Standard on Quality Control
Scope and objectives
A standard on Quality Control (SQC) issued by the Auditing and Assurance Standards Board (AASB) for firms conducting audits, reviews of historical financial information, and other assurance and related services engagements. The SQC establishes standards and provides guidance on a firm’s responsibilities for its system of quality control. The purpose of the system is to provide 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 partner(s) are appropriate in the circumstances.
The standard defines key terms such as engagement documentation, engagement partner, engagement quality control review, engagement quality control reviewer, engagement team, firm, inspection, listed entity, monitoring, network, partner, personnel, professional standards, reasonable assurance, staff, and suitably qualified external person.
The SQC applies to all firms, and the nature of the policies and procedures developed by individual firms to comply with this SQC will depend on various factors such as the size and operating characteristics of the firm and whether it is part of a network. The text also notes that additional standards and guidance on the responsibilities of firm personnel regarding quality control procedures for specific types of engagements are set out in other pronouncements of the AASB issued under the authority of the Council.
Overall, the SQC is intended to help firms establish and maintain an effective system of quality control to ensure compliance with professional standards and regulatory and legal requirements, and to provide reasonable assurance that reports issued by the firm or engagement partner(s) are appropriate in the circumstances.
Elements of a System of Quality Control
The elements of a system of quality control that a firm should have in place to ensure that it provides high-quality services to its clients. These elements include:
(a) Leadership responsibilities for quality within the firm – this means that the firm’s leaders should take responsibility for maintaining quality standards and ensuring that the firm’s policies and procedures support this goal.
(b) Ethical requirements – the firm should have policies and procedures in place to ensure that its personnel act in an ethical manner and comply with relevant professional standards.
(c) Acceptance and continuance of client relationships and specific engagements – the firm should have policies and procedures in place for deciding which clients and engagements to accept and continue, based on factors such as risk and the firm’s ability to provide high-quality services.
(d) Human resources – the firm should have policies and procedures in place for recruiting, training, and retaining personnel with the necessary skills and expertise to provide high-quality services.
(e) Engagement performance – the firm should have policies and procedures in place for planning, performing, and supervising engagements to ensure that they meet the firm’s quality standards.
(f) Monitoring – the firm should have policies and procedures in place for monitoring its quality control system to ensure that it is effective and efficient.
It also emphasizes the importance of documenting and communicating these quality control policies and procedures to the firm’s personnel, and encouraging feedback on quality control matters from personnel. Each individual is expected to have a personal responsibility for quality and comply with the policies and procedures in place.
Leadership Responsibilities for Quality within the Firm
The leadership team, including the chief executive officer (CEO) or managing partners, is responsible for setting policies and procedures that promote a quality-oriented internal culture.
The firm’s leadership is expected to emphasize the importance of complying with professional standards, regulatory and legal requirements, and issuing appropriate reports. To create this culture, they can use various means of communication such as training seminars, meetings, mission statements, newsletters, and more. It is also important for the firm’s leadership to recognize that their business strategy should always prioritize quality in all engagements.
To fulfil their responsibilities effectively, the individuals assigned to operational responsibility for the firm’s quality control system by the CEO or managing board of partners should have sufficient experience, ability, and necessary authority to identify and understand quality control issues and develop appropriate policies and procedures.
Finally, the policies and procedures should be designed to demonstrate the firm’s overriding commitment to quality and provide a framework for performance evaluation, compensation, and promotion. Additionally, the firm should devote sufficient resources for the development, documentation, and support of its quality control policies and procedures.
The ethical requirements and independence policies and procedures that should be established by a firm to provide reasonable assurance that it complies with relevant ethical requirements and maintains independence where required by the Code of Ethics for Professional Accountants. The Code establishes fundamental principles of professional ethics that include integrity, objectivity, and professional competence and due care, confidentiality, and professional behaviour.
The firm’s policies and procedures should emphasize the fundamental principles, which are reinforced by the leadership of the firm, education and training, monitoring, and a process for dealing with non-compliance. Independence for assurance engagements is a critical aspect of the Code and should be addressed separately. The policies and procedures should enable the firm to communicate its independence requirements, identify and evaluate circumstances and relationships that create threats to independence, and take appropriate action to eliminate those threats or reduce them to an acceptable level.
