• 20 Marks

AAA – L3 – Q4 – Practice management

Explain why a quality management system is necessary for Sowa Accountants Ltd.

A.  To: All employees of Sowa Accountants Ltd.
From: New partner
Date:
Subject: Quality management                                                                                                                                                                                        (i) Why a system of quality management is necessary

(ii) Components that must be addressed by a system of quality management                                                                                                 (iii) Engagements for which an engagement quality review is compulsory                                                                                                    B.

Queries from the question and answer session

(i) Difference between a hot review and a cold review                                                                                                                                              (ii) Why all audit reasons and justifications need to be documented in the audit working papers                                                                  (iii) Reasons for standardised audit working papers

A.  ISA 220 (Revised) Quality Management for an Audit of Financial Statements deals with the specific responsibilities of the auditor and engagement partner regarding audit quality at the engagement level. ISQM 1 Quality Management for Firms that Perform Audits or Reviews of Financial Statements or Other Related Services Engagements requires all firms to implement a system of quality management. In addition, ISQM 2 Engagement Quality Reviews deals with engagement quality reviews where one is required by ISQM 1. It is therefore clear that the audit profession as a whole perceives quality management to be necessary. The key reasons for this are set out below.

Whenever an audit assignment is performed by a firm there are several risks which they are exposed to such as performing work negligently such that the client or indeed a third party suffers loss as a result. This could have an adverse effect on the audit firm – its reputation could suffer, and therefore both the income from that client and potential clients may be lost due to the loss of one client.

Another risk that could materialise if there was an insufficient/inadequate system of quality management is that an auditor’s report may be unmodified when in fact it should be modified or vice versa e.g. it could be unnecessarily qualified.

Such risks are clearly ones that should be avoided by any firm and therefore a proper system of quality management within our firm is vital.                                                                                                                                                                                                                        (ii)

The firm’s risk assessment process – Sowa is required to establish quality objectives, identify and assess risks to the achievement of those quality objectives (quality risks) and design and implement responses to address the quality risks.

Governance and leadership – Sowa shall establish quality objectives to address the firm’s governance and leadership and establish an environment that supports the system of quality management. For example, leadership must demonstrate a commitment to quality through their actions and behaviours.

Relevant ethical requirements – Sowa shall establish quality objectives that address the fulfilment of responsibilities in accordance with relevant ethical requirements, including those related to independence. All staff must understand and adhere to the ethical code relevant to the engagement they are performing.

Acceptance and continuance of client relationships and specific engagements – judgments about acceptance and continuance must be appropriate and based on the firm’s ability to perform the engagement (i.e. that it has the necessary capacity and skills) and information about the client, for example whether the directors and management are trustworthy and have integrity.

Engagement performance – the engagement partner must be sufficiently and appropriately involved throughout the engagement. Work performed by less experienced team members is directed, supervised and reviewed by more experienced team members. Consultation must be undertaken on difficult or contentious matters. Documentation must be assembled on a timely basis.

Resources – resources can be human, technological or intellectual and include service providers. Appropriate resources must be available to perform each engagement. Resources must be obtained, developed, used, maintained, allocated and assigned in a timely manner. Staff must have the competence and capability for the work they are performing, including sufficient time.

Information and communication – Sowa shall establish quality objectives that address obtaining, generating or using information regarding the system of quality management, and communicating information within the firm and to external parties on a timely basis to enable the design, implementation and operation of the system of quality management.Monitoring and remediation process – a monitoring and remediation process must be established. Monitoring activities provide information about the design, implementation and operation of the system of quality control. This allows remedial action to be taken for any deficiencies identified. This should include inspecting, on a cyclical basis, at least one completed engagement for each engagement partner.                                                                                                                                                                                                                                                    (iii)

An engagement quality review is compulsory for:

  • audits of listed entities
  • audits or other engagements for which an engagement quality review is required by law or regulation (for example certain public sector entities), and
  • audits and other engagements for which the firm determines that an engagement quality review is an appropriate response to one or more quality risks (for example, an engagement involving a high level of judgement or complexity).                                                                                                                                                                                                                                                              B(i)

    A hot review is a review of working papers that is performed by a more senior member of staff during the course of the audit, and is usually performed soon after the work is completed. The reviewer will indicate that he has performed the review by dating and initialling the piece of work. The review should ensure that the work has been performed in line with the audit programme and that the conclusions are consistent with the results obtained.

    A cold review is one that is performed at the end of the audit – usually by the audit manager or partner. This will be done before the auditor’s report is signed off and will comprise a review of the whole file together with the financial statements. The purpose of this review is to ensure that the audit work has been fully completed and that the results and conclusions for the entire audit are consistent.                                                                                                                                                                                                                                                                                                                                                                                                    (ii)  All audit reasons and justifications need to be documented in the audit working papers because those working papers need to be sufficiently detailed and complete to enable an auditor with no previous experience of the audit to establish what work has been completed and how the conclusions were reached. This would become especially important if the auditors had to give evidence in a court of law regarding the audit. It should also be clear from the documentation in the file that the auditors’ conclusions are reasonable.                                                                                                                                                                                                                                                                                                                                                                                                  (iii)  The standardisation of audit working papers ensures that work is performed consistently across audits, and that the evidence that is necessary for each piece of work is always obtained. However, the working papers should not be so rigid that they inhibit the auditors’ skills and flair, as these are the factors that make the difference between a good and a bad auditor. Auditors should always be looking for anything unusual when performing their work and if any such issues are identified then they should be put on notice and ‘dig deeper’. Any such instances should never be ignored just because such work is not part of the standard programme. Auditors must be flexible in their approach, and use their initiative.

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