Advanced Audit and

Assurance
Chapter 05
QUALITY CONTROL
Learning Outcomes
a) Explain the principles and purpose of quality control of
audit and other assurance engagements.[1]
b) Describe the elements of a system of quality control
relevant to a given firm.[2]
c) Evaluate the quality control procedures which are in
place for a given firm and assess if they have been
appropriately applied in a given engagement.[3]

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Exam Focus
 A common requirement in the exam is to critically evaluate the audit work already
performed on an engagement and identify if the audit has been carried out to the
required standard of quality.

 If the firm does not perform work to a high quality it increases the risk of issuing an
inappropriate report which could damage the reputation of the firm and the profession.

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Quality management relevant to audit
engagements

Quality
management
relevant to audit
engagements

Elements of a
The principles and
quality
purpose of quality
management
management
system

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Principles and purpose of quality control of audit and other assurance
engagements

Quality control management basically deals with how an audit assignment must be handled to ensure
that the professional standards are maintained and work is performed satisfactorily.

ISA 220 Quality Control for Audits of Historical

Financial Information

Quality control
ISQM 1 Quality Management for Firms that Perform
procedures are
Audits or Reviews of Financial Statements, or Other
governed by two
Assurance or Related Services Engagements
standards

ISQM 2 Engagement Quality Reviews

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Purpose of quality control

Therefore firms must:

To enhance the intended user's confidence in the subject matter they are  conduct
using to make decisions. engagements in
accordance with
professional
standards and
In order for there to be confidence in the assurance process, engagements applicable legal and
must be performed to a satisfactory quality. regulatory
requirements, and
 issue reports that are
Failure to do so would not only mean a loss of confidence in the profession as appropriate in the
a whole but could lead to professional negligence claims against the assurance circumstances
provider.

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Elements of a quality management system

Leadership responsibilities

Ethical requirements

Acceptance and continuance

Engagement resources

Engagement performance

Monitoring & remediation

Overall responsibility

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Quality in a firm-Leadership responsibility

The engagement partner takes overall responsibility for managing and achieving
quality of the engagement

Firms should have a clear commitment to quality emphasising:

The importance of
open and robust The importance of
That all team members The importance of communication within each team member
are responsible for professional ethics, the team and the exercising professional
contributing to quality. values and attitudes. ability of the team to scepticism throughout
raise concerns without the engagement
fear of reprisal.

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Quality in a firm: Ethical requirements
Firms comply with ethical requirements such as the Code of Ethics – Chapter 3

The engagement partner must:

Prior to dating the

Remain alert Take appropriate auditor’s report,
Identify, evaluate throughout the action where take responsibility
and address ethical audit for breaches ethical for determining
threats. of ethical requirements have whether ethical
requirements. not been fulfilled. requirements have
been fulfilled. .

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Quality in a firm: Acceptance and
continuance: Detailed coverage in chapter 6

When determining whether to accept or continue with a client

relationship the engagement partner to consider the following

Whether
Whether the Whether
management and
engagement team significant matters
Integrity and Whether sufficient those charged
has the that have arisen
ethical values of and appropriate with governance
competence and during the current
principal owners, resources are have
capabilities or previous
management and available to acknowledged
including engagement have
those charged perform the their
sufficient time to implications for
with governance. engagement. responsibilities in
perform the continuing the
relation to the
engagement. engagement.
engagement.

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Quality in a firm: Engagement resources
The engagement partner must ensure sufficient and appropriate resources are
assigned or made available to the engagement team.

Human Capabilities of team

Technology to conduct meetings,

Engagement
Technological communication and automated tools
resources
and techniques
Include audit methodologies,
Intellectual implementation tools, auditing
guides, templates and checklists

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Quality in a firm: Human resources
The engagement team, auditor’s external experts and internal auditors who
provide direct assistance must be competent and capable to perform the audit

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Competence and capabilities includes
consideration of:
• Practical experience
• Understanding of professional
standards
• Expertise in specialised areas of
accounting and auditing
• Expertise in IT or automated tools
and techniques
• Knowledge of relevant industries
• Ability to exercise professional
scepticism and judgement
• Understanding of the firm’s policies
and procedures
If insufficient resources are made
available the following actions can be
taken:
• Change the planned audit approach
• Arrange an extension to the
reporting deadline
• Follow the firm’s policies and
procedures for resolving differences
of opinion
• Withdraw from the engagement if
possible under applicable law or
regulation
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Quality in a firm: Engagement performance