The firm’s policies and procedures should require engagement partners to provide relevant information about client engagements, including the scope of services, so the firm can evaluate the overall impact on independence requirements. Personnel should promptly notify the firm of circumstances and relationships that create a threat to independence, and the firm should accumulate and communicate relevant information to appropriate personnel to determine compliance with independence requirements, maintain and update independence records, and take appropriate action regarding identified threats to independence.
The firm should establish policies and procedures to provide reasonable assurance that it is notified of breaches of independence requirements and can take appropriate actions to resolve such situations. The policies and procedures should require all who are subject to independence requirements to promptly notify the firm of independence breaches of which they become aware, and the firm to communicate identified breaches to the engagement partner and other relevant personnel in the firm who need to take appropriate action. The firm should obtain written confirmation of compliance with its policies and procedures on independence at least annually from all firm personnel required to be independent.
The Code discusses the familiarity threat that may be created by using the same senior personnel on an assurance engagement over a long period of time and the safeguards that might be appropriate to address such a threat. The firm should establish policies and procedures setting out criteria for determining the need for safeguards to reduce the familiarity threat to an acceptable level when using the same senior personnel on an assurance engagement over a long period of time. For all audits of financial statements of listed entities, the firm should require the rotation of the engagement partner after a specified period in compliance with the Code.
Acceptance and Continuance of Client Relationships and Specific Engagements
The aim of these policies and procedures is to ensure that the firm only takes on or continues client relationships and engagements where it has reasonable assurance that it can perform the work competently, ethically, and with integrity.
The firm should consider the integrity of the client before accepting or continuing an engagement. Factors that may indicate a lack of integrity include issues with the client’s business practices, aggressive interpretation of accounting standards, inappropriate limitations in the scope of work, and indications of criminal activity such as money laundering. The firm may obtain information on these matters from a variety of sources, such as communications with other providers of professional services to the client, inquiries with third parties, and background searches of relevant databases.
The firm should also consider whether it has the capabilities, competence, time, and resources to undertake a new engagement from a new or existing client. This includes assessing whether its personnel have the necessary knowledge and expertise, whether experts are available if needed, and whether it can complete the engagement within the reporting deadline. The firm should also consider whether accepting the engagement may give rise to an actual or perceived conflict of interest.
When deciding whether to continue a client relationship, the firm should consider significant matters that have arisen during the current or previous engagements and their implications for continuing the relationship. If the firm obtains information that would have caused it to decline an engagement if that information had been available earlier, it should consider its professional and legal responsibilities and whether it should withdraw from the engagement or the client relationship.
Policies and procedures on withdrawal from an engagement or the client relationship should include discussing the appropriate action with the client’s management and those charged with its governance, documenting significant issues and the basis for conclusions, and considering any professional, regulatory, or legal requirements.
The policies and procedures that should be established by a firm to ensure that it has sufficient personnel with the capabilities, competence, and commitment to ethical principles necessary to perform engagements in accordance with professional standards and regulatory and legal requirements. The policies and procedures should address various personnel issues, such as recruitment, performance evaluation, capabilities, competence, career development, promotion, compensation, and estimation of personnel needs. The firm’s recruitment processes should help it select individuals of integrity who can develop the capabilities and competence necessary to perform the firm’s work.
The capabilities and competence of the firm’s personnel can be developed through various methods such as professional education, continuing professional development, work experience, and coaching by more experienced staff. The firm should emphasize the need for continuing training for all levels of firm personnel and provide the necessary training resources and assistance to enable personnel to develop and maintain the required capabilities and competence. The firm’s performance evaluation, compensation, and promotion procedures should give due recognition and reward to the development and maintenance of competence and commitment to ethical principles.
The firm should assign responsibility for each engagement to an engagement partner who has the appropriate capabilities, competence, authority, and time to perform the role. The firm should also assign appropriate staff with the necessary capabilities, competence, and time to perform engagements in accordance with professional standards and regulatory and legal requirements. The firm establishes procedures to assess its staff’s capabilities and competence based on factors such as an understanding of professional standards and regulatory and legal requirements, technical knowledge, relevant industry knowledge, ability to apply professional judgment, and understanding of the firm’s quality control policies and procedures.
