ISA (UK) 220: Quality Control for an Audit of Financial Statements

 

The auditor is responsible for the quality control of the audit of financial statements. This responsibility is not solely outlined through ISA 220, but also through ISQC 1 and is further to be corroborated through the applicable ethical requirements. Each audit firm is responsible for the implementation and maintenance of a quality control system in order to ensure that the firm and its personnel comply with the ethical, legal, and regulatory requirements [L&RR] and that the audit reports issued by the firm are appropriate.

Responsibilities of an Engagement Partner

Being the leader of the audit team, the engagement partner observes a higher need for the maintenance of quality control throughout the audit. He, being responsible for the overall quality of the audit engagement, should stay alert and skeptical for any instance of non-compliance with the ethical and regulatory requirements by any member of the audit team.

Ethical Requirements

While the ethical requirements may vary from jurisdiction to jurisdiction, the fundamental principles of ethics laid down by the IESBA Code of Ethics include Integrity, Objectivity, Professional Competence, Confidentiality, and Professional Behavior. Additional ethical requirements may be imposed on an auditor through the local codes of conduct prevalent in different jurisdictions.

Engagement Team and Performance

The engagement partner must ensure that the team deployed on the audit of financial statements under his audit engagement is competent and capable enough to comply with the professional standards and applicable L&RR. The audit team must have the necessary competence to enable an audit report under the given circumstances.

The responsibility for the audit report and its validity, however, rests with the engagement partner. He is also responsible for the direction, oversight, and performance of the audit engagement in accordance with the applicable LR&R and professional standards.

Practice

While accepting or continuing an audit engagement, an engagement partner shall obtain information from the firm and network firms to identify any potential threats of non-compliance with the applicable quality control requirements. In the instance of identifying any such threat, an auditor is advised to immediately report the matter in his reporting line, or seek the application of safeguards that reduce the threat to an acceptably low level, or where appropriate, withdraw from the audit engagement. Any inability to resolve a given matter should be disclosed to the firm immediately for appropriate action.

It is also advised to conduct a thorough and rigorous review of the audit documentation and working papers before or on the date of the audit report to be satisfied that sufficient and appropriate audit evidence has been obtained by the audit team to base the audit opinion on.

References:

https://www.frc.org.uk/getattachment/615b6684-314e-44ae-a47f-1fc8ffa92bac/ISA-(UK)-220_Revised-November-2019-With-Covers.pdf

Audit Method: Quality Review

ISA 220, deals with quality control for an audit of financial statements. Engagement teams have a responsibility to implement quality control procedures that are applicable to the audit engagement and that are within the context of the firm’s system of quality control. 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 applicable legal and regulatory requirements; and
• The auditor’s report issued is appropriate in the circumstances.

ISQC 1, 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 each of the following elements:

• 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.

For audits of financial statements of listed entities, and those other audit engagements, if any, for which the firm has determined that an engagement quality control review is required, the engagement partner shall:

• Determine that an engagement quality control reviewer has been appointed;
• Discuss significant matters arising during the audit engagement, including those identified during the engagement quality control review, with the engagement quality control reviewer; and
• Not date the auditor’s report until the completion of the engagement quality control review.

Practice

The engagement partner shall take responsibility for the overall quality on each audit engagement to which that partner is assigned. The engagement partner should ensure that

• Appropriate procedures regarding the acceptance and continuance of client relationships and audit engagements have been followed;
• All ethical requirements are met;
• Independence criterion is met;
• Assignment of team members is appropriate;
• Overall direction, supervision and monitoring of the audit engagement is carried out.

Audit Firm: Audit Quality Indicators

The Public Company Accounting Oversight Board (PCAOB) is a nonprofit corporation in USA established by Congress to oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports. The Sarbanes-Oxley Act of 2002, which created the PCAOB, required that auditors of U.S. public companies be subject to external and independent oversight.

The PCAOB has recently issued a concept release on Audit Quality Indicators (AQI). It has sought the public comment on the content and possible uses of a group of potential "audit quality indicators." The indicators are a potential portfolio of quantitative measures that may provide new insights about how to evaluate the quality of audits and how high quality audits are achieved.

The 28 potential Audit Quality Indicators are:

AUDIT PROFESSIONALS

Availability	Competence	Focus
1. Staffing Leverage 2.Partner Workload 3.Manager and Staff Workload 4.Technical Accounting and Auditing Resources 5.Persons with Specialized Skill and Knowledge	6.Experience of Audit Personnel 7.Industry Expertise of Audit Personnel 8.Turnoverof Audit Personnel 9.Amount of Audit Work Centralized at Service Centers10.Training Hours per Audit Professional	11.Audit Hours and Risk Areas 12.Allocation of Audit Hours to Phases of the Audit

AUDIT PROCESS

Tone at the Top and Leadership	Incentives	Independence	Infrastructure	Monitoring and Remediation
13.Results of Independent Survey of Firm Personnel	14.Quality Ratings and Compensation 15.Audit Fees, Effort, and Client Risk	16.Compliance with Independence Requirement	17.Investment in Infrastructure Supporting Quality Auditing	18.Audit Firms' Internal Quality Review Results 19.PCAOB Inspection Results 20.Technical Competency Testing

AUDIT RESULTS

Financial Statements	Internal Control	Going Concern	Communication between Auditors and Audit Committee	Enforcement and Litigation
21. Frequency and Impact of Financial Statement Restatements for Errors 22.Fraud and other Financial Reporting Misconduct 23.Inferring Audit Quality from Measures of Financial Reporting Quality	24.Timely Reporting of Internal Control Weaknesses	25.Timely Reporting of Going Concern Issues	26.Results of Independent Surveys of Audit Committee Members	27. Trends in PCAOB and SEC Enforcement Proceedings 28.Trends in Private Litigation

Additional Thoughts

Quality control for audit is very important as only with an effective Quality control mechanism, the public interest can be served through independence, integrity, ethics, objectivity and quality performance. The aforementioned quality indicators can prove to be a useful benchmark for auditors to gauge their performance.