Standard on Auditing SA 220
Scope and objectives of SA 220
The Standard on Auditing (SA) that provides guidance to auditors on quality control procedures for an audit of financial statements. The SA sets out the specific responsibilities of the auditor and engagement quality control reviewer in relation to quality control systems, policies, and procedures.
The SA is premised on the basis that the audit firm is subject to SQC 1, which deals with the firm’s responsibilities to establish and maintain its system of quality control for audit engagements. The system of quality control includes policies and procedures that address leadership responsibilities for quality within the firm, relevant ethical requirements, acceptance and continuance of client relationships and specific engagements, human resources, engagement performance, and monitoring.
The engagement team has a responsibility to implement quality control procedures that are applicable to the audit engagement and provide the firm with relevant information to enable the functioning of that part of the firm’s system of quality control relating to independence. The engagement team may rely on the firm’s system of quality control in relation to competence of personnel, independence, maintenance of client relationships, and adherence to regulatory and legal requirements unless information provided by the firm or other parties suggests otherwise.
The SA defines various terms, including engagement partner, engagement quality control review, engagement quality control reviewer, engagement team, firm, inspection, listed entity, monitoring, network firm, partner, personnel, professional standards, and relevant ethical requirements.
The objective of the auditor is to implement quality control procedures at the engagement level that provide the auditor with reasonable assurance that the audit complies with professional standards and regulatory and legal requirements, and the auditor’s report issued is appropriate in the circumstances. The SA is effective for audits of financial statements for periods beginning on or after April 1, 2010.
Leadership Responsibilities for Quality on Audits
The requirements and responsibilities of the engagement partner in ensuring the overall quality of each audit engagement they are assigned to. The engagement partner is responsible for taking appropriate actions and communicating necessary messages to the engagement team to emphasize the importance of audit quality.
The importance of complying with professional standards, regulatory and legal requirements, and the firm’s quality control policies and procedures. They should also emphasize the importance of issuing auditor’s reports that are appropriate in the circumstances and the engagement team’s ability to raise concerns without fear of reprisals.
The engagement partner should emphasize the fact that quality is essential in performing audit engagements and take responsibility for ensuring that the necessary actions are taken to achieve this goal. Overall, the text emphasizes the importance of quality in audit engagements and the engagement partner’s role in ensuring it.
Relevant Ethical Requirements
This relevant ethical requirements and guidelines for an engagement partner conducting an audit. The engagement partner must remain alert to any evidence of non-compliance with ethical requirements by members of the audit team throughout the engagement.
The Code of Ethics issued by the Institute of Chartered Accountants of India establishes fundamental principles of professional ethics that include integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour.
The definitions of “firm”, “network,” or “network firm” in relevant ethical requirements may differ from those set out in this document. For example, the Code of Ethics of the Institute of Chartered Accountants of India (ICAI) defines “Network Firm” as two or more firms under common control, ownership or management with the firm or having affiliation with an accounting entity or any entity that a reasonable and informed third party having knowledge of all relevant information would reasonably conclude as being part of the firm nationally.
If the engagement partner becomes aware of any instances of non-compliance with ethical requirements by members of the audit team, appropriate action must be taken to address the issue, including consultation with others in the firm.
The engagement partner must also form a conclusion on compliance with independence requirements that apply to the audit engagement. The engagement partner must obtain relevant information from the firm and network firms to identify and evaluate circumstances and relationships that create threats to independence, evaluate information on identified breaches of independence policies and procedures, and take appropriate action to eliminate or reduce such threats.
In some cases, the engagement partner may identify a threat to independence that safeguards may not be able to eliminate or reduce to an acceptable level. In such cases, the engagement partner may report to the relevant persons within the firm to determine appropriate action, which may include eliminating the activity or interest that creates the threat or withdrawing from the audit engagement, where withdrawal is legally permitted.
In some entities, such as Central/State governments and related government entities, statutory measures may provide safeguards for the independence of auditors of certain entities. However, auditors or audit firms carrying out audits on behalf of the statutory auditor may need to adapt their approach to promote compliance with ethical requirements. This may include disclosure through a public report of circumstances that have arisen that would have otherwise led the auditor to withdraw from the engagement.