The firm should strive to maintain consistency in the quality of engagement performance by providing written or electronic manuals, software tools, or other standardized documentation. These materials should cover a range of matters, including how engagement teams are briefed on the objectives of their work, how to comply with applicable standards, how to supervise and train staff, how to review the work performed and judgments made, and how to document the work performed and review process.
It’s important that all members of the engagement team understand the objectives of the work they are performing, and appropriate training should be provided to ensure that less experienced team members clearly understand their assigned work objectives.
Supervision involves tracking the progress of the engagement, considering the capabilities and competence of individual team members, addressing significant issues as they arise, and identifying matters for consultation or consideration by more experienced team members.
Review responsibilities are divided according to experience level, with more experienced engagement team members, including the engagement partner, reviewing work performed by less experienced team members. Reviewers consider whether the work has been performed in accordance with professional standards and regulatory and legal requirements, whether significant matters have been raised, whether consultations have taken place and conclusions have been documented and implemented, whether the nature, timing, and extent of work performed needs to be revised, whether the work performed supports the conclusions reached, whether the evidence obtained is sufficient and appropriate to support the report, and whether the objectives of the engagement procedures have been achieved.
The policies and procedures established by the firm should ensure that appropriate consultation takes place on difficult or contentious matters and those sufficient resources are available to enable such consultations to occur. The nature and scope of consultations should be documented, and conclusions resulting from consultations should also be documented and implemented.
Consultation involves discussions with individuals within or outside the firm who have specialized expertise, to resolve a difficult or contentious matter. The firm should use appropriate research resources and the collective experience and technical expertise of the firm to promote quality and improve the application of professional judgment. A culture should be established within the firm where consultation is recognized as a strength, and personnel are encouraged to consult on difficult or contentious matters.
Effective consultation requires that those consulted be given all relevant facts to enable them to provide informed advice on technical, ethical, or other matters. Consultation procedures should involve individuals within the firm who have appropriate knowledge, seniority, and experience, and appropriate documentation and implementation of conclusions resulting from consultations.
If the firm needs to consult externally, for example, if it does not have the appropriate internal resources, it may take advantage of advisory services provided by other firms or professional and regulatory bodies. Before contracting for such services, the firm should consider whether the external provider is suitably qualified for that purpose.
Finally, documentation of consultations with other professionals that involve difficult or contentious matters should be agreed upon by both the individual seeking consultation and the individual consulted. The documentation should be complete and detailed enough to enable an understanding of the issue on which consultation was sought, the results of the consultation, including any decisions taken, the basis for those decisions, and how they were implemented.
Differences of Opinion
The importance of having policies and procedures in place for dealing with and resolving differences of opinion that may arise within the engagement team during an audit or other professional engagement. These differences of opinion could be between team members, with those consulted outside the team, or between the engagement partner and the engagement quality control reviewer.
The procedures for resolving differences of opinion should encourage early identification of the issues and provide clear guidelines for the steps to be taken to resolve them. The process should also require documentation of the conclusions reached and their implementation. It is important to resolve these differences of opinion before issuing the report to ensure that the report reflects the agreed-upon conclusions.
SQC also suggests that a firm using an external person(s) to conduct an engagement quality control review should establish procedures for resolving differences of opinion. This could involve consulting with another practitioner or regulatory body to help resolve the issue.
Overall, having policies and procedures in place for resolving differences of opinion helps to ensure the quality of the work being performed, promotes timely resolution of issues, and reduces the risk of disputes arising later on.
Engagement Quality Control Review
The engagement quality control reviews (EQCRs), which are evaluations conducted by an independent reviewer to ensure that the significant judgments made by the engagement team and the conclusions reached in formulating a report are appropriate. These guidelines apply to audits of financial statements of listed entities and other engagements, such as reviews of historical financial information and other assurance and related services engagements.