Engagement
performance

Direction Supervision Review EQR

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Direction
Informing team members of their responsibility to

Perform audit
procedures &
direct,
Contribute to supervise, Understand Address
Exercise
achievement Fulfil ethical and review the objectives threats to the
professional
of quality of requirements the work of of the work to achievement
scepticism
engagement. less be performed. of quality
experienced
team
members

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Engagement performance
Firms must design policies and procedures to ensure engagements are performed to a satisfactory
standard. Policies and procedures should cover:

Matters relevant to
promoting consistency
• often accomplished through written manuals, software tools and standardised documentation
in the quality of
engagements

• Tracking the progress of the engagement ; Considering the competence and capabilities of the
Supervision
team members; Addressing significant matters that arise during the engagement; Identifying
responsibilities difficult or contentious matters for consultation.

• Work of less experienced team members should be reviewed by more

Review responsibilities experienced team members to identify whether: The work has been performed in accordance with
professional standards; The objectives of the engagement procedures have been achieved; etc.

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Supervision

Tracking the progress of the audit to ensure the objective of the work is achieved and adequate ongoing resources are
assigned.

Addressing issues arising and modifying the planned approach accordingly e.g. by reassigning planned procedures
to more experienced team members when issues are more complex than initially anticipated.

Identifying matters for consultation where the firm lacks appropriate internal expertise.

Providing coaching to help develop skills and competencies.

Creating an environment where engagement team members can raise concerns without fear of reprisal

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Review responsibilities

The work has been performed in accordance with professional standards, policies and procedures

Appropriate consultations have taken place

The work performed supports the conclusions reached

The evidence obtained is sufficient and appropriate to support the auditor's report

The objectives of the engagement procedures have been achieved

The engagement partner must review audit documentation at appropriate

points during the engagement including documentation of significant
matters, significant judgements and other matters relevant to the
engagement partner’s responsibilities

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Engagement quality control review
An engagement quality control review (EQCR) provides an objective evaluation of the significant judgments
made by the engagement team and the conclusions reached thereon, performed by the engagement quality
reviewer and completed on or before the date of the engagement report.

This may also be referred to as a pre-issuance review or 'Hot' review

High risk clients include those which are in the public

Listed entities and other high risk clients should be
interest, those with unusual circumstances and risks,
subject to an EQCR.
and those where laws or regulations require an EQCR

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Engagement quality control review
For audit engagements where an EQR is
required, the engagement partner must:
• Determine that an EQR has been
appointed.
• Cooperate with the reviewer and
inform other team members of their
responsibility to do so.
• Discuss significant matters and
significant judgements arising during
the engagement with the reviewer.
• Not date the auditor’s report until the
completion of the EQR.
Eligibility of engagement quality
reviewers:
• Cannot be a member of the
engagement team.
• Must have the competence and
capabilities, including sufficient time,
and the appropriate authority to
perform the EQR.
• Must comply with relevant ethical
requirements and laws and regulations
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Monitoring and remediation
A monitoring and
remediation process must
be established to provide
Monitoring relevant, reliable and
and timely information about
remediation the design,
implementation and
operation of the system of
quality management and
Evaluate Annual
Monitor Remediate take appropriate actions
deficiencies review
to respond to identified
deficiencies such that
deficiencies are
remediated on a timely
basis

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Summary of pre and post-issuance reviews
Pre-issuance (Hot) review
Purpose To enhance the quality of assurance work
When Before the auditor's report is issued
Which files Listed clients,, Public interest engagements,
Engagements where there are particular risks, Each
partner should have some of their engagements
reviewed
What Processes underpinning judgements about:
considered Significant risks & responses to them, Matters
requiring consultation, Materiality, Independence,
Conclusions, Misstatements, The audit opinion,
Matters to be communicated to management and
those charged with governance.
Post-issuance (Cold) review
Monitoring – to identify any deficiencies
in the firm's processes
After the auditor's report has been issued
A selection of completed engagements
To ensure that all working papers are: On
file, Complete, Signed as completed,
Evidenced as reviewed, The work
undertaken is sufficient and has been
documented appropriately
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Continued
Pre-issuance (Hot) review Post-issuance (Cold) review
Outcomes... A reduction in audit risk, i.e. the risk that the Identify remedial action that should be
auditor expresses an inappropriate audit opinion taken.
when the financial statements are materially Recommendations will be made
misstated. including:
• Communication of findings
• Additional quality reviews
• Training
• Changes to the firm's policies and
procedures
• Disciplinary action

