Chapter 5: Quality Control

Why do Firms require Quality control?

 Audit failure is too costly and the implications of poor quality engagement are: (***)
o Sued by shareholders / any parties who relied on the FS
o Adverse reputation
o Threaten the GC status of the firm
o Discharged by ICAEW
o Fines and penalties imposed by regulators
 Sued for reckless auditing under TORT law for negligence and the conditions for such a suit
are:
o Duty of care
o Breached the duty of care
o Monetary losses suffered due to the breach

Steps taken to reduce firm’s liabilities (***)

o Implement quality control procedures
o Establish the firm as limited liability partnership (LLP)
o Professional indemnity insurance (PII)
o Bannerman paragraph to prevent unwarranted 3P reliance
o Liability cap i.e. an agreed maximum compensation to be paid if an inappropriate report was
issued
o Proportionate liability cap between client and firm

Quality control – ISQC 1 / ISA 220

o Purpose this standard was created is to reduce the chance of audit failure

Breakdown / Components of Quality control

1. Leadership
2. Ethical requirements (Chapter 4)
3. Acceptance and continuance of client relationship (Chapter 4 & 6)
4. Human Resources
5. Engagement Performance
6. Monitoring

1. Leadership
o Partners should ensure:-
o Commercial considerations do not over-ride the quality of work; (impact of low-balling)
o Sufficient resources are allocated for every engagement;
o Establish firm’s policies in respect of:-
 Staff rotation;
 Promotion;
 Remuneration;
  Performance review
2. Human Resources
o Recruitment policy to only hire high calibre staff (**)
o Performance evaluation
o Career development
o Promotion is to be based on:-
o Competence;
o Capabilities

3. Engagement Performance (***)

(i) Direction
Engagement partner should ensure that all team members know:-
o What they are supposed to do
o Nature of client’s business
o Any relevant risks associated with the client
o Problems that may arise during the engagement
o Detailed audit approach

(ii) Supervision
o Progress tracking
o Consider the competence and capabilities of individual members
o Address significant matters arising during the audit
o Identify matters for consultation by more experienced engagement team
members

(iii) Review
o Assess if the work is carried out in accordance with the audit plan
o Sufficient appropriate evidence were gathered
o Conclusion is appropriate based on the evidence gathered
o Significant matters are resolved in a timely manner
o Any need to revise nature, extent and timing of the engagement
o Objectives of the engagement have been met

4. Monitoring (***)

HOT REVIEW COLD REVIEW

Performed before the issuance of the audit Performed after the issuance of the audit
report report
On all files On a sample of files
Work involves the entire audit file Work entails:
Compliance with Ethical Standards / ISA / UK
regulations
Areas for improvement and take remedial
actions
Engagement Quality Control Reviewer (EQCR) (***)
An EQCR is required for all listed clients and any engagement which is deemed high risks.
(Tip: please do not suggest an EQCR as a safeguard for listed entity i.e. independent partner for plc
client)
The review is still carried out before the issuance of the audit report
 Review judgemental areas and how it was resolved
 Appropriateness of the audit report based on the evidences gathered
 (Key Audit Matters)
 Compliance with ES / ISA / UK Gaap / CA

Attributes of EQCR & Cold reviewer

o Independent from the engagement
o Experience in the industry
o Experience in plc reporting (EQCR)
o High level of authority

Typical SFQ: If systemic deficiencies were identified during the cold review, what would be the
firm’s next course of actions?
A: communicate findings with staff members involved in the engagement
Consider additional training
Consider the need to amend nature, extent and timing of the engagement
Disciplinary actions

Steps taken by the UK Government on criticisms of external auditors in view of the recent audit
failures
Kingman Review - Revise the role of FRC

Brydon Review - Review the role of an audit

BEIS Report - Evaluate the future of audit and looking at the possibility of breaking up the Big 4

Competition and Market Authority Review - Evaluate the need for joint audit

Request FRC to increase the number of audit review