The firm should establish policies and procedures to require EQCRs for appropriate engagements, setting out criteria against which all other audits and reviews of historical financial information, and other assurance and related services engagements should be evaluated to determine whether an EQCR should be performed. The policies and procedures should also establish the nature, timing, and extent of the EQCR, as well as the criteria for the eligibility of engagement quality control reviewers and documentation requirements.
The extent of the review depends on the complexity of the engagement and the risk that the report might not be appropriate in the circumstances. An EQCR for audits of financial statements of listed entities includes considering the engagement team’s evaluation of the firm’s independence in relation to the specific engagement, significant risks identified during the engagement and the responses to those risks, judgments made, matters involving differences of opinion or other difficult or contentious matters, and the appropriateness of the report to be issued.
The engagement quality control reviewer conducts the review in a timely manner at appropriate stages during the engagement so that significant matters may be promptly resolved to the reviewer’s satisfaction before the report is issued. If the EQCR makes recommendations that the engagement partner does not accept and the matter is not resolved to the reviewer’s satisfaction, the report is not issued until the matter is resolved by following the firm’s procedures for dealing with differences of opinion.
The firm’s policies and procedures should address the appointment of engagement quality control reviewers and establish their eligibility based on technical qualifications, experience, and authority. The policies and procedures are designed to maintain the objectivity of the engagement quality control reviewer, and the engagement partner may consult the reviewer during the engagement, but care is taken to maintain the reviewer’s objectivity. Suitably qualified external persons may be contracted where sole practitioners or small firms identify engagements requiring EQCRs.
The SQC outlines several policies and procedures that firms should establish to ensure the confidentiality, safety, integrity, accessibility, and irretrievability of engagement documentation.
Time limits appropriate to the nature of the engagements should be established by the firm for the completion of final engagement files, and where two or more different reports are issued in respect of the same subject matter information of an entity, the firm’s policies and procedures relating to time limits for the assembly of final engagement files should address each report as if it were for a separate engagement.
SQC also discusses the confidentiality, safe custody, integrity, accessibility, and irretrievability of engagement documentation. The firm should establish policies and procedures designed to maintain the confidentiality, safe custody, integrity, accessibility, and irretrievability of engagement documentation. Relevant ethical requirements establish an obligation for the firm’s personnel to observe at all times the confidentiality of information contained in engagement documentation. The integrity, accessibility, or irretrievability of the underlying data may be compromised if the documentation could be altered, added to, or deleted without the firm’s knowledge, or if it could be permanently lost or damaged. Therefore, the firm should design and implement appropriate controls for engagement documentation.
The SQC notes that controls that the firm may design and implement to maintain the confidentiality, safe custody, integrity, accessibility, and irretrievability of engagement documentation include the use of a password among engagement team members to restrict access to electronic engagement documentation to authorized users, appropriate back-up routines for electronic engagement documentation at appropriate stages during the engagement, procedures for properly distributing engagement documentation to the team members at the start of engagement, processing it during engagement, and collating it at the end of engagement, procedures for restricting access to, and enabling proper distribution and confidential storage of, hardcopy engagement documentation.
SQC also discusses the retention of engagement documentation, stating that the firm should establish policies and procedures for the retention of engagement documentation for a period sufficient to meet the needs of the firm or as required by law or regulation. The retention period may depend on several factors, such as the nature of the engagement, the firm’s circumstances, whether local law or regulation prescribes specific retention periods for certain types of engagements, or whether there are generally accepted retention periods in the jurisdiction in the absence of specific legal or regulatory requirements.
Finally, SQC notes that unless otherwise specified by law or regulation, engagement documentation is the property of the firm. The firm may, at its discretion, make portions of, or extracts from, engagement documentation available to clients, provided such disclosure does not undermine the validity of the work performed, or, in the case of assurance engagements, the independence of the firm or its personnel.
The importance of monitoring and evaluating a firm’s quality control system to ensure that it is operating effectively, in compliance with professional standards and regulatory requirements, and that reports issued by the firm or its engagement partners are appropriate in the circumstances. The purpose of monitoring is to evaluate adherence to professional standards, assess the effectiveness of the quality control system, and determine whether the firm’s policies and procedures have been appropriately applied.
