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SA 220 – Quality Control for an audit of FS

The objective of the auditor is to Implement QC Policies that provide Reasonable Assurance that
audit complies with professional standards and audit report issued is appropriate.

Definitions
➢ Engagement partner –
• the partner or other person in the firm
• who is a member of the Institute of Chartered Accountants of India
• and is in full time practice and
• is responsible for the engagement and its performance,
• and for the report that is issued on behalf of the firm,

➢ Engagement quality control review –

• a process designed to provide an objective evaluation,
• before the report is issued,
• of the significant judgments the engagement team made and
• the conclusions they reached in formulating the report.
➢ Engagement quality control reviewer –
• a partner, other person in the firm,
• suitably qualified external person,
• or a team made up of such individuals,
• with sufficient and appropriate experience and authority
• to objectively evaluate,
• before the report is issued,
• the significant judgments the engagement team made and the conclusions they
reached in formulating the report.

➢ Engagement team – all personnel performing an engagement, including any experts contracted
by the firm in connection with that engagement

Quality control policies (HEAL ME)

The firm’s system of quality control should include policies and procedures addressing each of the
following elements:

• Leadership responsibilities for quality within the firm.

• Ethical requirements.
• Acceptance and continuance of client relationships and specific engagements.
• Human resources.
• Engagement performance.
• Monitoring.

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Leadership

➢ The engagement partner shall take responsibility for the overall quality on each audit
engagement to which that partner is assigned
➢ The actions of the engagement partner and appropriate messages to the other members of the
engagement team, in taking responsibility for the overall quality on each audit engagement,
emphasise
(a) The importance to audit quality of:
• Performing work that complies with professional regulatory and legal requirements;
• Complying with the firm’s quality control policies and procedures as applicable;
• Issuing auditor’s reports that are appropriate in the circumstances; and
• The engagement team’s ability to raise concerns without fear of reprisals;
(b) The fact that quality is essential in performing audit engagements.

Ethical Requirements

The auditor shall comply with relevant ethical requirements, including those pertaining to independence,
relating to financial statement audit engagements. Relevant ethical requirements ordinarily comprise
the Code of Ethics for Professional Accountants (IESBA Code) related to an audit of financial
statements

➢ Integrity
➢ Objectivity
➢ Professional behaviour
➢ Professional Competence & due care
➢ Confidentiality

Independence

The auditor should be independent of the entity subject to the audit. The Code describes independence
as comprising both-

“Independence is:

(a) Independence of mind – the state of mind that permits the provision of an opinion without being
affected by influences allowing an individual to act with integrity, and exercise objectivity and
professional skepticism; and

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(b) Independence in appearance – the avoidance of facts and circumstances that are so significant that
a third party would reasonably conclude an auditor’s integrity, objectivity or professional skepticism
had been compromised.”

Threats to Independence

1. Self-interest threats - which occur when an auditing firm, its partner or associate could
benefit from a financial interest in an audit client.

Examples include (i) direct financial interest or materially significant indirect financial interest
in a client, (ii) loan or guarantee to or from the concerned client, (iii) undue dependence on a
client’s fees and, hence, concerns about losing the engagement, (iv) close business relationship
with an audit client, (v) potential employment with the client, and (vi) contingent fees for the
audit engagement.

Like, in case an audit firm unduly relies on fees from a client, it may result in threat to self-
interest of auditor and he may not work objectively for the fear of losing client.

2. Self-review threats - which occur when during a review of any judgement or conclusion reached
in a previous audit or non-audit engagement.
Instances where such threats come into play are (i) when an auditor having recently been a
director or senior officer of the company, and (ii) when auditors perform services that are
themselves subject matters of audit.
3. Advocacy threats - which occur when the auditor promotes, or is perceived to promote, a
client’s opinion to a point where people may believe that objectivity is getting compromised, e.g.
when an auditor deals with shares or securities of the audited company, or becomes the client’s
advocate in litigation and third party disputes.
In such situations, auditor can be perceived as backing and championing causes of auditee client
and it may lead to belief that auditor is not acting and working objectively. Remember that
auditor has not only to be independent but also appear to be acting so.
4. Familiarity threats - are self-evident, and occur when auditors form relationships with the
client where they end up being too sympathetic to the client’s interests.

This can occur in many ways: (i) close relative of the audit team working in a senior position in
the client company, (ii) former partner of the audit firm being a director or senior employee of
the client, (iii) long association between specific auditors and their specific client counterparts,
and (iv) acceptance of significant gifts or hospitality from the client company, its directors or
employees.

