Standards on Auditing

SQC 1 & SA 220

Leadership responsibilities for quality within firm

Question 1

ABC & Associates, Chartered Accountants has a policy to accept the clients wherein the risk evaluation
is conducted with respect to the Company and the promoter. XYZ Limited approached ABC & Associates.
Promoter of XYZ Limited is a close associate and family friend of Mr. A, Managing Partner of ABC &
Associates. XYZ Limited is in news in the previous year for certain inquiries from the regulatory
authorities in relation to certain matters. The existing auditor of XYZ Limited has resigned and has
created a casual vacancy. XYZ Limited is ready to offer 25% more than the existing fees and has
approached ABC & Associates for appointment as Auditor. Mr. A has strong recommendation to the Firm
to accept the audit.

What is your understanding of the functioning of the tone at the top of the Firm ABC & Associates,
Chartered Accountants? What are the considerations one should exercise to uphold Quality of the
Firm? (ICAI Module TYU)

Answer

The given situation indicates that proposed client is a new one whose promoter is close associate and
family friend of managing partner of M/s ABC & Associates. However, previous auditor of proposed
client has resigned and company is offering hike in audit fees in comparison to audit fees paid to
previous auditor. Besides, there are also regulatory inquires against the company. In spite of all this,
managing partner of firm Mr. A has recommended for acceptance of offered audit of the company.

It reflects poorly regarding functioning at top of the firm as regards to quality control. SQC 1
requires that firm should establish a system of quality control designed to provide it with reasonable
assurance that firm and its personnel comply with professional standards and legal and regulatory
requirements. It further requires that firm’s business strategy is subject to overriding requirement
of firm to achieve quality in all engagements. However, in the given situation, commercial considerations
seem to be overriding factor.

The managing partner of firm is close associate and family friend of promoter. The matter should have
been brought to knowledge of firm in accordance with requirements of SQC 1 as it involves issue of
independence of managing partner of the firm with respect to proposed audit engagement. Further,
matters of inquiries from regulators and resignation of previous auditor raise Question about
integrity of the proposed client. SQC 1 further requires firm to consider before acceptance of an
engagement that client does not lack integrity. All these factors need to be taken into consideration
before accepting engagement.

Overall, such a situation reflects lack of proper establishment of quality control framework at top of
the firm. Following considerations should be taken into account while upholding quality of firm: -

(i) The firm assigns its management responsibilities so that commercial considerations do not
override quality of work performed
(ii) The firm‘s policies and procedures in relation to its personnel are designed to demonstrate its
overriding commitment to quality.
(iii) The firm devotes sufficient resources for development and documentation of its quality control
policies and procedures
(iv) A firm before accepting an engagement should acquire vital information about the client. Such
an information should help firm to decide about integrity of Client, promoters and key managerial

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personnel, competence (including capabilities, time and resources) to perform engagement and
compliance with ethical requirements.

Ethical requirements

Question 2

SS Ltd. is a company listed in India. The Company has appointed M/s Z & Co. as auditors. Mr. Q, a CA has
recently joined the firm and has been appointed as the engagement partner for the first time. He
understands that it is necessary to ensure the compliance of independence for the audit team as per
standard audit practices. But he could not find as such, any policies and procedures available with the
firm in documented form. Why do you think that the firm should have policies and procedures to ensure
the independence of the firm in every assignment? How does an engagement partner ensure the
compliance of independence? Discuss with reference to relevant SAs. (PYQ Nov‘23)

Answer

As per SQC 1, ―Quality Control for Firms that Perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services Engagements,‖ the firm should establish
policies and procedures designed to provide it with reasonable assurance that the firm, its personnel
and, where applicable, others subject to independence requirements (including experts contracted by
the firm and network firm personnel), maintain independence where required by the Code. Such policies
and procedures should enable the firm to:

(i) Communicate its independence requirements to its personnel and, where applicable, to others
subject to them; and
(ii) Identify and evaluate circumstances and relationships that create threats to independence, and
to take appropriate action to eliminate those threats or reduce them to an acceptable level by
applying safeguards, or, if considered appropriate, to withdraw from the engagement.

Further, as per SA 220, ―Quality Control for an Audit of Financial Statements‖, the engagement partner
shall form a conclusion on compliance with independence requirements that apply to the audit
engagement. In doing so, the engagement partner shall:

(i) Obtain relevant information from the firm and, where applicable, network firms, to identify and
evaluate circumstances and relationships that create threats to independence;
(ii) Evaluate information on identified breaches, if any, of the firm‘s independence policies and
procedures to determine whether they create a threat to independence for the audit
engagement; and
(iii) Take appropriate action to eliminate such threats or reduce them to an acceptable level by
applying safeguards, or, if considered appropriate, to withdraw from the audit engagement,
where withdrawal is permitted by law or regulation. The engagement partner shall promptly
report to the firm any inability to resolve the matter for appropriate action.