The monitoring process should be entrusted to individuals within the firm who have sufficient experience and authority to assume that responsibility. They should evaluate the system of quality control on an on-going basis, analyse new developments in professional standards and regulatory requirements, assess the firm’s compliance with its policies and procedures on independence, evaluate continuing professional development, and review decisions related to acceptance and continuance of client relationships and specific engagements.
The inspection of a selection of completed engagements is typically performed on a cyclical basis, and engagements selected for inspection include at least one engagement for each engagement partner over an inspection cycle, which spans no more than three years. The inspection process includes the selection of individual engagements, some of which may be selected without prior notification to the engagement team. Those inspecting the engagements are not involved in performing the engagement or the engagement quality control review.
Deficiencies noted during the monitoring process should be evaluated to determine whether they are instances that do not necessarily indicate that the firm’s system of quality control is insufficient or whether they are systemic, repetitive, or other significant deficiencies that require prompt corrective action. The firm should communicate deficiencies noted as a result of the monitoring process and recommendations for appropriate remedial action to relevant engagement partners and other appropriate personnel.
At least annually, the firm should communicate the results of the monitoring of its quality control system to engagement partners and other appropriate individuals within the firm, including the firm’s chief executive officer or managing partner(s). The communication should include a description of the monitoring procedures performed, the conclusions drawn from the monitoring procedures, and a description of any systemic, repetitive, or other significant deficiencies and of the actions taken to resolve or amend those deficiencies.
The firm is responsible for establishing policies and procedures that require proper documentation. The manner in which the documentation is created is left up to the firm’s discretion, and may vary depending on the size and complexity of the firm’s practice and organization. For example, large firms may use electronic databases while smaller firms may use simpler methods such as manual notes, checklists, and forms.
When determining the form and content of the documentation, firms should consider factors such as the size of the firm and the number of offices, the degree of authority personnel and offices have, and the nature and complexity of the firm’s practice and organization. The firm must retain the documentation for a period sufficient to allow those performing monitoring procedures to evaluate the firm’s compliance with its system of quality control, or for a longer period if required by law or regulation.
Finally, the Standard on Quality Control discussed in this text is recommendatory for all engagements relating to accounting periods beginning on or after April 1, 2008, and is mandatory for all engagements relating to accounting periods beginning on or after April 1, 2009.
Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements
The updates include changes to the definition of “engagement quality control reviewer,” which can now include a team of individuals led by a member of the Institute of Chartered Accountants of India. The definition of “firm” has also been updated to include “proprietor” in India, as individuals can practice in their own name or as the proprietor of a firm.
Other changes include the deletion of “corporation” from the definition of “firm” due to regulations in India, and the removal of a specific reference to external partners or employees as “suitably qualified” due to the fact that only members of the Institute of Chartered Accountants of India can carry out audits or reviews.
The ISQC 1 requires rotation of the engagement partner for audit engagements of listed companies every seven years to avoid familiarity threat, but this provision cannot be applied to sole practitioners/proprietors. However, peer review is mandated for such firms to mitigate familiarity threat. SQC also notes that the standards apply to all engagements, irrespective of the form, nature, and size of the entity, including those in the public sector.
Quiz on Standard on Quality Control Scope and Objectives:
1. What is the purpose of the Standard on Quality Control (SQC)?
a) To establish standards for financial reporting
b) To provide guidance on a firm’s responsibilities for its system of quality control
c) To regulate the auditing process
d) To enforce legal requirements on firms conducting audits
2. Which of the following is NOT an element of a system of quality control?
a) Leadership responsibilities for quality within the firm
b) Engagement performance
d) Financial reporting requirements
3. Who is responsible for setting policies and procedures that promote a quality-oriented internal culture within the firm?
a) Engagement partner
b) Chief executive officer (CEO) or managing partners
c) Suitably qualified external person
d) Auditing and Assurance Standards Board (AASB)
4. What is the purpose of establishing ethical requirements in a firm’s quality control policies and procedures?
a) To ensure compliance with regulatory and legal requirements
b) To maximize profitability
c) To minimize conflicts of interest
d) To prioritize client relationships over professional standards
5. What should a firm consider when deciding whether to accept or continue a client relationship or specific engagement?
a) The client’s profitability
b) The firm’s financial resources
c) The engagement partner’s availability
d) The firm’s ability to perform the work competently, ethically, and with integrity
6. Why is it important to have policies and procedures in place for resolving differences of opinion within the engagement team?