Acceptance and Continuance of Client Relationships and Audit Engagements
The importance of appropriate procedures being followed for the acceptance and continuance of client relationships and audit engagements. The engagement partner should ensure that the firm has obtained necessary information before accepting or continuing an engagement, and that appropriate conclusions have been reached. The engagement partner should consider factors such as the integrity of the entity’s owners and key management, the competence of the engagement team, compliance with relevant ethical requirements, and significant matters that have arisen during previous or current audit engagements.
The Audit engagement highlights that in the case of certain entities, such as Central/State governments and related government entities, auditors may be appointed in accordance with statutory procedures, which may impact the acceptance and continuance of client relationships and audit engagements. However, the engagement partner should still gather information as part of the process of performing risk assessments and carrying out reporting responsibilities.
If the engagement partner obtains information that would have led the firm to decline the audit engagement, had it been available earlier, this information should be communicated promptly to the firm so that appropriate action can be taken.
Assignment of Engagement Teams
This assignment of engagement teams for audit engagements. The engagement partner is responsible for ensuring that the team assigned to the engagement, including any auditor’s experts, collectively has the necessary competence and capabilities to perform the audit engagement in accordance with professional standards and regulatory and legal requirements. The engagement team includes individuals who are engaged or employed by the firm and have specialized knowledge or expertise relevant to the audit engagement.
The engagement partner should consider the team’s understanding of audit engagements of a similar nature and complexity, professional standards and regulatory and legal requirements, technical expertise, knowledge of relevant industries, ability to apply professional judgment, and understanding of the firm’s quality control policies and procedures.
For certain entities, such as Central/State governments and related government entities, additional appropriate competence may be required to discharge the terms of the audit mandate in a particular jurisdiction. This may include an understanding of the applicable reporting arrangements, such as reporting to the legislature or other governing body or in the public interest. The wider scope of audit of such entities may include aspects of performance auditing or a comprehensive assessment of compliance with legislative authorities and preventing and detecting fraud and corruption.
Engagement Performance
The responsibilities of an engagement partner in an audit engagement. The engagement partner is responsible for the direction, supervision, and performance of the audit engagement in compliance with professional standards and legal requirements.
The direction of the engagement team involves informing team members of their responsibilities, the objectives of the work to be performed, the nature of the entity’s business, risk-related issues, problems that may arise, and the detailed approach to the performance of the engagement. Effective communication and discussion among team members allow less experienced members to ask questions and receive appropriate guidance.
Supervision involves tracking the progress of the audit engagement, considering the competence and capabilities of individual members of the engagement team, addressing significant matters arising during the audit engagement, and identifying matters for consultation or consideration by more experienced team members during the audit engagement.
The engagement partner is also responsible for ensuring that reviews are performed in accordance with the firm’s review policies and procedures. The review process involves considering whether the work has been performed in accordance with professional standards and legal requirements, whether significant matters have been raised for further consideration, whether appropriate consultations have taken place, and whether the evidence obtained is sufficient and appropriate to support the auditor’s report.
The engagement partner must be satisfied that sufficient appropriate audit evidence has been obtained to support the conclusions reached and for the auditor’s report to be issued. Timely reviews of critical areas of judgment, significant risks, and other important areas help to resolve significant matters on a timely basis.
Where a member of the engagement team with expertise in a specialized area of accounting or auditing is used, the engagement partner is responsible for agreeing with that member the nature, scope, and objectives of their work, and evaluating the adequacy of their work.
Finally, the engagement partner is responsible for ensuring that appropriate consultation takes place on difficult or contentious matters, both within the engagement team and between the engagement team and others at the appropriate level within or outside the firm, and that conclusions resulting from such consultations have been implemented. Effective consultation requires that those consulted have all the relevant facts and appropriate knowledge, seniority, and experience.
Engagement Quality Control Review
An Engagement Quality Control Review (EQCR) in the context of auditing financial statements. An EQCR is a review conducted by a separate reviewer to ensure that the audit engagement has been conducted in accordance with professional standards and firm policies, and that sufficient appropriate audit evidence has been obtained to support the auditor’s opinion on the financial statements.
