Reformas educativas (LOEI – Reglamento a la LOEI – Plan Decenal)

ISQC 1/NSQC 1 – Quality Control for Firms that perform Audits and Reviews of Historical Financial Information and Other Assurance and Related Services Engagements. This deals with a firm’s responsibilities for its system of quality control for audits and reviews of financial statements, and other assurance and related services engagements.

Elements of a firm’s System of Quality control

ISQC 1/NSQC 1 requires that a “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 that reports issued by the firm or engagement partners are appropriate in the circumstances.”

The elements to be addressed in a firm’s system of quality control are:

1. leadership responsibilities for quality within the firm;

2. ethical requirements;

3. acceptance and continuance of client relationships;

4. human resources/assignment of engagement teams;

5. engagement performance; and 6. monitoring (internal and external) 7. Documentation

1. Leadership

Leadership sets the ‘tone at the top’ that will convey strong support for quality work and quality control culture. Thus, the standard requires that a firm establishes policies and procedures designed to promote an internal culture based on recognition that quality is essential in performing engagements. The managing partner of firm’s managing board of partners is required to assume ultimate responsibility for the firm’s system of quality control and ensures that any persons assigned operational responsibility for the firm’s quality control system have sufficient and appropriate experience and ability, and the necessary authority to assume that responsibility.

Leadership therefore, involves:

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 setting the strategies and objectives – aligning personal and business objectives of partners, staff and business units with the need for audit quality;

 balancing commercial and professional approaches – the leadership needs to be sufficiently experienced to understand where there may be threats to audit quality, either through pressure from client management or internal efficiency targets;

 ensuring the organization will deliver the required quality;

 ensuring quality is always communicated.

2. Ethical requirements

ISQC 1 requires the firm to establish policies and procedures to provide it with reasonable assurance that the firm and its staff:

 comply with relevant ethical requirements, and

 maintain independence where required to do so by those requirements.

The firm should:

 communicate its independence requirements to staff, and

 identify and evaluate circumstances and relationships that create threats to independence, assessing the impact of such threats and applying safeguards or withdrawing from the engagement if appropriate.

The policies and procedures should include requiring:

 staff to notify the firm of circumstances and relationships that might create a threat to independence

 staff to notify the firm of any breaches of independence of which they have become aware

 the firm to communicate such breaches to the engagement partner and other relevant staff

 the engagement partner to advise the firm of action to be taken.

At least annually, the firm should obtain written confirmation from all staff of compliance with the firm’s policies and procedures on independence.

3. Acceptance and continuance of engagements

ISQC 1 requires the firm to establish policies and procedures to provide it with reasonable assurance that the firm will only take on or continue work where the firm:

 is competent to perform the engagement

 has the capabilities (including the necessary resources and time) to do so

 can comply with the relevant ethical requirements, and

 has assurance of the client’s integrity (that is, does not have information which would lead it to conclude that the client lacks integrity).

The policies and procedures should include requiring the firm to:

 obtain sufficient information to make such decisions (for new or existing engagements)

 consider potential conflicts of interest (and therefore whether it should accept the engagement)

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 document all identified issues and how they were resolved.

When an audit firm accepts an audit engagement from a new client, suitable procedures should be carried out to ensure that:

 the firm will be independent and there are no conflicts of interest

 the firm has the technical competence to do the work

 professional clearance has been obtained from the previous auditors of the new client

 appropriate anti-money laundering (client identification) procedures are performed.

Before the start of the audit each year, the engagement partner for the audit should ensure that all members of the audit team are independent of the client and there are no conflicts of interest; and be satisfied with the ethical integrity of the client entity and its management.

Client relationships are managed at two levels namely:

 Managing overall client base by accepting and continuing to act only for those audit clients where a quality service can be delivered, considering integrity of the principal owners, key management and those charged with governance of the entity; and

 Managing client relationships appropriately on a day-to-day basis so that an efficient audit is undertaken while achieving audit quality with an appropriate level of financial return.

Note:An evaluation of prospective clients and a review on an ongoing basis, of existing clients should be conducted. Deciding whether to continue a client relationship includes consideration of significant matters that have arisen during the current or previous engagements, and their implications for continuing the relationship. The auditor should be courageous to withdraw from any relationship that threatens or tends to compromise quality regardless of the level of financial return.

Note: Where it becomes appropriate to withdraw from an engagement, it is necessary to

1. discuss with the appropriate level of client’s management and those charged with its governance, the decision to withdraw from the engagement or from both the engagement and the client relationship and the reasons for the withdrawal.

2. consider whether there is a professional, regulatory or legal requirement to report the withdrawal to regulatory authorities.

3. document significant issues, consultations, conclusions and basis for the conclusions.

Client’s Integrity

Matters concerning client’s integrity to be considered for the purpose of acceptance or continuance of client relationships include:

 The identity and business reputation of the client’s principal owners, key management, related parties and those charged with its governance.

 The nature of the clients operations, including its business practices.

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 Information concerning the attitude of 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.

 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 the work.

 Indications of client’s involvement in money laundering or other criminal activities.

