsibilities of firm personnel
regarding quality control procedures for
audits of historical financial
information, including audits of
financial statements.
ENGAGEMENT TEAMS:
 Implement quality control procedures that
are applicable to the audit engagement;
 Provide the firm with relevant information
to enable the functioning of that part of the
firm’s system of quality control relating to
independence; and
 Are entitled to rely on the firm’s systems,
unless information provided by the firm or
other parties suggests otherwise.
LEADERSHIP RESPONSIBILITIES
 The engagement partner:
 should take responsibility for the overall quality
on each audit engagement to which that partner
is assigned.
 Sets an example regarding audit quality to the
other members of the engagement team through
all stages of the audit engagement.
ETHICAL REQUIREMENTS
 The engagement partner should form a conclusion on
compliance with independence requirements that apply
to the audit engagement. He/she should:
 Obtain relevant information from the firm and where
applicable, network firms, to identify and evaluate
circumstances and relationships that create threats to
independence;
 Evaluate information on identified breaches, if any, of the
firm’s independence policies and procedures to determine
whether they create a threat to independence for the audit
engagement;
 Take appropriate action to eliminate such threats or reduce
them to an acceptable level by applying safeguards. Failure to
resolve matters should be promptly reported to the firm; and
 Document conclusions on independence and any relevant
discussions with the firm that support these conclusions
ACCEPTANCE AND CONTINUANCE
OF CLIENT RELATIONSHIPS
 Appropriate information should be gathered
and evaluated before a new client or a
recurring engagement is accepted.
 The engagement partner may or may not
initiate the decision making process for
acceptance or continuance regarding the
audit engagement.
 Regardless of whether the engagement partner
initiated that process, the partner determines
whether the most recent decision remains
appropriate.
CONSIDERATIONS IN ACCEPTING OR
CONTINUING A CLIENT RELATIONSHIP
 The integrity of the principal owners, key
management and those charged with
governance of the entity;
 Whether the engagement team is competent
to perform the audit engagement and has
the necessary time and resources; and
 Whether the firm and the engagement team
can comply with ethical requirements.
INVESTIGATION PROCEDURES TO ASCERTAIN
INTEGRITY OF PRINCIPAL OWNERS, KEY
MANAGEMENT AND THOSE CHARGED WITH
GOVERNANCE
 Obtain and review available financial
statements regarding the prospective client,
such as annual reports, interim financial
statements and income tax returns.
 Inquire of 3rd parties as to any information
regarding the prospective client.
 Communicate with the predecessor auditor.
Successor auditor initiates the communication
and must secure permission of prospective client.
 Consider circumstances which would cause the
firm to regard the engagement as one requiring
special attention or presenting unusual risks.
COMPETENCE TO PERFORM THE AUDIT
ENGAGEMENT AND AVAILABILITY OF TIME
AND RESOURCES
 Do not accept an engagement for which you
are not competent to carry out.
 Early appointment enables the auditor to
plan the engagement properly.
 If
appointed after balance sheet date, consider
whether alternative procedures may be applied.
ACCOUNTING POLICIES, PRACTICES
AND ACCOUNTING RECORDS
 Accept engagements only when the auditor
concludes that the financial reporting
framework adopted by management is
acceptable or when it is required by law or
regulation.
 When framework for general purpose financial
statements required by law or regulation is
unacceptable to the auditor, engagement is
accepted only if the deficiencies in the
framework can be adequately explained to avoid
misleading users.
ACCOUNTING POLICIES, PRACTICES
AND ACCOUNTING RECORDS
 If differences with GAAP exist, the auditor
communicates the same to the prospective
client, and assesses the prospective client’s
willingness to accept any proposed
adjustments.
 If the client is not willing to accept the
adjustment, auditor determines the effect on
the opinion and discuss this with the prospective
client.
 If accounting records is in a disorganized
state, this might prevent the auditor from
being able to express an unqualified opinion.
