Main drivers to achieve Audit Quality
Description
Drivers to achieve Audit Quality 1.0 Scope: The purpose of this document is to provide guidance to licensed auditors and audit firms for enhancing quality in audit practice. This paper provides clarity to other stakeholders in understanding the purpose of audit quality. 1.1 Objective : Audit quality is becoming a major concern for stakeholders, especially the shareholders, investors and any other parties who invest resources in the client organisation. Nowadays the way of conducting business is becoming more complex with the international dimension. There is also the perception that management is finding it difficult to reflect the state of affairs of the businesses in a manner which is easily understandable by non-accountants. Therefore auditing is becoming more risk-based. Heavy reliance is now placed on auditors to bring that confidence to the stakeholders that the funds entrusted to the directors of the company have been well-managed. 1.2 Key Drivers for Quality Audit: The key drivers are: • To promote confidence in the audit practice • To protect stakeholders 1.3 Ways to achieve Quality Audit FRC believes that there are two main key drivers to attain quality audit . They are: • Quality Culture in the Audit Practice: the setting of a quality management system (QMS) • Quality during the audit process: duties and responsibilities vis-à-vis the clients prior, during and after the audit 2.0 Quality Culture in the Audit ...
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| Publié par | Mophing |
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| Langue | English |
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Financial Reporting Council
Drivers to achieve Audit Quality
1.0
Scope:
The purpose of this document is to provide guidance to licensed auditors and audit firms
for enhancing
quality in audit practice.
This paper provides clarity to other stakeholders in understanding the purpose of audit
quality.
1.1
Objective :
Audit quality is becoming a major concern for stakeholders, especially the shareholders,
investors and any other parties who invest resources in the client organisation.
Nowadays
the way of conducting business is becoming more complex with the international
dimension.
There is also the perception that management is finding it difficult
to reflect
the state of affairs of the businesses in a manner which is easily understandable by non-
accountants.
Therefore auditing is becoming more risk-based.
Heavy reliance is now placed on auditors to bring that confidence to the stakeholders that
the funds entrusted to the directors of the company have been well-managed.
1.2
Key Drivers for Quality Audit:
The key drivers are:
•
To promote confidence in the audit practice
•
To p
rotect stakeholders
1.3
Ways to achieve Quality Audit
FRC believes that there are two main key drivers to attain quality audit .
They are:
•
Quality Culture in the Audit Practice: the setting of a quality management system
(QMS)
•
Quality during the audit process: duties and responsibilities vis-à-vis the clients
prior, during and after the audit
2.0
Quality Culture in the Audit Firm or by the practitioner through a QMS
The FRC is of view that an audit practice shall have a proper Quality Management
System (QMS) in order to obtain a quality culture in the organisation.
The firm should
have the right policies and procedures on quality control documented and communicated
to all personnel.
However, the nature of policies and procedures to be designed and established by
individual firm will depend on factors such as the size and operating characteristics of the
firm.
The QMS sets out the main requirements that the audit practice shall comply in order to
create the quality culture. These requirements are based on the International Standard for
Quality Control (ISQC1 (UK)
Financial Reporting Council
Policies and procedures on each of the following elements shall be documented and
communicated to personnel:
1.
Leadership and responsibilities for quality within the firm
2.
Ethical requirements to be followed by personnel of the firm making reference to
IFAC codes of Ethics
3.
Acceptance and continuance of client relationships and specific engagement
4.
Human resources
5.
Engagement Performance and
6.
Monitoring, analysis
and measurement
2.1. Leadership and responsibilities for quality control in a firm
Management commitment shall be seen. Management shall create an environment where
achieving high quality is valued, invested and rewarded.
There shall be a mission
statement on quality and management shall communicate to the personnel either formally
or informally on the essentials of a quality system.
2.2
Ethical Requirements
Management shall establish policies and procedures so that firm and its personnel comply
with all relevant ethical requirements and also those specified under the IFAC code of
ethics.
According to IFAC any audit firm shall have policies and procedures with regards
to
integrity, objectivity, professional competence and due care, confidentiality and
professional behaviour.
Maintaining Independence
Management shall document and demonstrate that engagement partners/ the engagement
team maintain their independence and provide information about the client engagement
that are likely to affect their independence or threat to their independence.
Management shall also establish policies and procedures to deal with breaches of
independence ( S290 of IFAC Code of Ethics).
Management shall request written confirmation from the personnel that they are totally
independent before engaging on any assignment with a client.
Management shall also demonstrate criteria set to determine the need for safeguards to
reduce familiarity with clients.
For instance, for the audits of listed companies, the
requirement to rotate the engagement partner after a certain number of years (normally 5
yrs) shall be documented and implemented.
2.3
Acceptance and continuance of Client Relationships and Specific Engagements
The audit practice shall establish policies and procedures for the acceptance and
continuance of client relationship and specific engagements. The following requirements
shall be considered under this element:
•
Information to be gathered on the client’s reputation, key management, related
parties, operation and business practices.
Financial Reporting Council
•
Knowledge on the client’s operating system to be sought which will include
amongst others assessment of the internal control procedures and corporate
governance.
