Practice Management

( Quality Management, Obtaining and Accepting new clients)

Relevant Professional skills

Skepticism and judgment : review the audit work and evidence obtained during the engagement and assess
whether it is sufficient to support and appropriate, review if ISAs were followed, if the quality of work was
sufficient etc.

Commercial acumen: Candidates may show commercial acumen by assessing the impact of the engagement
on the audit firm. This may be relevant in a scenario which requires an evaluation of whether to accept an
engagement, for example, whether the audit firm is happy to be associated with the client or industry.

Analysis and evaluation: Assess the impact of poor quality work done for example.

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 Quality Management (ISQM 1, ISQM 2, ISA 220)

ISQM 1 : A risk-based approach to quality management at the firm level ( for all assignments: audits or reviews of financial
statements, or other assurance or related services engagements)

A firm’s system of quality control should include:

1. The firm’s risk assessment process;

2. Governance and leadership;
3. Relevant ethical requirements;
4. Acceptance and continuance of client relationships and specific engagements;
5. Engagement performance;
6. Resources;
7. Information and communication; and
8. The monitoring and remediation process

The firm’s risk The firm has to understand the conditions and circumstances that can negatively affect the achievement
assessment process of the quality objectives. ( for example, management style of leadership, the resources of the firm, the
types of assignments the firm takes up etc)

The firm then needs to design and implement responses to address the quality risks.
Example include:
❖ Making policies or procedures for addressing threats to the code of ethics
❖ Reporting of any breaches of code of ethics in a timely manner.
❖ At least once a year, obtaining a written confirmation of compliance with independence
requirements from all personnel required by the code of ethics to be independent.

Governance and Specific responsibilities need to be allocated among staff members with appropriate experience,
leadership knowledge and authority:
- The CEO of the firm/Managing partner: ultimate responsibility
- Operational implementation: delegated to other personnel

The firm should have a culture that recognises the importance of quality. This is not a separate function
of the firm but should be embedded throughout
Relevant ethical The firm and all personnel should UNDERSTAND and FULFILL their responsibilities as per IESBA code of
requirements ethics covered earlier.
Can consider have stricter safeguards in place as compared to the ones allowed by the code. For
example, not accepting ANY gift or hospitality even if it is trivial.

Acceptance and
continuance of client
relationships and
specific engagements
- Obtain info about the integrity/ethical values of the client/its management/tcwg before
accepting or continuing a an engagement for e.g. expectation of low fee, ML indicators etc.
- Consider other info about the nature of the engagement for e.g. need of specialist expertise
- Can the firm perform the work in accordance with laws, regulation, professional standards for
e.g. resource and expertise availability, need of an eng quality review etc.
- Not base acceptance decision purely on financial or operational priorities

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Engagement
performance ✓ Direction, supervision the teams and review of their work should be done properly and the
resources assigned according to the assignment.

✓ Engagement teams exercise appropriate professional judgment and professional skepticism.

✓ Consultation on difficult or contentious matters is undertaken

✓ Engagement documentation: assembled, maintained and retained appropriately

Resources Resources need to be allocated by the firm to design, implement and operate a system of quality
management.
Resource include
- Human Resources- people assigned to the engagement: competence, experienced, committed
to quality. Their performance evaluation, compensation, promotion and other incentives should
be based on their commitment to quality
- Technological resources (audit software, data analytics)
- Intellectual resources (trainings)
- Service providers- if the firm wants to outsource human, technological and intellectual
resources because they have inadequate level of these resources within the firm, the
responsibility of maintaining quality still remains with the firm.

Information and The firm should have a proper system in place for obtaining, generating or using information regarding
communication the system of quality management, and communicating information within the firm and to external
parties on a timely basis.
This includes a culture in the form that emphasizes on the responsibility of team members to exchange
information with the firm and with one another where needed.
Another example includes the need to ensure that information is communicated externally when
required by law, regulation or professional standards, or to support external parties’ understanding of
the system of quality management.
The monitoring and The firm shall establish a monitoring and remediation process to:
remediation process a) Provide relevant, reliable and timely information about the design, implementation and
operation of the system of quality management.
b) Take appropriate actions to respond to identified deficiencies such that deficiencies are
remediated on a timely basis.

The firm shall include the inspection of completed engagements in its monitoring activities and shall
determine which engagements and engagement partners to select. In doing so, the firm has to select at
least one completed engagement for each engagement partner on a cyclical basis determined by the
firm.