The requirements for the engagement partner, who is responsible for overseeing the audit engagement, to ensure that an engagement quality control reviewer has been appointed, to discuss significant matters arising during the engagement with the reviewer, and to not date the auditor’s report until the completion of the EQCR. It also explains that the engagement quality control reviewer must perform an objective evaluation of the significant judgments made by the engagement team, including discussion with the engagement partner, review of financial statements and selected audit documentation, and evaluation of the conclusions reached in formulating the auditor’s report.
The extent of the EQCR may depend on the complexity of the audit engagement, whether the entity is a listed entity, and the risk that the auditor’s report might not be appropriate in the circumstances. It also explains that when key audit matters are required to be included in the auditor’s report, the review of the proposed auditor’s report must include consideration of the proposed wording to be included in the Key Audit Matters section.
It also explains that an EQCR may be required for audits of financial statements of other entities if the firm has established criteria that subject engagements to an EQCR. The EQCR notes that for certain entities, such as government entities, a statutorily appointed auditor may act in a role equivalent to that of the engagement partner, and that the selection of the EQCR reviewer includes consideration of the need for independence from the audited entity and the ability to provide an objective evaluation. Finally, the additional considerations specific to smaller entities and for audits of financial statements of listed entities, including the engagement team’s evaluation of the firm’s independence in relation to the audit.
Monitoring
The monitoring required for an effective system of quality control in auditing. The system must include a monitoring process to ensure that the firm’s policies and procedures are relevant, adequate, and operating effectively. The engagement partner, who is responsible for the audit engagement, must consider the results of the firm’s monitoring process and take into account any deficiencies noted that may affect the audit engagement.
The auditor is also required to document several aspects of the audit process, including issues related to ethical requirements, independence requirements, client relationships, and consultations with other professionals. The documentation of consultations should be complete and detailed to provide a clear understanding of the issue and the decisions made.
Additionally, the engagement quality control reviewer must document that the required procedures have been performed and completed before the auditor’s report. The reviewer must also confirm that they are not aware of any unresolved matters that would cause them to believe that the significant judgments made by the engagement team were not appropriate.
Documentation
The documentation of consultations with other professionals should be complete and detailed and should include the issue on which consultation was sought and the results of the consultation, including any decisions taken, the basis for those decisions, and how they were implemented.
The engagement quality control reviewer, who reviews the audit engagement, is required to document that the required procedures for engagement quality control review have been performed, the review has been completed before the date of the auditor’s report, and the reviewer is not aware of any unresolved matters that would cause the reviewer to believe that the significant judgments made by the engagement team and the conclusions they reached were inappropriate.
Finally, the preface to the standards on quality control, auditing, review, other assurance, and related services applies equally to all entities, irrespective of their form, nature, and size, and a specific reference to the applicability of the standard to public sector entities has been deleted. The requirements for documentation may also exist in the case of non-public sector entities pursuant to a requirement under the statute, and the standard has been made more generic in its application.
Quiz: Quality Control for an Audit of Financial Statements
1. What is the objective of SA 220?
a) To establish quality control procedures for audit engagements
b) To provide guidance on ethical requirements for auditors
c) To ensure compliance with regulatory and legal requirements
d) To implement quality control procedures at the engagement level
Answer: d)
2. Who is responsible for ensuring the overall quality of each audit engagement?
a) Engagement team
b) Engagement quality control reviewer
c) Engagement partner
d) Audit firm
Answer: c)
3. What are the relevant ethical requirements for an engagement partner?
a) Compliance with professional standards
b) Integrity and confidentiality
c) Objectivity and professional competence
d) All of the above
Answer: d)
4. When should the engagement partner communicate information about non-compliance with ethical requirements?
a) At the end of the audit engagement
b) When it is legally required
c) Throughout the engagement as evidence arises
d) Only if the non-compliance is significant
Answer: c)
5. What factors should the engagement partner consider when assigning an engagement team?
a) Technical expertise and knowledge of relevant industries
b) Understanding of professional standards and regulatory requirements
c) Ability to apply professional judgment
d) All of the above
Answer: d)