•
The firm shall also obtain reasons to the non-appointment of the previous
auditors. The firm shall consult the previous auditors prior to any new
engagements.
•
The firm shall also determine whether it is competent to perform a particular
engagement and whether it has the capabilities, time and required resources and
can comply with the ethical requirements.
Firm shall obtain such information as it considered necessary in the circumstances before
accepting an engagements with a new client, or when deciding whether to continue with
an existing engagement or when considering acceptance of a new engagement with an
existing client.
2.4
Human Resources
The firm shall establish policies and procedures for recruitment, performance evaluation,
capabilities and competencies
and
career development
The firm shall also have a policy and documented procedures for the continuous
development of the personnel.
However, the size and the characteristics of operation of the firm will influence the
structure of the firm and the system for performance evaluation.
2.5
Assignment of Engagement Teams
The firm shall assign responsibility for each engagement to an engagement partner.
The
firm shall establish policies and procedures requiring that :
(a)
the identity and role of the engagement partner are communicated to members
of the engagement team
(b)
responsibilities of
the Engagement Partner clearly defined and communicated
to him/her
2.6
Engagement Performance
The firm shall establish polices and procedures that ensure consistency in the quality of
engagement performance.
It is important that the engagement team understand the
objectives of the work they have to perform.
2,6,1
Assignment of work to engagement team
The firm shall deal with the following matters when assigning work to engagement
team:
•
Considering the capabilities and competence of individual members of the
engagement team
•
How engagement teams are briefed on the engagement to obtain an
understanding of the objectives of their work
•
Establish processes for complying with applicable engagement standards
Financial Reporting Council
•
Establish processes with regards to engagement supervision, staff training and
coaching
•
Establish
criteria for reviewing the work performed, the judgements made
and the form of report being used
•
Establish appropriate documentation to record the work performed and the
timing and extent of the review
•
Appropriate team working and training are necessary to assist less
experienced members of the engagement team to clearly understand the
objectives of the assigned work.
2,6,2
Consultation
In order to promote quality , the firm shall establish policy and procedures to provide
reasonable assurance that
(a)
appropriate consultation takes place on difficult and contentious matters
(b)
consultation can be either internal or external, for instance expert advice
outside the firm could be sought
(c)
the nature and the scope of the consultation are documented
(d)
conclusions resulting from consultations are documented and implemented
Documentation shall be sufficiently complete to highlight the issue on which
consultation was sought ,the results of the consultation, decision taken and how the
decision was implemented.
2.6.3
Differences of opinion
The firm shall establish policies and procedures dealing with and resolving
differences of opinion within the Engagement Team and other parties.
Such
procedures encourage identification of differences of opinion at an early stage,
provide clear guidelines as to the solution reached.
2.6.4
Engagement Quality Control Review (EQCR)
The EQCR shall provide an objective evaluation of the significant judgement made
by the Engagement Team and the conclusions reached in formulating the report.
The
EQCR shall be undertaken and completed before
issuing the audit report.
The intensiveness of the EQCR shall depend on the following :
•
the nature of the engagement and the extent to which the engagement involves
Public Interest;
•
the identification of unusual circumstances or risks in an engagement or class
of engagement
•
compliance with laws/regulations
The firm shall establish policy and procedures setting out :
(a) the nature , the timing and the extent of EQCR
(b) Criteria for the eligibility of a Quality Control Review
© documentation requirements of an EQCR
Financial Reporting Council
2.6.5
Engagement Documentation
The firm shall establish policy and procedures for the documentation of all
engagements.
At the final stage of the engagement, the engagement team shall
assemble the engagement file on a timely basis, normally, 30 days after issuing the
auditors’ report.
The firm shall have policy and procedures with regards to all records pertaining to an
engagement:
•
Confidentiality
•
Safe Custody
•
Accessibility and retrievability and
•
Retention period, to meet the needs of the firm or as required by law or
regulation.
2.6.6
Monitoring , Analysis and Measurement of Quality Control System
The firm shall have policy and procedures to ensure that the quality control system is
relevant, adequate, operating effectively and complied with, in practice.
Management shall ensure that the quality control system is complete with regards to
adherence to professional standards and regulatory and legal requirements, and whether
the audit reports that are issued by the firm or engagement partners are appropriate in the
circumstances.
Evaluation of the system shall be performed through periodic inspection of a selection of
completed engagements
2.6.7
Management Responsibility to appoint a responsible person for monitoring
A competent individual shall be appointed to perform the monitoring of the quality
system which covers both the appropriateness of the design and the effective operation of
the system.
Other issues have to be taken into consideration during the monitoring exercise such as:
•
Analysis of new developments in professional standards
•
Determination of corrective actions to be taken and improvement to be made in
the system
•
Provision of feedback into the firm’s policies and procedures
2.6.8
Complaints and Allegations
The firm shall establish policy and procedures dealing with complaints and allegations.
Complaints and allegations may originate from within or outside the firm.
The firm shall deal appropriately with complaints and allegations made with respect to
the work performed by the firm and fails to comply with professional standards and
regulatory and legal requirements.