Provisions in Companies Act, 2013 regarding rotation of auditors mainly address these very
familiarity threats. Such provisions prescribe that auditor is rotated after a certain number of
years so that auditors do not become too familiar with their clients.

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5. Intimidation threats - which occur when auditors are deterred from acting objectively with
an adequate degree of professional skepticism.
Basically, these could happen because of threat of replacement over disagreements with the
application of accounting principles, or pressure to disproportionately reduce work in response
to reduced audit fees or being threatened with litigation.
Such threats attempt to intimidate auditors to deter them from acting objectively.

Safeguards to Independence

The Chartered Accountant has a responsibility to remain independent by taking into account the
context in which they practice, the threats to independence and the safeguards available to eliminate
the threats.

The following are the guiding principles in this regard:

➢ For the public to have confidence in the quality of audit, it is essential that auditors should
always be and appears to be independent of the entities that they are auditing
➢ In the case of audit, the key fundamental principles are integrity, objectivity and
professional skepticism, which necessarily require the auditor to be independent.
➢ Before taking on any work, an auditor must conscientiously consider whether it involves
threats to his independence.
➢ When such threats exist, the auditor should either desist from the task or put in place
safeguards that eliminate them.
➢ If the auditor is unable to fully implement credible and adequate safeguards, then he must
not accept the work.

Acceptance & Continuance of Client Relationship

The engagement partner shall be satisfied that appropriate procedures regarding the acceptance and
continuance of client relationships and audit engagements have been followed:

SQC 1 requires the firm to obtain information before accepting an engagement. Information such as
the following assists the engagement partner in determining whether the decisions

regarding the acceptance and continuance of audit engagements are appropriate:

♦ The integrity of the principal owners, key management and those charged with
governance of the entity;

♦ Whether the engagement team is competent to perform the audit engagement and has
the necessary capabilities, including time and resources;

♦ Whether the firm and the engagement team can comply with relevant ethical
requirements; and

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♦ Significant matters that have arisen during the current or previous audit engagement,
and their implications for continuing the relationship

If the engagement partner obtains information that would have caused the firm to decline the audit
engagement had that information been available earlier, the engagement partner shall communicate
that information promptly to the firm, so that the firm and the engagement partner can take the
necessary action

Human Resources
The firm should establish policies and procedures designed to provide it with reasonable assurance
that it has sufficient personnel with the capabilities, competence, and commitment to ethical
principles necessary to perform its engagements in accordance with professional standards and
regulatory and legal requirements, and to enable the firm or engagement partners to issue reports that
are appropriate in the circumstances.

Such policies and procedures address the following personnel issues:

(a) Recruitment; (b) Performance evaluation; (c) Capabilities; (d) Competence; (e) Career
development; (f) Promotion; (g) Compensation; and (h) Estimation of personnel needs.

Engagement Performance
The firm should establish policies and procedures designed to provide it with reasonable assurance
that engagements are performed in accordance with professional standards and regulatory and legal
requirements, and that the firm or the engagement partner issues reports that are appropriate in the
circumstances.

Through its policies and procedures, the firm seeks to establish consistency in the quality of
engagement performance. This is often accomplished through written or electronic manuals, software
tools or other forms of standardized documentation, and industry or subject matter-specific guidance
materials. Matters addressed include the following:

♦ How engagement teams are briefed on the engagement understanding of the objectives of
their work.

♦ Processes for complying with applicable engagement standards.

♦ Processes of engagement supervision, staff training and coaching.

♦ Methods of reviewing the work performed, the significant judgments made and the form of
report being issued.

♦ Appropriate documentation of the work performed and of the timing and extent of the
review.

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♦ Processes to keep all policies and procedures current

Monitoring

The firm should establish policies and procedures designed to provide it with reasonable assurance
that the policies and procedures relating to the system of quality control are relevant, adequate,
operating effectively and complied with in practice.

The purpose of monitoring compliance with quality control policies and procedures is to provide an
evaluation of:

(a) Adherence to professional standards and regulatory and legal requirements;

(b) Whether the quality control system has been appropriately designed and effectively
implemented; and

(c) Whether the firm’s quality control policies and procedures have been appropriately applied,
so that reports that are issued by the firm or engagement partners are appropriate in the
circumstances.

Follow-up by appropriate firm personnel so that necessary modifications are promptly made to the
quality control policies and procedures.