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Taking overall responsibility for managing and
achieving quality

Indicators that the engagement partner may not

Prior to dating the auditor’s report have had sufficient involvement with the
engagement include

the engagement partner must ensure

their involvement has been sufficient
lack of timely review by the
and appropriate throughout the audit
engagement partner and a lack of
engagement such that they have a
evidence of the engagement
basis for determining that the
partner’s direction and supervision
significant judgements made and the
conclusions reached are appropriate

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Documentation
Conclusions reached with respect to fulfilment of
responsibilities relating to ethical requirements, and
acceptance and continuance.

The nature, scope and conclusions resulting from

Auditors to
consultations undertaken during the course of the
document:
audit.

If the audit engagement is subject to an EQR, that the

EQR has been completed on or before the date of the
auditor’s report.

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Examples of weaknesses in the audit work that if not identified
by the EQCR - could directly impact audit quality.
Lack of objectivity: For example,
If the EQCR was included in the
If EQCRs do not have sufficient the EQCR was to become the
tender document and could
specialist experience, needed to audit partner following the audit
therefore have been contacted by
evaluate key judgements specific and had attended audit
the audit committee which – it
to the industry committee meetings as an
would threaten their objectivity
observer

the EQCR had been performed

too late to provide meaningful
input the EQCR had not identified
If insufficient evidence that the
deficiencies in the work
EQCR had been performed.
performed by the audit team that
should have been identified and
raised by the EQCR

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In order to ensure effectiveness of the EQCR, firms should
• Complete checklists confirming completion of procedures required by standards.
• Copies of financial statements and reports to the audit committee should be
annotated by the EQCR and kept as evidence of review.
• Key audit working papers should be signed off by the EQCR to indicate that they
have read them.
• EQCR notes should be kept as evidence.
• Audit file notes of significant matters discussed with the audit team and how they
were resolved should be kept as evidence.
• The time spent by the EQCR on the audit should be recorded.
• Firms should ensure the EQCR has sufficient industry experience.
• The EQCR should be required to re-confirm their objectivity at the completion stage
to ensure any issues arising during the audit have been appropriately dealt with

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 Approach to exam questions: Quality management

A common requirement in the exam is to critically evaluate the audit work already performed on
an engagement and identify if the audit has been carried out to the required standard of quality.
In order to assess the quality of the audit you should consider factors such as:
Have ISAs been followed?
• If not, sufficient appropriate evidence will not have been obtained and an inappropriate report may be issued.

Has the work been allocated to the appropriate level of staff?

• Areas which are judgemental or subjective, such as goodwill, WIP, impairments, fair values, revenue recognition, and
material estimates, should be audited by senior members of the team with appropriate experience and professional
judgement.

Has the audit been time pressured?

• If the audit has been rushed, insufficient work will have been performed and conclusions may not be appropriate

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Continued
Has the appropriate type of evidence been obtained?
• Auditors should try and obtain the most reliable forms of evidence. Too much reliance on enquiry and written
representations may mean sufficient appropriate evidence has not been obtained and sufficient scepticism has
not been applied

Has the audit been performed in accordance with the audit plan?
• The audit plan will have been developed in response to the assessed risks of material misstatement. Sample sizes
will have been chosen to ensure sufficient appropriate evidence is obtained. If the plan is not followed,
inappropriate conclusions may be drawn

Has the audit been properly supervised?

• Supervision is necessary to ensure issues are identified on a timely basis, the competence of the team is
continually assessed and the audit is on track to be completed on schedule. If there is inadequate supervision
issues will not be identified. Look for information in the scenario that suggests the supervisor has been too busy
with other work, has been absent during the audit, or has not visited the client for a while

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Has the audit work been properly reviewed?

• Reviews should take place on a timely basis to ensure the work has been performed properly.
Issues which need to be dealt with by someone more senior can then be resolved. Review of
work should take place shortly after the work has been completed, not several weeks later.
Reviews should be performed by someone more senior than the person who performed the
work to ensure issues are identified. If issues are discovered too late there may not be sufficient
time to address them.

Has an EQR been performed where required e.g. listed and other high risk
clients?

Has the engagement partner given sufficient time to properly review

significant matters and judgements to be able to form a conclusion?

Have matters that are required to be documented been documented on the

audit file?