 The reasons for the proposed appointment of the firm and non-appointment of the previous firm.

4. Human Resources/Assignment of Engagement Teams

The quality of any audit is as good as the people that undertook the engagement. Meeting the fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behavior centre around people who:

 are intelligent, discerning and ethical;

 genuinely believe in the public interest purpose of audit;

 are curious and enquiring by nature with strong inter-personal skills;

 have sufficient strength of character to stand firm in challenging or confrontational situations;

 have up-to-date technical knowledge and understanding of their clients’ business;

 are motivated, both personally and by their working environment, to deliver quality efficiently and to the best of their abilities.

The standard therefore requires a firm to ensure:

 it has sufficient personnel with the competence, capabilities and commitment to ethical principles to meet its overall quality control objectives, and

 that for each engagement an appropriate engagement partner and team are assigned.

 Personnel have an understanding of the firm’s quality control policies and procedures.

Policies should therefore exist for the recruitment, training and development of staff. The firm should ensure compliance with ISAs and audit staff should have a good knowledge of accounting standards and local/national statutory accounting regulations.

The firm’s technical auditing procedures should be set out in a manual and reinforced by training. Newsletters and/or meetings could be used as a means of ensuring that professional staff are kept up-to-date on current developments.

Work should be assigned to staff that are competent to perform that work. There should be procedures for ensuring that an audit team collectively has the appropriate level of technical knowledge for the audit engagement and includes individuals with experience of audits of a similar complexity, and an ability to apply professional judgment.

5. Engagement Performance

74 Achieving audit quality requires embedding good working practices in the audit process. Good working practices encompass:

 ensuring each member clearly understands his role and responsibilities and using coaching effectively;

 instilling an attitude of professional skepticism and communicating important audit issues within the team timely;

 applying original thought to planning and execution of an audit in order to tailor the approach to the client’s particular circumstances;

 performing review procedures and the completion of audits in an effective way so that all issues are addressed appropriately and time pressure is dealt with robustly;

 ensuring that there are appropriate resources for consultation, and fostering a culture whereby seeking consultation is seen as a strength, not a weakness, (Igbokwe 2010).

The firm, through its policies should seek to establish consistency in the quality of engagement performance. This is achieved through documentation and communication of firm’s processes/methods:

 for complying with engagement standards;

 of engagement supervision, staff training and coaching;

 reviewing the work performed (including timing and extent of the review), the significant judgments made and the form of report being issued;

 of consultation with individuals, within and outside the firm, who have specialized expertise, to resolve difficult and contentious matters.

Note: 1. There should be policies and procedures in place on how to resolve differences in opinion arising from consultations.

2. A firm should also establish policies and procedures requiring an engagement quality control review that provides an objective evaluation of the significant judgments made by the engagement team and the conclusions reached in formulating the report. The engagement quality review (internal or external) will need to be completed before the report is issued.

6. Monitoring

The Standards require that the firm should establish policies and procedures designed to provide it with reasonable assurance that the policies and procedures relating to the system of quality control are relevant, adequate, operating effectively and complied with in practice. Monitoring compliance with quality control policies and procedures aims at providing an evaluation of:

 adherence to professional standards and regulatory and legal requirements;

 whether the quality control system has been appropriately designed and implemented;

and

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 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.

Monitoring of compliance could be external or internal.

Internal monitoring

Internal assessment is critical to ensuring an effective quality assurance and improvement programme.

 Quality processes should be designed to assist the leadership and practice management in improving and refining audit quality, managing risk and improving both inputs and outputs.

 Quality processes should recognize the key ingredient of people; especially quality of individual judgments and the development of individuals.

 Quality processes themselves can usually be improved as the results of lessons learnt.

Members of staff are more likely to be cooperative if they consider that the reviewers themselves are constantly re-appraising, and where necessary modifying their own procedures.

External monitoring

This relates to “external audit” performed by the regulatory and professional bodies e.g.

Professional Practice Monitoring Committee (PPMC) of ICAN and FRC. The regulatory visit is an important indicator to firms as to whether their quality control processes meet the standards required. Quality processes need to work in harmony with the checks and balances within working practices such as independent reviews and hot reviews, and also external monitoring of the regulatory bodies.

Note: 1. An independent external inspection program does not act as a substitute for firm’s own internal monitoring programme.

2. Deficiencies noted during monitoring should be communicated to both engagement partners and personnel and the firm for implementation of recommended remedial actions – changes to policies, improvement in training and professional development, disciplinary action for infraction of policies etc.

3. Genuine complaints and allegations of non-compliance with the firm’s system of quality control or that work performed fails to comply with professional standards, regulatory and legal requirements, should be promptly addressed.

7. Documentation

A firm should document evidence of the operation of the each element of its system of quality control. Factors to consider when determining the form and content of this documentation include:

 The size of the firm and number of offices;

 The degree of authority both personnel and offices have; and

 The nature and complexity of the firm’s practice and organization.

76 Self-assessment question

1. Briefly explain the elements of the quality control system of a professional accounting firm.

B. Quality Control on an Individual Audit (ISA 220 - Quality Control for an Audit of