QUALITY CONTROL, WORKING PAPERS, PEER REVIEW

Introduction

APB statement of auditing standard 240 deals with “Quality Control for audit
work”. It takes Quality Control to be of paramount importance to the independent
audit function.
The standard describes quality control policy and processes as those “designed
to provide reasonable assurance as to the appropriateness of the auditors’ report
and of adherence to auditing standards, ethical and other regulatory
requirements.
Many quality assurance frameworks take a holistic approach to quality,
encompassing a wide range of business considerations including; client and
employee satisfaction, and commercial performance. Firms are encouraged
to embed procedures to meet the requirements of the statement of auditing
standards on quality control into a wider quality assurance framework”. (Chitty,
2004).
Wider quality assurance objectives may be achieved by the auditors by
discussing audit performance with boards of directors, audit committees (where
they exist) and senior management.

Small firms

In order to satisfy quality control requirements,
(a) Firms should develop different policies and processes on various matters
pertaining to the practice.
(b) The nature, timing and extent of those policies and processes will depend
on many factors, including the size and nature of the firm.
(c) The policies and processes adopted by small firms need not be complex
or time consuming to be effective.
(d) Quality control encompasses several different roles and functions within
the audit firm, including responsibilities for quality control policy and
processes and monitoring.
(e) For small firms and sole practitioners, a single individual may perform
some of these roles and functions but in some circumstances they may
wish to use the services of a suitably qualified external consultant.

Quality Drivers

Compliance with quality control standard in setting quality drivers for the
purpose of complying with quality control standard, the following matters
should be considered:
(a) distinction of individual responsibilities and the collective responsibilities
of the firm;
(b) personal accountability and team working;
(c) building quality into processes and monitoring the results;
(d) Individual responsibilities and the collective responsibilities of the firm;
and
(e) involvement of all members of an audit team who should feel responsible
for the performance of their work in accordance with professional
standards.
The audit engagement partner has an especially important role in promoting
a quality culture within the audit team. The appointment of a suitably senior
audit partner within the firm to take overall responsibility for quality control
policy and processes will assist this process.

Personal Accountability and Team Working

(a) Personal accountability can provide an important motive for ensuring
that quality control policy and processes are applied in practice while it
is important to clarify responsibilities within the firm and the audit
team; and
(b) It is also necessary that consultation takes place to ensure that the
collective wisdom of, first the team, and then the firm, is applied in
resolving difficult or contentious matters.

Building quality into processes and monitoring the results

(a) Quality processes are aimed at ‘getting it right first time’ as well as
monitoring performance after the event.
(b) Monitoring provides the stimulus for performance as well as important
information on the application of quality control and processes which
can be used to improve them.

Definitions

The APB Statement of Auditing Standard 240 on ‘Quality Control for audit work
provides the following definitions:
(a) ‘audit engagement partner’ - the partner or other person in the firm
who assumes responsibility for the conduct of the audit and for issuing
an auditors’ report on the financial statements on behalf of the firm.
(b) ‘audit staff’ - the personnel involved in an individual audit, including
experts employed by the auditors, other than the audit engagement
partner.
(c) ‘client service partner’ - a partner who takes primary responsibility for
coordinating the range of services provided to an audit client.
(d) ‘competencies’ - the knowledge, skills and abilities of audit engagement
partners and audit staff.
(e) ‘firm’ - sole practitioners, partnerships, limited liability partnerships
and other corporate entities engaged in the provision of auditing services.
(f) ‘independent partner’ - a partner with sufficient experience and authority
to perform an ‘independent review’, other than the audit engagement
partner, who is not engaged in the performance of the audit or the
provision of other services and who is free of all other responsibilities
for the audited entity and any entities in the same group of entities.
(g) ‘independent review’- an objective, independent assessment of the
quality of the audit undertaken before the issue of the auditors’ report.
(h) ‘listed companies’ - entities whose capital instruments are listed or
publicly traded on a stock exchange or market, including domestic and
foreign exchange and markets, and markets other than main markets.
(i) ‘monitoring’ - periodic reviews of working papers for completed audits
by, wherever possible, reviewers independent of those who performed
the audit.
(j) ‘partner’ - sole practitioners, partners in partnerships and limited
liability partnerships and directors of other corporate entities engaged
in the provision of auditing services.
(k) ‘quality control policy and processes’ - policy and processes designed to
provide reasonable assurance as to the appropriateness of the auditors’
report, and of adherence to auditing standards, ethical and other
regulatory requirements.
(l) ‘suitably qualified external consultant’ - another registered auditor or
an employee ( with appropriate experience) of either a professional
accountancy body whose members may register as auditors or a
specialist organisation, such as a training consortium, which provides
review services.