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ISQM 2 ( International Standard on Quality Management)

ISQM 2 is a new standard. It addresses the eligibility, appointment and responsibilities of an Engagement Quality reviewer (EQ).

EQRs now apply to:

✓ audits of financial statements of listed entities;

✓ audits or other engagements for which an EQR is required by local law or regulation; and
✓ audits or other engagements for which the firm determines that an EQR is an appropriate response to address one or
more quality risks. A firm might like to consider whether the nature of their client base warrants a firm-wide policy to
require an EQR for certain types of entity, sector, experience of the audit team or a combination. For example, an EQR
for new partners to financial services audits or for entity borrowings in excess of a certain amount.

Enhanced eligibility criteria

These include:

- a cooling-off period of at least two years before the engagement partner can become the EQ Reviewer (and comply with
other relevant provisions of law/regulation/ethical requirements); and
- the EQ Reviewer should have appropriate competence, capabilities, time and authority.

The EQR is conducted at appropriate points in time – not just at the end, but as appropriate throughout planning, performing and
reporting.

The EQ Reviewer must ensure professional scepticism.

The engagement partner cannot date the audit report until the EQ Reviewer says: “My review is complete.”

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ISA 220 ( International Standard on Auditing)

The objective of the auditor is to manage quality at the engagement level to obtain reasonable assurance that quality has been
achieved such that:

- The auditor has fulfilled the auditor’s responsibilities, and has conducted the audit, in accordance with professional
standards and applicable legal and regulatory requirements; and
- The auditor’s report issued is appropriate in the circumstances.

Leadership The Engagement Partner (EP)

Responsibilities for ✓ Has overall responsibility for managing and achieving quality
Managing and ✓ Has to be sufficiently and appropriately involved throughout the audit.
Achieving Quality on ✓ Is responsible for the direction and supervision of the engagement team and the review of their
Audits work

Towards the end of the engagement, but before the engagement report is dated, the engagement partner is
also required to ‘stand back’ and determine whether he or she has taken overall responsibility for managing
and achieving quality on the engagement

Relevant Ethical The engagement partner needs to have an understanding of the relevant ethical requirements, including
Requirements, those related to independence.
Including Those
Related to He has to make sure that all team members been made aware of relevant ethical requirements
Independence
If matters come to the engagement partner’s attention that indicate that a threat to compliance with
relevant ethical requirements exists, the partner has to implement safeguards or take other necessary
actions.

Before dating the auditor’s report, the engagement partner has to take responsibility for determining
whether relevant ethical requirements, including those related to independence, have been fulfilled.

Acceptance and
Continuance of The engagement partner has to determine that the firm’s policies or procedures for the acceptance and
Client Relationships continuance of client relationships and audit engagements have been followed
and Audit
Engagements If the engagement team becomes aware of information that may have caused the firm to decline the audit
engagement had that information been known by the firm prior to accepting or continuing the client
relationship, the engagement partner shall communicate that information promptly to the firm, so that the
firm and the engagement partner can take the necessary action.

Read for AAA exam questions

Information obtained during the acceptance and continuance process will assist the engagement partner in
making informed decisions about appropriate courses of action.
Examples of such information include:

- Information about the size, complexity and nature of the entity, including whether it is a group
audit, the industry in which it operates and the applicable financial reporting framework;
- The entity’s timetable for reporting, such as at interim and final stages;
- In relation to group audits, the nature of the control relationships between the parent and its
components; and
Whether there have been changes in the entity or in the industry in which the entity operates since the
previous audit engagement that may affect the nature of resources required, as well as the manner in which
the work of the engagement team will be directed, supervised and reviewed.
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Engagement The engagement partner shall determine that sufficient and appropriate resources to perform the
Resources engagement are assigned or made available to the engagement team in a timely manner.

The engagement partner has to determine whether the engagement team, and any auditor’s external
experts and internal auditors who provide direct assistance, collectively have the appropriate competence
and capabilities, including sufficient time, to perform the engagement.
Reminder: Internal auditors and an auditor’s external expert are not members of the engagement team!

Read for AAA Exam

Example of dealing with insufficient or inappropriate resources
An engagement partner determined that the engagement team members initially assigned was not
sufficient and appropriate to perform the engagement. Specifically, the engagement team was lacking
sufficient leadership resources given the size and complexity of the engagement and also lacking skills in
accounting for revenue from contracts and derivatives. Accordingly, the engagement partner communicated
this information to the appropriate personnel in the firm. The firm assigned:
• An additional partner and director to assist with specialist knowledge and additional direction, supervision
and review. The partner has expertise in the specific revenue accounting involved.
• An expert in derivatives.