Acceptance & Continuance of Client Relationships & Specific Engagements

Question 3

PQR Associates are the statutory auditors of a large un-listed company, which is engaged in
manufacturing of auto components. Subsequent to reappointment of auditors in the Annual General
Meeting, the Company shared the appointment letter with PQR Associates, seeking acknowledgement
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and acceptance letter. CA. R is the engagement partner and is planning to issue the acceptance letter.
During the current financial year, there was a search by the Income-tax Authorities on the company,
and certain accounting records were seized for verification. Based on the information available on social
media, CA. R noted that the promoters‘ brother, is contemplating to contest in the ensuing elections,
under the banner of a political party. One of the current senior engagement team managers, who has
been doing the audit engagement till last year, has left PQR Associates and is planning to provide some
accounting services to one of the associate companies. PQR Associates are yet to recruit another senior
manager having adequate experience in the audits of clients engaged in automotive sector.

Elaborate the matters to be considered by PQR Associates with respect to acceptance & continuance of
client relationships considering the above issues. (PYQ May‘24)

Answer

As per SQC 1, ―Quality Control for Firms that Perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services Engagements,‖ a firm before accepting an
engagement should acquire vital information about the client. Such an information should help firm to
decide about: -

 Integrity of Client, promoters, and key managerial personnel.

 Competence (including capabilities, time, and resources) to perform engagement.
 Compliance with ethical requirements.

The firm should obtain such information as it considers necessary in the circumstances before accepting
an engagement with a new client, when deciding whether to continue an existing engagement, and when
considering acceptance of a new engagement with an existing client. Where issues have been identified,
and the firm decides to accept or continue the client relationship or a specific engagement, it should
document how the issues were resolved.

Further, as per SA 220, ―Quality Control for an Audit of Financial Statements‖, the engagement
partner shall form a conclusion on compliance with independence requirements that apply to the audit
engagement. In doing so, the engagement partner shall obtain relevant information from the firm and,
where applicable, network firms, to identify and evaluate circumstances and relationships that create
threats to independence. In view of the above, PQR Associates should:

 follow their firm's policies and procedures for client acceptance and continuance. This
includes evaluating the integrity of the client, assessing potential risks associated with the
engagement, and ensuring the firm has the necessary resources and expertise to perform the
engagement effectively. The engagement team, should assess, whether the company is involved in
any funding activities, to the political parties, and if so enquire and assess the risks related to
such transactions.
 communicate clearly with the client regarding the scope of the engagement, the
responsibilities of both parties, and any limitations on the services to be provided. This helps
manage expectations and ensures alignment between the firm and the client.
 independence and objectivity throughout the engagement. Any potential threats to
independence, such as relationships with the client's affiliates or involvement in political
activities by related parties, should be evaluated and mitigated appropriately. Since the senior
manager who was on this engagement is providing certain accounting services, to one of the group
companies, the engagement partner, should assess, whether it would have any impact on the audit
and examine the relevant ethical/independence requirements.
 continually monitor the client relationship for any changes or developments that may impact
the firm's ability to provide services effectively. This includes staying informed about
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significant events such as the income-tax search, changes in client management, or potential
conflicts of interest. Since there was an income-tax raid on the organisation, the engagement
partner should evaluate the risks of material misstatements, and non-disclosure of tax disputes
and liabilities.
 ensure that their engagement team possesses the necessary competence and capabilities to
perform the audit effectively. The departure of a senior manager and the need to recruit a
replacement with specific industry experience should be addressed promptly to maintain audit
quality. Since one of the senior engagement team members has left PQR Associates, the
engagement partner should assess, whether he would be in a position to devote adequate time on
the engagement or whether to recruit another resource, before commencement of the audit.

Question 4

CA M is introduced to a prospective client in a social function. He assures to visit office of CA M very

soon in relation to professional work. During discussions over a cup of coffee next week, it transpires
that there was a search by Enforcement Directorate in his premises about a month back resulting in
recovery of huge sum of cash. The income tax department had also searched his premises in relation to
bogus capital gains on penny stocks. Lamenting poor quality of services provided by his present auditor,
he offers appointment as tax auditor of his five family-owned firms to CA M in lieu of handsome fees.
What are the factors to be evaluated by CA M if he wants to take up the engagement? (ICAI Module
TYU)

Answer

As per SQC 1, before accepting a new engagement, integrity of client should be considered including
matters that indicate involvement in money laundering or criminal activities. There has been search of
ED on the said party leading to recovery of huge amount of cash. The above coupled with actions of
income tax department relating to bogus capital gains on penny stocks indicates that client might be
involved in money laundering activities. Therefore, offer should not be accepted.

