ISQC 1 QUALITY CONTROL FOR AUDIT FIRMS

 

Audit firms are responsible for setting up its system of quality control for audits and reviews of financial statements, and other assurance and related services engagements.

International Standard on Quality Control (ISQC) deals with the objective, definitions, and requirements for quality control for audit firms.

Summary of ISQC 1

QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND REVIEWS OF FINANCIAL STATEMENTS, AND OTHER ASSURANCE AND RELATED SERVICE ENGAGEMENTS

(Systems of quality control in compliance with this ISQC are required to be established by December 15, 2009)

Objective

The objective of the firm is to establish and maintain a system of quality control to provide it with reasonable assurance that:

 (a) The firm and its personnel comply with professional standards and applicable legal and regulatory requirements; and

 (b) Reports issued by the firm or engagement partners are appropriate in the circumstances

Requirements

Applying, and complying with, Relevant Requirements

Personnel within the firm responsible for establishing and maintaining the firm’s system of quality control shall have an understanding of the entire text of this ISQC its objective and  apply its requirements properly.

Elements of a System of Quality Control

A system of quality control includes following elements:

(a) Leadership responsibilities for quality within the firm.

 (b) Relevant ethical requirements.

 (c) Acceptance and continuance of client relationships and specific engagements.

 (d) Human resources.

 (e) Engagement performance.

 (f) Monitoring.

The firm shall document its policies and procedures and communicate them to the firm’s personnel.

Let`s look at each element of the system of quality control.

Leadership Responsibilities for Quality within the Firm

The firm shall establish policies and procedures such that any person or persons assigned operational responsibility for the firm’s system of quality control by the firm’s chief executive officer or managing board has sufficient and appropriate experience and ability to assume that responsibility.

 Relevant ethical requirements

The firm and its personnel comply with relevant ethical requirements. The established policies and procedures should provide reasonable assurance that the firm, its personnel and, where applicable, others subject to independence requirements (including network firm personnel) maintain independence.

At least annually, the firm shall obtain written confirmation of compliance with its policies and procedures on independence from all firm personnel required to be independent by relevant ethical requirements.

The firm shall establish policies and procedures:

Setting out criteria for determining the need to eliminate the circumstances that create a threat of long association with an entity to an acceptable level

Requiring, for audits of financial statements of listed entities, the rotation of the engagement partner and the individuals responsible for engagement quality control review after a specified period.

Acceptance and Continuance of Client Relationships and Specific Engagements

 The firm will only undertake or continue relationships and engagements where it:

·        Is competent to perform the engagement and has the capabilities, including time and resources.

·        Can comply with relevant ethical requirements.

·        Has considered the integrity of the client, and does not have information that would lead it to conclude that the client lacks integrity.

Human Resources

The firm shall establish policies and procedures designed to provide it with reasonable assurance that it has sufficient personnel with the competence, capabilities, and commitment to ethical principles. Such policies and procedures include recruitment, performance evaluation, competence, career development, promotion, compensation.

Engagement Performance

The firm shall establish policies and procedures designed to provide it with reasonable assurance that engagements are performed in accordance with professional standards, supervised and reviewed.

Consultation

The firm shall establish policies to provide it with reasonable assurance that:

(a) Appropriate consultation takes place on difficult or contentious matters.

(b) Sufficient resources are available for consultation.

(c) The nature, scope and conclusions resulting from such consultations are documented.

(d) Conclusions resulting from consultations are implemented.

Engagement Quality Control Review

 The established policies and procedures for engagement quality control review shall:

·        Require an engagement quality control review for all audits of financial statements of listed entities

·    Set out criteria against which all other audits and reviews of historical financial information and other related services engagements should be come under Engagement Quality Control Review

Criteria for the Eligibility of Engagement Quality Control Reviewers

The criteria include:

  1.      The technical qualifications required to perform the role like experience and authority.
  2.   The degree to which an engagement quality control reviewer can be consulted on the engagement without compromising the reviewer’s objectivity.

Documentation of the Engagement Quality Control Review

The documentation should fix that:

(a) The procedures required by the firm’s policies on engagement quality control review have been performed.

(b) The engagement quality control review has been completed on or before the date of the report; and

(c) The reviewer believes that that the significant judgments the engagement team made and the conclusions it reached were appropriate.

Monitoring the firm’s quality control policies and procedures

Monitoring is designed to get evidence that the policies and procedures relating to the system of quality control are relevant, adequate, and operating effectively. The firm shall communicate to relevant engagement partners and other appropriate personnel deficiencies noted as a result of the monitoring process and recommendations for appropriate remedial action.

The firm shall communicate to relevant engagement partners and other appropriate personnel deficiencies noted as a result of the monitoring process and recommendations for appropriate remedial action.

Recommendations for appropriate remedial actions for deficiencies noted shall include one or more of the following:

(a) Taking appropriate remedial action in relation to an individual engagement or member of personnel; (b) The communication of the findings to those responsible for training and professional development; (c) Changes to the quality control policies and procedures; and

 (d) Disciplinary action against those who fail to comply with the policies

Complaints and Allegations

The firm shall establish policies and procedures designed to deal with:

(a) Complaints and allegations that the work performed by the firm fails to comply with professional standards and applicable legal and regulatory requirements; and

(b) Allegations of non-compliance with the firm’s system of quality control.

Documentation of the System of Quality Control

The firm shall establish policies and procedures requiring appropriate documentation to provide evidence of the operation of each element of its system of quality control.

The firm shall establish policies and procedures that require retention of documentation for a period of time sufficient to evaluate the firm’s compliance with its system of quality control, or for a longer period if required by law or regulation.


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