EVENTS THAT INITIATE EVALUATION
OF CONTINUING CLIENTS
 The expiration of a time period
 A major change in one or more of the ff:
 Management
 Directors
 Ownership
 Legal advisers
 Financial condition
 Litigation status
 Scope of the engagement
 Nature of the client’s business
 The existence of conditions which would have caused
the firm to reject a client had such conditions existed
at the time of the initial acceptance.
 ASSIGNMENT OF ENGAGEMENT
TEAMS
 Appropriate capabilities and competence expected
of the engagement team as a whole include the ff:
 An understanding of, and practical experience with, audit
engagements of a similar nature and complexity through
appropriate training and participation
 An understanding of professional standards and
regulatory and legal requirements
 Appropriate technical knowledge, including knowledge of
relevant information technology
 Knowledge of relevant industries in which the client
operates
 Ability to apply professional judgment
 An understanding of the firm’s quality control policies
and procedures
ENGAGEMENT PERFORMANCE
 Engagement partner takes overall
responsibility for the engagement. He/she
informs the engagement team of:
 Their responsibilities
 The nature of the entity’s business
 Risk-related issues
 Problems that may arise; and
 The detailed approach to the performance of the
engagement
ENGAGEMENT PERFORMANCE
 Engagement team’s responsibilities include:
 Maintaining an objective state of mind
 An appropriate level of professional skepticism
 Performing the work in accordance with ethical
principle of due care.
 Members are encouraged to raise questions
with more experienced team members
 It is important for everyone to understand
the objectives of the work they are to
perform.
SUPERVISION AND REVIEW
 Supervision includes:
 Tracking the progress of the engagement
 Considering capabilities and competence of
individual members, whether they have
sufficient time to carry out their work, whether
they understand instructions and whether work is
carried out in accordance with planned approach
to the audit engagement.
 Addressing significant issues, consider their
significance and modify the approach if needed
 Identify matters for consultation or consideration
FACTORS CONSIDERED BY
REVIEWERS OF ENGAGEMENT WORK
 The work has been performed in accordance with professional
standards and regulatory and legal requirements
 Significant matters have been raised for further consideration
 Appropriate consultations have taken place and the resulting
conclusions have been documented and implemented
 There is a need to revise the nature, timing and extent of
work performed
 The work performed supports the conclusions reached and is
appropriately documented
 The evidence obtained is sufficient and appropriate to support
the report and
 The objectives of the engagement procedures have been
achieved.
CONSULTATION
 Engagement partner should:
 Be responsible for the engagement team
undertaking appropriate consultation on difficult
or contentious matters
 Be satisfied that members have undertaken
appropriate consultation both within the team
and with others within or outside the firm
 Be satisfied that the nature and scope of such
consultations are documented and agreed with
the party consulted
 Determine that conclusions resulting from
consultations have been implemented
EXTERNAL CONSULTANTS
 Documentation of consultations should be
sufficiently complete and detailed to enable
an understanding of the issue on which
consultation was sought; results and
decisions; basis for decisions and how they
were implemented.
DIFFERENCES OF OPINION
 The policies and procedures for dealing with
and resolving differences of opinion within
the engagement team, with those consulted
and, where applicable, between the
engagement partner and the engagement
quality control reviewer should be followed.
 Engagement partner informs members that
they may bring matters to the attention of
the partner or others within the firm as
appropriate without fear of reprisals.
ENGAGEMENT QUALITY
CONTROL REVIEW
 The engagement partner should:
 Determine that an engagement quality control
reviewer has been appointed
 Discuss significant matters arising during the
audit engagement and those identified during
the engagement quality control review with the
engagement quality control reviewer
 Not issue the auditor’s report until the
completion of the engagement quality control
review.