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Q 49: Exam kit- page 150

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Solution

Tip for answer

• Part (a) requires evaluation of quality management, ethical and other professional
matters arising.
Typical issues to look out for in such a question are:
• whether the work has been assigned to the appropriate level of staff
• whether sufficient time has been allocated for the audit,
• whether sufficient appropriate evidence has been obtained (e.g. have the ISAs been
followed),
• whether any ethical threats are apparent (e.g. threats to objectivity or competence)

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Answer debrief – Time pressure

Copy point from Q

• Edit it to add value

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Answer debrief – Time pressure

Point identified is: ‘The audit has been quite time-pressured’.

Rewrite as follows:
• The junior’s first comment is that the audit was time pressured. All audits
This adds
should be planned to ensure that adequate time can be spent to obtain value
sufficient appropriate audit evidence to support the audit opinion.

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Answer debrief – Time pressured- continued

Point identified is: ‘. The audit manager told the juniors not to perform some of the planned audit
procedures on items such as directors’ emoluments and share capital as they are considered to be low
risk.

Rewrite as follows:
• It seems that the audit is being rushed and the juniors instructed not to perform work properly, and
that review procedures are not being conducted appropriately. All of this increases the detection risk
of the audit and, ultimately, could lead to an inappropriate opinion being given.
Consequence
• Directors’ emoluments and share capital transactions and are material by their nature and so should
not be ignored. Any modifications to the planned audit procedures should be discussed with, and
approved by, senior members of the audit team and should only occur for genuine reasons
This adds
value

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Answer debrief – Method of selecting sample

Point identified is: ‘. He also instructed us not to use the firm’s statistical sampling methods in selecting trade
receivables balances for testing, as it would be quicker to pick the sample based on our own judgement. .

Rewrite as follows:
• The audit manager favours non-statistical sampling as a quick way to select a sample, instead of the firm’s usual
statistical sampling method. There is a risk that changing the way items are selected for testing will not provide
sufficient, reliable audit evidence as the sample selected may no longer be representative of the population as a
whole. Or that an insufficient number of items may be selected for testing
• The juniors may not understand how to pick a sample without the use of the audit firm’s statistical selection
method, and there is a risk that the sample may be biased towards items that appear ‘easy to audit’. Again, this
instruction from the audit manager is a departure from planned audit procedures, made worse by deviating from
the audit firm’s standard auditing methods, and likely to increase detection risk

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Answer debrief – Audit of going concern

Point identified is:

• Two of the juniors were given the tasks of auditing trade payables and going concern.

Rewrite as follows:
• Going concern can be a difficult area to audit, and given the Group’s listed status and the fact that
losses appear to have been made this year, it seems unwise to delegate such an important area of
the audit to an audit junior. The audit of going concern involves many subjective areas, such as
evaluating assumptions made by management, analysing profit and cash flow forecasts and forming
an overall opinion on the viability of the business.
• The going concern audit programme should be performed by a more senior and more experienced
member of the audit team. This issue shows that the audit has not been well planned as appropriate
delegation of work is a key part of direction and supervision, essential elements of good quality
management.

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Answer debrief – Review of work

Point identified is: ‘The audit manager asked us to review each other’s work as it
would be good training for us, and he didn’t have time to review everything

Rewrite as follows:

• The juniors have been asked to review each other’s work which is unacceptable. ISA 220 (Revised) requires
that the engagement partner shall take responsibility for reviews being performed in accordance with the
firm’s review policies and procedures. Ideally, work should be reviewed by a person more senior and/or
experienced than the person who conducted the work.
• Audit juniors reviewing each other’s work are unlikely to spot mistakes, errors of judgement and
inappropriate conclusions on work performed. The audit manager should be reviewing all of the work of
the juniors, with the audit partner taking overall responsibility that all work has been appropriately
reviewed.

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Answer debrief – Review of work

Point identified is: ‘‘I was discussing the Group’s tax position with the financial controller,
when she said that she was struggling to calculate the deferred tax asset that should be
recognised. The deferred tax asset has arisen because several of the Group’s subsidiaries
have been loss making this year, creating unutilised tax losses. As I had just studied
deferred tax at college I did the calculation of the Group’s deferred tax position for her.

Rewrite as follows:
• . It is concerning that the client’s financial controller is not able to calculate the deferred tax figure. This could
indicate a lack of competence in the preparation of the financial statements, and the audit firm should consider if
this impacts the overall assessment of audit risk.
• Continued page 593

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Deferred tax

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Thank You

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