Engagement The engagement partner has to take responsibility for the direction and supervision of the engagement
Performance team and the review of their work

The IAASB recognized that large engagement teams may involve more complex team structures than smaller
engagement teams and, accordingly, some responsibilities may be assigned to other senior members of the
engagement team but the overall responsibility is still with the engagement partner!

The audit plan is now required to include a description of the nature, timing and extent of the planned
direction, supervision and review activities.

Direction

Direction of the engagement team may involve informing the members of the engagement team of their
responsibilities, such as:

• Maintaining a questioning mind and being aware of unconscious or conscious auditor biases in exercising
professional skepticism when gathering and evaluating audit evidence
• Fulfilling relevant ethical requirements.
• The responsibilities of respective engagement team members to perform audit procedures and of more
experienced engagement team members to direct, supervise and review the work of less experienced
engagement team members.
• Understanding the objectives of the work to be performed and the detailed instructions regarding the
nature, timing and extent of planned audit procedures as set forth in the overall audit strategy and audit
plan.
• Addressing threats to the achievement of quality, and the engagement team’s expected response. For
example, budget constraints or resource constraints should not result in the engagement team members
modifying planned audit procedures or failing to perform planned audit procedures.

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 Supervision

Supervision may include matters such as:

• Tracking the progress of the audit engagement, which includes monitoring:
➢ The progress against the audit plan;
➢ Whether the objective of work performed has been achieved; and
➢ The ongoing adequacy of assigned resources.

• Taking appropriate action to address issues arising during the engagement, including for example,
reassigning planned audit procedures to more experienced engagement team members when issues are
more complex than initially anticipated.

• Identifying matters for consultation or consideration by more experienced engagement team members
during the audit engagement.

• Providing coaching and on-the-job training to help engagement team members develop skills or
competencies.

• Creating an environment where engagement team members raise concerns without fear of retaliation.

Review

The engagement partner is required to review audit documentation at appropriate points in time during the
audit engagement.

It is important to note that the requirement specifically requires the engagement partner to review audit
documentation relating to significant matters and significant judgements.

The engagement partner does not need to review all audit documentation. He/She has to review the
financial statements, the auditor’s report, and formal written communications to management, those
charged with governance, or regulatory authorities.

On or before the date of the auditor’s report, the engagement partner shall determine, through review of
audit documentation and discussion with the engagement team, that sufficient appropriate audit evidence
has been obtained to support the conclusions reached and for the auditor’s report to be issued.

Consultation The engagement partner has to take responsibility for the engagement team undertaking consultation on:
✓ Difficult or contentious matters and matters on which the firm’s policies or procedures require
consultation; and
✓ Other matters that, in the engagement partner’s professional judgment, require consultation

Engagement Quality For audit engagements for which an engagement quality review is required, the engagement partner shall:
Review
a) Determine that an engagement quality reviewer has been appointed;
b) Cooperate with the engagement quality reviewer and inform other members of the engagement
team of their responsibility to do so
c) Discuss significant matters and significant judgments arising during the audit engagement, including
those identified during the engagement quality review, with the engagement quality reviewer; and
Not date the auditor’s report until the completion of the engagement quality review

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Differences of If differences of opinion arise within the engagement team, or between the engagement team and the
opinion engagement quality reviewer or between the partner and the expert:

The engagement partner shall:

(a) Take responsibility for differences of opinion being addressed and resolved in accordance with the firm’s
policies or procedures;
(b) Determine that conclusions reached are documented and implemented; and
(c) Not date the auditor’s report until any differences of opinion are resolved.

In some circumstances, the engagement partner may not be satisfied with the resolution of the difference of
opinion. In such circumstances, appropriate actions for the engagement partner may include, for example:
• Seeking legal advice; or
• Withdrawing from the audit engagement, when withdrawal is possible under applicable law or regulation.

Monitoring and The engagement partner shall take responsibility for:

Remediation
a) Obtaining an understanding of the information from the firm’s monitoring and remediation
process
b) Remaining alert throughout the audit engagement for information that may be relevant to the
firm’s monitoring and remediation process and communicate such information to those
responsible for the process.

Taking Overall Prior to dating the auditor’s report, the engagement partner shall determine that he has taken overall
Responsibility for responsibility for managing and achieving quality on the audit engagement.
Managing and
Achieving Quality In doing so, the engagement partner shall determine that his/her involvement has been sufficient and
appropriate throughout the audit engagement such that the engagement partner has the basis for
determining that the significant judgments made and the conclusions reached are appropriate.