a) To ensure that the engagement partner’s opinion always prevails
b) To promote timely resolution of issues and reduce the risk of disputes
c) To discourage team members from expressing their opinions
d) To expedite the issuance of the report
7. What is the purpose of an engagement quality control review (EQCR)?
a) To ensure that engagement team members agree on all judgments made
b) To evaluate the performance of the engagement partner
c) To identify differences of opinion within the engagement team
d) To ensure that significant judgments and conclusions in the report are appropriate
8. What should a firm do if the engagement quality control reviewer makes recommendations that the engagement partner does not accept?
a) Proceed with issuing the report without resolving the differences of opinion
b) Consult with another practitioner or regulatory body to help resolve the issue
c) Replace the engagement quality control reviewer
d) Ignore the recommendations and follow the engagement partner’s judgment
9. How can a firm promote the early identification and resolution of differences of opinion?
a) By avoiding consultations with external parties
b) By suppressing disagreements within the engagement team
c) By establishing clear guidelines and procedures for resolving differences of opinion
d) By minimizing documentation of differences of opinion
10. What is the purpose of documenting the conclusions reached in resolving differences of opinion?
a) To create a record of disagreements within the engagement team
b) To assign blame for the differences of opinion
c) To ensure that the report reflects the agreed-upon conclusions
d) To discourage engagement team members from expressing their opinions
11. What is the purpose of the engagement quality control review?
a) To ensure the engagement team has performed their work diligently
b) To evaluate the performance of the engagement partner
c) To assess the overall quality of the engagement and the appropriateness of the report
d) To review the firm’s system of quality control
12. How should a firm monitor its quality control system?
a) By conducting regular inspections of engagement documentation
b) By regularly reviewing and evaluating the effectiveness of its quality control policies and procedures
c) By engaging suitably qualified external persons to review engagement performance
d) By implementing technology-based monitoring tools
13. What is the role of engagement documentation in the quality control process?
a) It serves as evidence of the firm’s compliance with professional standards
b) It ensures the engagement team follows the engagement plan
c) It facilitates communication between the firm and the client
d) It provides a record of the engagement team’s qualifications and experience
14. What factors should a firm consider when establishing policies and procedures for acceptance and continuance of client relationships?
a) The firm’s financial stability and profitability
b) The client’s industry and market share
c) The risk associated with the client and engagement
d) The availability of suitably qualified external persons for consultation
15. How can a firm promote a culture of consultation within the organization?
a) By establishing rewards and incentives for seeking external consultation
b) By minimizing the documentation requirements for consultation
c) By providing training and resources for personnel to consult on difficult or contentious matters
d) By discouraging personnel from seeking consultation to maintain client relationships
16. What is the purpose of early identification of differences of opinion within the engagement team?
a) To escalate the issue to higher management for resolution
b) To prevent conflicts from arising within the team
c) To allow sufficient time for discussion and resolution before issuing the report
d) To assign blame for the differences of opinion
17. Who may be involved in resolving differences of opinion within the engagement team?
a) Only the engagement partner and engagement quality control reviewer
b) Only external consultants hired by the firm
c) Any team member who has a differing opinion
d) Only senior members of the team
18. Why is it important to document the conclusions reached in resolving differences of opinion?
a) To comply with regulatory requirements
b) To provide evidence for potential legal disputes
c) To demonstrate the thoroughness of the engagement process
d) To enable proper review and understanding of the decisions made
19. What role does consultation play in resolving differences of opinion?
a) It helps to validate the engagement partner’s opinion
b) It prolongs the resolution process and should be avoided
c) It allows for input and perspectives from knowledgeable individuals
d) It is not necessary as the engagement team should be self-sufficient in resolving differences
20. How can a firm promote a culture that encourages open discussion and resolution of differences of opinion?
a) By penalizing team members who express differing opinions
b) By limiting the involvement of external consultants
c) By providing training on conflict resolution and effective communication
d) By strictly enforcing the engagement partner’s decisions