6. What are the responsibilities of the engagement partner in engagement performance?
a) Directing and supervising the audit engagement
b) Ensuring reviews are performed in accordance with policies
c) Obtaining sufficient appropriate audit evidence
d) All of the above
Answer: d)
7. What is an Engagement Quality Control Review (EQCR)?
a) A review conducted by the engagement team
b) A review conducted by an external party
c) A review to evaluate the auditor’s opinion on financial statements
d) A review to evaluate the engagement team’s competence
Answer: c)
8. When should the auditor’s report be dated according to SA 220?
a) At the beginning of the engagement
b) At the completion of the audit fieldwork
c) After the completion of the Engagement Quality Control Review
d) Before the engagement team’s evaluation
Answer: c)
9. What additional considerations apply to audits of financial statements of listed entities?
a) Evaluation of the firm’s independence in relation to the audit
b) Review of proposed Key Audit Matters section
c) Evaluation of significant judgments made by the engagement team
d) All of the above
Answer: d)
10. What is the purpose of an EQCR in auditing financial statements?
a) To ensure compliance with professional standards
b) To obtain sufficient appropriate audit evidence
c) To provide an objective evaluation of the audit engagement
d) To select the engagement partner and team
Answer: c)
11. Why is monitoring an essential component of an effective system of quality control in auditing?
a) To ensure that the firm’s policies and procedures are relevant
b) To identify and address any deficiencies that may affect audit engagements
c) To document consultations with other professionals
d) To confirm the appropriateness of significant judgments made by the engagement team
Answer: b)
12.What should be included in the documentation of consultations with other professionals?
a) The issue on which consultation was sought
b) The decisions made and their basis
c) The implementation of those decisions
d) All of the above
Answer: d)
Additional questions:
13. What are some components of a firm’s system of quality control for audit engagements?
a) Leadership responsibilities, human resources, engagement performance
b) Engagement team competence, client relationships, legal requirements
c) Monitoring, regulatory compliance, network firm affiliations
d) All of the above
Answer: d)
14.How should the engagement team address potential threats to independence?
a) Consult with others in the firm for guidance
b) Report the threats to the relevant regulatory authorities
c) Withdraw from the audit engagement immediately
d) Rely on the firm’s system of quality control to mitigate the threats
Answer: a)
What information should the engagement partner consider when accepting or continuing a client relationship?
a) Integrity of the entity’s owners and key management
b) Compliance with relevant ethical requirements
c) Significant matters from previous or current audit engagements
d) All of the above
Answer: d)
16.In which situations may the engagement partner need additional competence for the audit engagement?
a) Auditing Central/State governments and related government entities
b) Auditing small entities
c) Auditing non-profit organizations
d) Auditing privately held companies
Answer: a)
17. What does the engagement partner’s supervision involve during an audit engagement?
a) Monitoring the progress of the audit engagement
b) Evaluating the competence of individual team members
c) Addressing significant matters that arise
d) All of the above
Answer: d)
`18. What is the purpose of the engagement partner’s consultation on difficult or contentious matters?
a) To gather additional evidence for the audit engagement
b) To ensure compliance with professional standards
c) To obtain guidance and ensure appropriate conclusions are reached
d) To challenge the independence of the engagement team
Answer: c)
19. What is the objective of an Engagement Quality Control Review (EQCR)?
a) To identify areas of improvement in the firm’s quality control system
b) To assess the engagement team’s performance in meeting audit objectives
c) To provide an independent evaluation of the audit engagement
d) To identify potential conflicts of interest within the engagement team
Answer: c)
20.When should an engagement quality control reviewer be appointed?
a) At the planning stage of the audit engagement
b) At the completion of the audit fieldwork
c) Throughout the entire audit engagement process
d) Before the engagement partner’s evaluation
Answer: a)
21.What factors determine the extent of an Engagement Quality Control Review (EQCR)?
a) Complexity of the audit engagement
b) Risk of the auditor’s report not being appropriate
c) Whether the entity is a listed entity
d) All of the above
Answer: d)
22.What are the additional considerations for audits of financial statements of smaller entities?
a) Evaluation of significant judgments made by the engagement team
b) Review of the firm’s independence in relation to the audit
c) Assessment of compliance with professional standards
d) Examination of the engagement team’s competence in specialized areas
Answer: d)
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