EQCR

Question 5

Pine & Associates is the statutory auditor of BB Ltd., a listed company and started its operations 6
years ago. The fieldwork during the audit of the financial statements of the company for the year ended
31st March, 2023 was completed on 1st May, 2023. The auditor‘s report was dated 15th May, 2023.
During the documentation review of the engagement, it was observed that the engagement quality
control review was completed on 18th May, 2023. The engagement partner had completed his reviews in
entirety by 12th May, 2023. Comment (MTP Apr‘24, Oct‘18, Mar‘19)

Answer

As per SA 220, ―Quality Control for an Audit of Financial Statement‖, the engagement partner shall
take responsibility for reviews being performed in accordance with the firm‘s review policies and
procedures.

For audits of financial statements of listed entities, the engagement partner shall:

 Determine that an engagement quality control reviewer has been appointed;

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 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.

Further, SA 700,‖ Forming an Opinion and Reporting on Financial Statements‖, requires the auditor‘s
report to be dated not earlier than the date on which the auditor has obtained sufficient appropriate
evidence on which to base the auditor‘s opinion on the financial statements.

In cases of an audit of financial statements of listed entities where the engagement meets the criteria
for an engagement quality control review, such a review assists the auditor in determining whether
sufficient appropriate evidence has been obtained. Conducting the engagement quality control review in
a timely manner at appropriate stages during the engagement allows significant matters to be promptly
resolved to the engagement quality control reviewer‘s satisfaction on or before the date of the auditor‘s
report.

In this case, the audit of BB Ltd. for the year ending on 31st March 2023 was conducted by Pine &
Associates and was completed on 1st May, 2023. Subsequently, the engagement partner reviewed the
audit by 12th May, 2023. The audit report issued by Pine and Associates was dated 15th May, 2023.
However, the engagement quality control review was finalized on 18th May, 2023, which is later
than the date of the audit report. In view of above, the date of auditors‘ report before the
completion of the engagement quality control review, is not correct.

Question 6

Rishikumar & Co. has been appointed as an auditor of PK Ltd. for the financial year 2016 -17. CA. Kumar,
one of the partners of M/s Rishikumar & Co., completed entire routine audit work by 29th May, 2017.
Unfortunately, on the very next morning, while roving towards office of PK Ltd. to sign final audit
report, he met with a road accident and died. CA. Rishi, another partner of M/s Rishikumar & Co.,
therefore, signed the accounts of PK Ltd., without reviewing the work performed by CA. Kumar. Advise,
whether CA. Rishi is right in expressing an opinion on financial statements the audit of which is
performed by another auditor. (MTP Apr‘18)

Answer

As per SA 220 ―Quality Control for an Audit of Financial Statements‖, an engagement partner taking
over an audit during the engagement may apply the review procedures such as the work has been
performed in accordance with professional standards and regulatory and legal requirements; significant
matters have been raised for further consideration; appropriate consultations have taken place and the
resulting conclusions have been documented and implemented; there is a need to revise the nature,
timing and extent of work performed; the work performed supports the conclusions reached and is
appropriately documented; the evidence obtained is sufficient and appropriate to support the auditor‘s
report; and the objectives of the engagement procedures have been achieved.

Further, one of the basic principles, which govern the auditor‘s professional responsibilities and which
should be complied with wherever an audit is carried, is that when the auditor delegates work to
assistants or uses work performed by other auditor and experts, he will continue to be responsible for
forming and expressing his opinion on the financial information. However, he will be entitled to rely on
work performed by others, provided he exercises adequate skill and care and is not aware of any
reason to believe that he should not have so relied. This is the fundamental principle which is ethically
required as per Code of Ethics.

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However, the auditor should carefully direct, supervise and review work delegated. He should obtain
reasonable assurance that work performed by other auditors/experts and assistants is adequate for his
purpose.

In the given case, all the auditing procedures before the moment of signing of final report have been
performed by CA. Kumar. However, the report could not be signed by him due to his unfortunate death.
Later on, CA. Rishi signed the report relying on the work performed by CA. Kumar. Here, CA. Rishi is
allowed to sign the audit report, though, will be responsible for expressing the opinion. He may rely on
the work performed by CA. Kumar provided he further exercises adequate skill and due care and
review the work performed by him as required in compliance with SA 220.

Question 7

BNE & Co. are in midst of audit process of a listed company. During the course of audit, an issue arose
relating to revenues from contracts with customers in terms of Ind AS 115. The engagement partner
took a certain stand. However, engagement quality control reviewer recommended otherwise after
review. The engagement partner is not willing to accept recommendations of reviewer. How can the
stalemate be ended? (ICAI Module TYK)

Answer

In case, recommendations of engagement quality control reviewer are not accepted by engagement
partner and matter is not resolved to reviewer‘s satisfaction, the matter should be resolved by following
established procedures of firm like by consulting with another practitioner or firm, or a
professional or regulatory body. The audit report should be issued only after resolution of matter.