Senior audit partner responsible for quality control

Considering the importance of audit quality, the development, documentation
and communication of quality control and processes should be made the
responsibility of a senior audit partner. Where a firm operates in more than
one office, the firm may appoint several individuals to undertake quality control
activities in their local offices but one senior audit partner should take ultimate
responsibility for quality control matters within the firm.
The senior audit partner with overall responsibility for quality control has the
experience, seniority and authority necessary to fulfil the role, and the influence
to help ensure that the quality of audit engagements conducted by the firm is
never compromised by commercial considerations.
Partners having concerns on quality control issues should discuss their concerns,
and agree appropriate actions, with the senior audit partner responsible for
establishing quality control policy and processes.

Establishment of policy and processes

The establishment of quality control policy and processes within a firm involves:
(a) setting a framework within which all relevant requirements, including
the requirements of auditing standards and ethics, can be met.
(b) size and nature of the practice and its organisation

Communication

Communication of quality control involves:
(a) communication of quality control policy and processes to all audit staff
and audit;
(b) engagement partners for effective implementation;
(c) use of internal training, electronic and paper circulars, and staff manuals
to communicate quality control policy and processes.

Documentation

Appropriate documentation of quality control policy and processes normally
includes:
(a) a description of the policy and processes and the objectives they are
designed to achieve.
(b) Records of amendments to policies and processes
(c) A record of how policy and processes and changes to them have been
communicated.

Acceptance and continuance of audit engagements

Before accepting a new audit engagement firms, should ensure that they:
(a) are competent to undertake the work;
(b) consider careful whether there are threats to their independence and
objectivity and, if so, whether adequate safeguards can be established;
(c) assess the integrity of the owners, directors and management of the
entity; and comply with the ethical requirements of the professional
accountancy bodies in relation to changes in appointment.
The firm should regularly reconsider the above matters whether the firm should
continue in office as auditor. The following matters should be considered in
deciding whether to continue in office as auditors:
(a) the identity of those who control the entity, its owners, directors and
managers (or their equivalents),
(b) the nature of the entity’s activities;
(c) the reasons for the proposed appointment and the reasons for the
retirement or removal of any incumbent or predecessor auditors.
(d) potential audit risks associated with the engagement.

Professional clearance

(a) Before accepting a new engagement, the prospective auditor should
communicate in writing with the incumbent auditors
(b) ascertain whether the incumbent auditors have information which the
prospective auditors should be aware, before deciding whether or not
to accept the appointment.
(c) The responsibility for the decision to accept or decline an audit
appointment rests solely with the prospective auditors, regardless of
the outcome of these enquiries.

Resources

Resource considerations should take into account the following:
(a) require resources to be developed and implemented by a firm and
periodically review plans for recruitment;
(b) have available adequate number of audit engagement partners and
audits staff with the competencies necessary to meet their needs;
(c) project personnel needs in order to establish number and characteristics
of the individuals required; and
(d) have recruitment processes including procedures to help determine
whether recruits are individuals of integrity and have the capacity to
develop the competencies necessary to perform the firm’s work.
Competencies are developed through:
(a) professional education and development (including technical and
management training, in-house courses and external training);
(b) work experience and coaching by other members of the audit team; and
(c) development and maintenance of technical competencies by the
provision of technical circulars, libraries and technical departments.