MATTERS CONSIDERED DURING AN
ENGAGEMENT QUALITY CONTROL REVIEW
 The engagement team’s evaluation of the
firm’s independence in relation to the specific
engagement
 Significant risks identified during the
engagement and the responses to those risks
 Judgments made, particularly with respect to
materiality and significant risks
 Whether appropriate consultation has taken
place on matters involving differences of
opinion or other difficult or contentious
matters and the conclusions arising from those
consultations
MATTERS CONSIDERED DURING AN
ENGAGEMENT QUALITY CONTROL REVIEW
 The significance and disposition of corrected
and uncorrected misstatements identified
during the engagement
 The matters to be communicated to
management and those charged with
governance and, where applicable, other
parties such as regulatory bodies
 Whether working papers selected for review
reflect the work performed in relation to the
significant judgments and support the
conclusions reached
 The appropriateness of the report to be issued.
MONITORING OF QUALITY
CONTROLS
 The engagement partner considers the
results of the monitoring process as
evidenced in the latest information
circulated by the firm and, if applicable,
other network firms. The engagement
partner considers:
 Whether deficiencies noted in that information
may affect the audit engagement; and
 Whether the measures the firm took to rectify
the situation are sufficient in the context of that
audit.
MONITORING OF QUALITY
CONTROLS
 A deficiency in the firm’s system of quality
control does not indicate that a particular
audit engagement was not performed in
accordance with professional standards and
regulatory and legal requirements, or that
the auditor’s report was not appropriate.
 Please refer to Appendix 1: Compliance
Review Checklist on pp 154 to 155.
A FRAMEWORK OF AUDIT
QUALITY
 Audit objective:
 Form an opinion on the financial statements based on
sufficient appropriate audit evidence.
 Engagement team characteristics for a quality
audit:
 Exhibited appropriate values, ethics and attitudes
 Knowledgeable, skilled and experienced and had
sufficient time to perform the audit work
 Applied rigorous audit process and quality control
procedures that complied with law, regulations and
applicable standards
 Provided useful and timely reports; and
 Interacted appropriately with relevant stakeholders
A FRAMEWORK OF AUDIT
QUALITY
 Aimed at raising awareness of the key
elements of audit quality, thereby
encouraging auditors, audit firms and other
stakeholders to challenge themselves about
whether there is more they can do to
increase audit quality in their particular
environments.
 This is not a substitute for standards set by
PSQC1, nor does it establish additional
standards or provide procedural requirements
for the performance of audit engagements.
ELEMENTS DISTINGUISHED BY
THE FRAMEWORK
 Inputs
 Process
 Outputs
 Key interactions within the
Financial Reporting Supply
Chain
 Contextual factors
INPUTS
 Groups:
 Values, ethics and attitudes of
auditors, which in turn are influenced
by the culture prevailing within the
audit firm; and
 Knowledge, skills and experience of
auditors and the time allocated for
them to perform the audit
INPUTS – QUALITY ATTRIBUTES
 Those that apply directly at:
 Audit engagement level
 Level of the audit firm, and therefore
indirectly to all audits undertaken by that
audit firm; and
 National (or jurisdictional) level and
therefore indirectly to all audit firms
operating in that country and the audits
they undertake.
PROCESS

 The rigor of the audit process

and quality control procedures
impact audit quality
OUTPUTS
 Reports and information formally prepared
and presented by one party to another
 Outputs that arise from the auditing process
that are generally not visible to those
outside the audited organization (e.g.,
operational recommendations in the
management report)
 These are often determined by the context,
including legislative requirements.
 Most stakeholders have no influence on the
nature of the outputs.
KEY INTERACTIONS WITHIN THE
FINANCIAL REPORTING SUPPLY CHAIN

 Formal and informal interactions will be

influenced by the context in which the
audit is performed and allow a dynamic
relationship to exist between inputs and
outputs.
CONTEXTUAL FACTORS
 Factors which have the potential to
impact the nature and quality of
financial reporting and audit quality:
 Laws
 Regulations;and
 Corporate governance
 Auditors should respond to these factors
when determining how best to obtain
sufficient appropriate audit evidence