Financial Reporting Council
2.6.9
Follow-up
The appointee shall also be responsible to have a follow-up of the system.
S/he shall
evaluate the effect of the deficiencies noted as a result of the monitoring process and
shall:
(i)
determine inadequacy in the system
(ii)
systemic, repetitive or other significant deficiencies that require prompt corrective
actions.
The firm’s evaluation of each type of deficiency shall result in recommendations as
follows:
(a)
take appropriate remedial action in relation to the individual engagements or
member of personnel
(b)
communication of the findings to the responsible personnel
©
changes that could be brought in the quality policies and procedures
(d)
Disciplinary actions against those who fail to comply with policies and
procedures, especially those who do so repeatedly
3.0
Quality during the audit process
The audit process is about the requirements for an effective audit process in order to
ensure that quality audit is maintained.
The main
requirements are
(i) structure of the engagement
(ii) relationship between the auditors and the client
(iii)audit methodology used and last but not least
(iv) audit report
3.1
Structure of the engagement team
•
Organising the engagement team
Structuring the engagement team involves the organisation of competent and experienced
staff for a particular engagement assignment.
Sometimes involvement of other technical
support could be enlisted.
•
Audit program and planning
The engagement team prepares an audit program and plan the audit in such way in a
timely manner.
The companies and even the state owned enterprises have tight reporting
deadlines vis-à-vis the regulatory bodies.
3.2
Relationship between the auditors and the client
Maintaining a consultative relationship with the client will not only ensure quality of
services but also avoid any misunderstandings.
Both management and the auditor have to
be clear of the role and responsibilities
3.3
Role and responsibilities of Management
Financial Reporting Council
The primary responsibility for the prevention and detection of fraud rests with
both those charged with governance of the entity and with management.
It is the responsibility of those charged with governance of the entity to ensure,
through oversight of management, that the entity establishes and maintains
internal control to provide reasonable assurance with regard to reliability of
financial reporting, effectiveness and efficiency of operations and compliance
with applicable laws and regulations.
The responsibility of management includes establishing and maintaining controls
pertaining to the entity’s objective of preparing financial statements that give a
true and fair view (or are presented fairly in all material respects) in accordance
with the applicable financial reporting framework and managing risks that may
give rise to material misstatements in those financial statement
It is important that management, with the oversight of those charged with
governance, place a strong emphasis on fraud prevention, which may reduce
opportunities for fraud to take place, and fraud deterrence, which could persuade
individuals not to commit fraud because of the likelihood of detection and
punishment.
Management shall establish a culture of honesty and ethical behavior. Such a
culture, based on a strong set of core values, is communicated and demonstrated
by management and by those charged with governance and provides the
foundation for employees as to how the entity conducts its business.
Management shall creating a culture of honesty and ethical behavior includes
setting the proper tone; creating a positive workplace environment; hiring,
training and promoting appropriate employees; requiring periodic confirmation by
employees of their responsibilities and taking appropriate action in response to
actual, suspected or alleged fraud.
•
Role and responsibilities of the auditor:
In planning and performing the audit to reduce audit risk to an acceptably low
level, the auditor shall consider the risks of material misstatements in the financial
statements due to fraud.
The auditor has to maintain an attitude of professional scepticism recognizing the
possibility that a material misstatement due to fraud could exist, notwithstanding
the auditor’s past experience with the entity about the honesty and integrity of
management and those charged with governance;
Two types of fraud relevant to the Auditor, that is misstatements resulting from
misappropriation of assets and misstatements resulting from fraudulent financial
reporting;
Members of the engagement team shall discuss the susceptibility of the entity’s
financial statements to material misstatement due to fraud and
The auditor shall perform procedures to obtain information that is used to identify
the risks of material misstatement due to fraud;
The auditor shall identify and assess the risks of material misstatement due to
fraud at the financial statement level and the assertion level; and for those
assessed risks that could result in a material misstatement due to fraud,
Financial Reporting Council
The auditor shall evaluate the design of the entity’s related controls, including
relevant control activities, and to determine whether they have been implemented;
The auditor shall carry out the audit in compliance with International Standards
for Auditing and with all relevant laws and legislations
The auditor shall communicate the audit report to the audit committee
3.4
Audit Methodology
The audit methodology is a means used by audit firm to ensure that audit engagement is
being carried out in a consistent and comprehensive manner.
The audit methodology
shall
provide a framework to assist the engagement team in carrying out the audit in an
effective and efficient manner.
The auditor should gather quality evidence to be
used as basis to form an opinion.
provide compliance with International Standards of Auditing and applicable laws
and regulations which prevents the possibility of using subjective and
judgemental opinion.
require the documentation of the work carried out
provide a proper system where the management of the audit firm could review the
work performed.
3.5
Audit Report
The Audit Report shall command confidence by management and ultimately by other
stakeholders such as employees, shareholders etc.
The opinion expressed in the audit report is linked with the quality audit process.
Users
of accounts have the tendency to linked the audit opinion with the quality of financial and
non-financial reporting of the client.
Therefore a high confidence is placed on the audit
report.
The Financial Reporting Council
3 June 2008
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