Assignment of Personnel to Audit Engagements

(a) Each audit engagement should have an engagement partner who should
take responsibility for the engagement on behalf of the firm;
(b) Audit engagement partners are responsible for the conduct of the audits
to which they have been appointed, ethical and other regulatory
requirements, and for the issue of the auditors’ report on behalf of the
firm;
(c) Firms should assign audit staff with the competencies necessary to
perform the audit work expected of them to individual audit
engagements;
(d) firms should establish processes to assess individuals’ knowledge, skills
and abilities;
(e) Firms should ‘develop policies and processes to provide reasonable
assurance that:
(i) audit engagement partners have the competencies necessary to
perform their role;
(ii) audit engagement partners’ responsibilities are clearly defined
and communicated to them;
(iii) the identity and role of the audit engagement partner is known
to the directors and senior management of the audited entity;
(iv) audit engagement partners have appropriate support (e.g.
another partner), where necessary, at meetings with the directors
and senior management of the audited entity that will involve
matters that are, or may be, material to the auditors’ report; and
(v) audit engagement partners have sufficient time to discharge their
responsibilities’ ( Chitty, 2004).
Competencies which a firm must consider include:
(a) understanding and practical experience of auditing (through
participation in audit engagements and appropriate training);
(b) Understanding applicable accounting, auditing, ethical and other
technical standards;
(c) Knowledge of specific industries;
(d) Professional judgement;
(e) Understanding the firm’s quality control policy and processes; and
(f) Drive and career path.

Consultation

Firms should establish procedures to:
(a) facilitate consultation and to ensure that sufficient resources are
available to enable appropriate consultation to take place in relation to
difficult or contentious matters;
(b) Document results of consultation that are relevant to audit conclusions;
(c) Deal with difficult or contentious matters; and
(d) Resolve conflicts.
Firms establish the likely circumstances in which consultation is encouraged
or required, and who is to be consulted. Consultation may be:
(a) on technical matters from the firm’s technical department or from an
expert within the firm; and
(b) necessary in relation to ethical matters affecting either the firm or
individual partners and others within it.
Consultation procedures are designed to ensure that individuals of appropriate
seniority and experience within the firm are consulted on all difficult or
contentious issues and that the results of consultations relevant to audit
conclusions are properly documented.

THE AUDIT ENGAGEMENT PARTNER

Leadership and Responsibilities

(a) Audit engagement partners should, in all cases, take responsibility on
behalf of the audit firm, for the quality of the audit engagements to
which they are assigned; and
(b) Audit engagement partners are responsible for finalising and signing
the auditors’ report on behalf of the firm and for applying the firm’s
quality control policy and processes to individual audit engagements
in an appropriate manner.

Direction, Supervision and Review

Audit engagement partners should ensure that audit work is directed, supervised
and reviewed in a manner that provides reasonable assurance that the work
has been performed competently.
Direction of audit staff involves:
(a) Being informed of their responsibilities, the nature of the entity’s
business, accounting or auditing problems that may arise, and the
overall audit plan;
(b) Being encouraged to raise any questions they may have with more
experienced team members;
(c) Understanding the objectives of the work to avoid drawing inappropriate
conclusions as a result of misunderstandings; and
(d) Being educated on appropriate team-working and training.
Supervision is closely linked to both direction and review and includes:
(a) considering the progress of the audit;
(b) considering whether audit staff have the competencies necessary to
perform the audit work expected of them and sufficient time to carry out
their work, whether they understand their instructions and whether the
work is being carried out in accordance with the overall audit plan and
audit programme;
(c) Addressing significant accounting and auditing questions raised during
the audit, assessing their significance and modifying the overall audit
plan and audit programme as appropriate; and
(d) Identifying matters for further consideration during the audit.
Work performed by audit staff is reviewed by other more senior audit staff or
the audit engagement partner. Reviewers should consider whether:
(a) the work has been performed in accordance with the firm’s procedures
and in accordance with the audit programme;
(b) The work performed is adequate in light of the results obtained and has
been adequately documented;
(c) Significant audit matters have been raised for further consideration;
(d) Appropriate consultations have taken place and the results of such
consultations have been documented;
(e) The objectives of the audit procedures have been achieved; and
(f) The conclusions are consistent with the results of the work performed.
Audit engagement partners perform an overall review of working papers. The
review is sufficient for them to be satisfied that the working papers contain
sufficient appropriate evidence to support the conclusions reached and for the
auditors’ report to be issued. Although the review may not cover all working
papers, it covers:
(a) all critical areas of judgement, especially any relating to difficult or
contentious matters identified during the audit.
(b) audit evidence relating to high risk areas; and
(c) any other areas which the audit engagement partner considers
important.
Audit engagement partners document the extent of their review and its timing
so as to demonstrate that is was completed before the auditors’ report was
signed.
The audit engagement partner reads the auditors’ report, the financial
statements and the information issued with the financial statements” (Chitty,
2004).
Review notes recording questions or points raised in the course of the audit
need not be retained at the end of the audit provided that the working papers
have been updated thereto and, in particular, record the reasoning on all
significant matters which require the exercise of judgement.

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