Chapter 3 - Quality control

Question 1

What are the UNDESIRABLE outcomes of POOR quality control?

Answer 1

• Financial effects

- Damaged reputation

Question 2

Which standards focus on quality control? (2 of them)

Answer 2

ISQC 1 - any assurance engagement

ISA 220 - audit

Question 3

What are the BENEFITS of good quality control?

• for client
• for audit firm

Answer 3

• Client receives acceptable level of service
• Reduce risk of negligence claims
• Reduce risk of disciplinary
• Maintain strong reputation

Question 4

Audit quality is monitored by ____________ and ____________

Answer 4

FRC Audit Quality Review Committee

ICAEW’s Practice Assurance scheme

Question 5

What steps do FRC take to promote audit quality?

Answer 5

• Issue ISAs, ethical standards, briefing papers (eg: on professional scepticism )
• Monitor compliance by reviews of audit firms –> make those reviews public
• Oversee regulatory activities
• Investigate misconduct and take action

Question 6

List the SIX PILLARS of quality control.

Answer 6

1. Leadership
2. Ethical requirements
3. Acceptance and Continuance Considerations
4. Human Resources
5. Engagement Performance
6. Monitoring

Question 7

Pillar: Leadership

How should an ENGAGEMENT PARTNER maintain audit quality?

Answer 7

Commercial consideration should NOT override quality.

• if they need more staff
• if they need to allocate more time
• if they need a third party because not enough competence themselves

Question 8

Pillar: Acceptance and Continuance Considerations

What should the AUDITOR consider?

Answer 8

• Management Integrity
• Competence/Time/Resources
• Compliance with Ethical Standard
• Significant matters from previous engagements

Question 9

Pillar: Human Resources

What should ENGAGEMENT PARTNER ensure?

Answer 9

Appropriate members of staff in team

• Relevant knowledge/experience/can apply professional judgement

Question 10

Pillar: Human Resources

ISQ1 sets out policies to ensure firm employs appropriate staff which cover:

Answer 10

• Recruitment
• Performance Evaluation
• Career development/Promotion (for good work, not fast work)
• Compensation

Question 11

Pillar: Human Resources

ICAEW members need to carry out appropriate continuing professional development when renewing membership every year.

TRUE/FALSE

Answer 11

TRUE

Question 12

Pillar: Engagement Performance

How should the AUDIT PARTNER ensure direction/supervision/review of the team?

Answer 12

• Inform them of their responsibilities, nature of the business, audit risk/approach
• Appropriate teamwork
• Supervise individual members
• Address significant issues
• Train less experienced members and review work

Question 13

Why is Documentation important for quality control?

Answer 13

Allows the firm/FRC/ICAEW to monitor the quality control procedures.

Question 14

Firms need to MONITOR that quality control procedures are: (3 THINGS)

Answer 14

• relevant
• adequate
• operating effectively

Question 15

Engagement Quality Control reviews:

HOT/COLD REVIEW

Answer 15

HOT REVIEW

Question 16

Monitoring:

HOT/COLD REVIEW

Answer 16

COLD REVIEW

Question 17

Engagement Quality Control reviews PURPOSE/AIM:

Answer 17

Independent evaluation (another partner) of independence/significance/judgement/conclusion of audit opinion. (2 opinions all together)

Aim: Prevents inappropriate opinion BEFORE issuing.

Question 18

Engagement Quality Control reviews:

When?

Answer 18

BEFORE opinion is issued

Question 19

Engagement Quality Control reviews:

Which clients?

Answer 19

Listed/High risk

Question 20

Pillar: Monitoring

1. PURPOSE
2. AIM

Answer 20

1. Ensure compliance with firm’s procedure/ISA/Ethical standards/ other regulation.
2. Identify areas for improvement.

Question 21

Pillar: Monitoring

When?

Answer 21

On-going basis/ AFTER opinion is issued

Question 22

Pillar: Monitoring

Which clients?

Answer 22

ALL/sample of audit files

Question 23

Which reporting framework requires Audit Committees to review and monitor their external auditor?

Answer 23

UK Corporate Governance Code

Question 24

How does the UK Corporate Governance code facilitate monitoring of external auditors?

Answer 24

Questionnaires sent to Audit Committee/Directors/Senior Management/Internal Audit

Question 25

The external auditor is rated by the audit committee, on factors such as:

Answer 25

- Communication - Quality of reports - Expertise - Business understanding - Value for money £££££

Question 26

If someone was to be the Engagement Quality Control Reviewer, what ATTRIBUTES must they have:

Answer 26

- Technically Competent (Partner) - Expertise in Industry of that entity - Expertise in listed clients - Independent of both engagement team and client

Question 27

What are the ICAEW CONSEQUENCES of poor quality control?

Answer 27

- Fines £££ - Disciplinary action - Withdrawal of firm from carrying out anymore Audit work

Question 28

What are the OTHER CONSEQUENCES of poor quality control?

Answer 28

- Sued for negligence - Loss of reputation, clients, staff - Collapse of firm - Prosecuted for criminal offence under Companies Act 2006 (misleading, false, deceptive). Penalty = Fine

Question 29

What is Professional Indemnity Insurance?

Answer 29

Insurance that pays out settlements in Negligence claims.

Question 30

How are firms not completely covered by Professional Indemnity Insurance?

Answer 30

They still have to bear legal fees, partner time and impact on reputation.

Question 31

Since 2001, individual partners in LLPs do not face unlimited liability for claims against the firms. TRUE/FALSE

Answer 31

TRUE

Question 32

What is a LIABILITY CAP?

Answer 32

A provision that allows auditors to agree a limit to their liability to the entity, requiring a statutory audit.

Question 33

A LIABILITY CAP is only valid when it: 1. 2. 3.

Answer 33

1. Only covers ONE financial year 2. Approved by the company shareholder 3. FAIR and REASONABLE so a court cannot override the agreement.

Question 34

How do the Auditor and Client set the liability cap?

Answer 34

- The auditor's proportionate share of the responsibility for the loss. - Use a monetary amount or agreed formula.

Question 35

What concerns would mid-tier audit firms have when setting liability caps?

Answer 35

Smaller resources push them to negotiate a low liability cap - which shareholders may not find acceptable.

Question 36

How does ICAEW promote improvements in quality?

Answer 36

Trainees need to pass rigorous exams Qualified members need to complete CPD ICAEW helpline available for advice ICAEW code of ethics Monitors compliance with standards Investigate misconduct/discipline of individual members