Documentation The auditor shall include in the audit documentation:

(a) Matters identified, relevant discussions with personnel, and conclusions reached with respect to:
✓ Fulfillment of responsibilities relating to relevant ethical requirements, including those related to
independence
✓ The acceptance and continuance of the client relationship and audit engagement.

(b) The nature and scope of, and conclusions resulting from, consultations undertaken during the audit
engagement and how such conclusions were implemented.

(c) If the audit engagement is subject to an engagement quality review, that the engagement quality review
has been completed on or before the date of the auditor’s report.

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 Practice Management: Advertising, Obtaining professional work, Professional Appointment

Obtaining new clients

Advertising

1. Truthful, no false claims, no exaggerated claims, no unsubstantiated claims

2. No disparaging remarks about other firms
3. Comply with local laws and regulations

Practice descriptions: learn- SKANS Notes

Tendering- Contents of a tender document

1. Brief outline of firm

2. Specialism of firm
3. Prospective client: identify needs
4. Outline of proposed approach ( audit stages and methodology, use of ISAs)
5. Quality control procedures within the firm outlined (IESBA, ISQM)
6. Communication with management outlined
7. Timeframe outlined
8. Key staff and resources
9. Proposed fee
10. Additional non-audit and assurance services which the firm can offer (clearly state and emphasise that the
provision of such services is subject to meeting ethical requirements and will be completely separate from the
audit service)

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Factors to consider when accepting new client/client continuation

1. Independence, conflict of interest (try and link to the scenario)

2. Resources; (try and link to the scenario)

✓ Staff
✓ Time
✓ Competence of the firm including knowledge and experience of relevant industry, regulatory and
reporting requirements

3. Scale of engagement ( if global: travel cost, language, time)

4. Client/ management integrity (try and link to the scenario)- affect’s firm’s reputation too

5. Commercial considerations ( level of fee, profitability of the engagement etc)( if too high, sel-interest or if too
low, quality of work might be affected)

6. Know Your Client/ Customer Due diligence

7. Risk-purely scenario-based! (money laundering, listed company, weak ICS etc)

How to assess risk at this stage? Credit reference agencies, recently published F/S (solvency, adequacy of
disclosures, appropriate accounting policies), contacts, newspapers, internet, company search( annual returns
filed, SH details, PEP-politically exposed persons?)

8. Professional liability implication (e.g. audit required by lender)-liable to a 3rd party in case of negligence?

9. Professional etiquette letter ( clearance from outgoing auditor)-‘any professional or ethical issues?’

10. Pre- conditions of an audit

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 System of Internal Control- Auditor’s work-
VERY important reminder for AAA

What work does the external auditor do on the internal controls?

1. Understand the systems the client has in place ( the five components studied in AA).

2. Document the understanding of the systems.

3. Test the systems for two things. Design deficiencies AND operating effectiveness ( test of controls)

4. Report significant deficiencies in writing to the client’s TCWG ( Deficiency + implication + recommendations)

5. Decide extent of substantive testing ( i.e. if weak systems, more substantive testing and vice versa).

When the external auditors find deficiencies in the client’s system, what do they need to do next?

1. Update the documented system notes

2. Increase system testing in that area ( for example, if five sales orders were tested, test more!)

3. Increase substantive testing at the next stage in that area

4. Be aware that this could indicate a weak control environment

5. Report significant deficiencies in writing to TCWG ( imp: significant deficiencies are those which have caused
a material fraud/error in the f/s OR can cause material problems in the f/s in the future)

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Q1

You are a senior manager in Macau & Co, a firm of Chartered Certified Accountants. In your capacity as engagement quality control
reviewer, you have been asked to review the audit files of Stanley Co having a financial year ended 31 December 2015, and the
audit is nearing completion.

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Q2

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Q3

You have been temporarily assigned as audit manager on Watson Co, an IT consultancy company which is listed on a
second tier investment market.
One of your colleagues at Jansen & Co, Rodney Evans, has been taken ill at short notice which is why you were assigned
as the manager on this audit.
The final audit of Watson Co for the year ended 30 June 20X8 is approaching completion and you are in the process of
reviewing the audit working papers. The draft financial statements for the year recognize profit before taxation for the
year of $54·2 million and total assets of $23·1 million.

The audit supervisor, who is a part-qualified chartered certified accountant, has sent you an email from which the
following extract is taken:

‘It’s great to have you on board as I was beginning to worry that there would be no manager review of our working
papers prior to the final audit clearance meeting next week. The audit assistant and myself have done our best to
complete all of the audit work but we only saw Rodney on the first day of the audit about a month ago when I think he
was already feeling unwell. We had a short briefing meeting with him at which he told us ‘if in doubt, follow last year’s
working papers.’
One issue which I wanted to check with you is that Watson Co has introduced a cash-settled share-based payment
scheme by granting its directors share appreciation rights (SARs) for the first time this year. This was not identified at
planning as a high risk area. The SARs were granted on 1 July 20X7 at which date the client obtained a valuation of the
rights which was performed by an external firm of valuers. I have filed a copy of the valuation report and I have looked
up the valuers online and have found a very professional looking website which confirms that they know what they are
doing. The cost of the SARs scheme based on this valuation is being appropriately recognised over the three-year vesting
period and a straight line expense of $195,000 has been recognised in the statement of profit or loss on this basis. A
corresponding equity reserve has also been correctly recognised on the statement of financial position. The amount also
seems immaterial and I can’t see any need to propose any amendments to the financial statements in relation to either
the amounts recognised or the disclosures made in the notes to the financial statements.’

Required: Comment on the quality of the planning and performance of the audit of Watson Co discussing the quality
control and other professional issues raised. (10 marks)

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Q4

You are a manager in Monet & Co, a firm of accountants which has 12 offices and 30 partners, 10 of whom are
members of ACCA. As an expert in ethics and professional conduct, you have been asked to advise the partners on
the following issue.

An advertisement has been drafted as part of the firm’s drive to increase the number of clients. It is suggested
that it should be placed in a number of quality national as well as local newspapers:

Evaluate the issue described above, commenting on the ethical and professional issues raised and
recommend any actions necessary in response to the issues identified. 6 marks

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Q5

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Q6

You are a manager in the audit department of McClane & Co, a firm of Chartered Certified Accountants. You are
assigned to the audit of Gruber Co, which has a financial year ending 30 September 20X5.

Gruber Co is a new audit client of McClane & Co, the audit firm having been appointed in January 20X5. The audit was
previously performed by Ellis Associates.

Gruber Co is owned and managed by the Gruber family, its principal operations being the design and construction of
bespoke machinery used in the oil industry.

Martin, who is the company’s chief executive officer, owns 60% of the shares in the company, with the remainder split
equally between his brother and sister, Craig and Iris Gruber.

The company’s board of directors includes Craig Gruber as chief finance officer (CFO), Iris Gruber as marketing director,
and a non-family member, Kali Hayes, who is director of operations.

Martin is planning to sell his shares and retire from the business. Craig and Iris, who are younger than Martin, will retain
their shares and their board positions. Initial discussion with a potential acquirer for Martin’s shares began last month.

A meeting took place yesterday in which the audit engagement partner discussed the potential sale of Martin Gruber’s
shares with the company directors.

The company directors revealed that Willis Co is the company with whom negotiations have started in relation to the
sale of Martin Gruber’s shares. Willis Co is an existing audit client of McClane & Co.

The directors have requested that McClane & Co assist them with the sale by performing a vendor’s due diligence
service, in which they would conduct an independent review of Gruber Co’s financial position and future prospects and
produce a report on their findings to be provided to Willis Co.

Required:

Discuss the ethical issues raised and recommend actions to be taken by our firm. (8 marks)

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Q7

It is 1 July 20X5. You are an audit manager in James & Co, a firm of Chartered Certified Accountants. Your role includes
performing post-issuance audit quality reviews, and you are currently reviewing the audit of the Bond Group (the
Group), which had a financial year ended 31 January 20X5.

The Group supplies computer components, specialising in graphics cards. You are reviewing the audit files for one of the
Group's subsidiaries with a financial year end of 31 January 20X5. The subsidiary's audit opinion was unmodified.

Subsidiary: Horner

During the audit of Horner Co, the audit team became aware of a breach of data protection regulation, whereby an
employee of the company had made its customer database available to a third party. This disclosure is in contravention
of the regulation. The audit working papers refer briefly to this situation, and conclude that ‘it has little to do with the
audit, as no one outside of the company is aware’. No further investigations were made by the audit team, and the audit
manager noted in the working papers that ‘the matter does not need to be discussed any further with Horner Co’s or
the Group’s management teams as I have received assurance that the person responsible for the breach of regulation
has been dismissed’.

Required: Comment on the quality of the planning and performance of the Group audit, discussing the quality control
and other professional issues raised. 7 marks

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