Question 8

PQR & Associates are statutory auditors of a listed company. There arose an issue during the course of
audit relating to related party transactions. The engagement partner wants to consult engagement
quality control reviewer on this matter during the course of audit process itself. Can he consult with
engagement quality control reviewer? Discuss. (ICAI Module TYK)

Answer

It is necessary to maintain objectivity of reviewer. Therefore, participation in engagement or making

decisions for engagement team is to be avoided at all costs. However, engagement partner may consult
engagement quality control reviewer during the engagement so as not to compromise his objectivity and
eligibility to perform the role.

Question 9

GVN & Associates are auditors of a listed company involved in ―fin-tech‖ sector. The engagement team is
stuck up with some issue pertaining to a particular Ind-AS applicable to the company. They have framed
a query and sent to ICAI for expert opinion on the matter. The issue was resolved upon receipt of
expert opinion. Since expert opinion was provided by ICAI, engagement team was of the view that
appointment of engagement quality control reviewer has lost its relevance. Do you agree? (ICAI Module
TYU)

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Answer

Engagement quality control review in listed entities is a mandatory requirement. Expert opinion of
ICAI pertains to issue of interpretation. The appointment of reviewer is a separate and mandatory
requirement in audits of listed companies.

Question 10

During the audit of Mahaveer Ltd, a listed company, Engagement Partner (EP) completed his reviews and
also ensured compliance with independence requirements that apply to the audit engagement. The
engagement files were also reviewed by the Engagement Quality Control Reviewer (EQCR) except the
independence assessment documentation. Engagement Partner was of the view that matters related to
independence assessment are the responsibility of the Engagement Partner and not Engagement Quality
Control Reviewer. Engagement Quality Control Reviewer objected to this and refused to sign off the
documentation. Please advise as per SA 220. (RTP – May‘22, May‘19, MTP – Oct‘19, ICAI Module TYK)

Answer

As per SA 220, Engagement Partner shall form a conclusion on compliance with independence
requirements that apply to the audit engagement. In doing so, the Engagement Partner shall:

 Obtain relevant information from the firm and, where applicable, network firms, to identify
and evaluate circumstances and relationships that create threats to independence;
 Evaluate information on identified breaches, if any, of the firm's independence policies and
procedures to determine whether they create a threat to independence for the audit
engagement; and
 Take appropriate action to eliminate such threats or reduce them to an acceptable level by
applying safeguards, or, if considered appropriate, to withdraw from the audit engagement,
where withdrawal is permitted by law or regulation. The engagement partner shall promptly
report to the firm any inability to resolve the matter for appropriate action.

Engagement Partner shall take responsibility for reviews being performed in accordance with the firm's
review policies and procedures.

As per SA 220, "Quality Control for Audit of Financial Statements", for audits of financial statements
of listed entities, Engagement Quality Control Reviewer (EQCR), on performing an engagement quality
control review, shall also consider the engagement team's evaluation of the firm's independence in
relation to the audit engagement.

In the given case, the Engagement Partner is not right. The independence assessment documentation
should also be given to Engagement Quality Control Reviewer for his review.

Question 11

HK & Co. Chartered Accountants have been auditors of SAT Ltd (a listed entity) for the last 8 financial
years. CA. H, partner of the firm, has been handling the audit assignment very well since the
appointment. The audit work of CA. H and her team is reviewed by a senior partner CA. K to assure that
audit is performed in accordance with professional standards and regulatory and legal requirements. CA.
K was out of India for some personal reasons, so this year CA. G has been asked to review the audit
work. In your opinion, what areas CA. G should consider at the time of review. List any four areas and

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also comment whether firm is complying with Standard on Quality Control or not. (PYQ - MAY‘21, MTP
Oct‘22)

OR

J.A.C.K. & Co., a Chartered Accountant firm was appointed as the statutory auditor of Falcon Ltd. after
ensuring the compliance with relevant provisions of the Companies Act, 2013. Mr. Jay was the
engagement partner for the aforesaid audit and prior to commencement of the audit, Mr. Jay had called
for a meeting of the engagement team in order to direct them and assign them their responsibilities. At
the end of meeting, Mr. Jay assigned review responsibilities to two of the engagement team members
who were the most experienced amongst all, for reviewing the work performed by the less experienced
team members. While reviewing the work performed by the less experienced members of the
engagement team, what shall be the considerations of the reviewers? (MTP Mar‘21)

Answer

As per SQC 1, an engagement quality control review for audits of financial statements of listed entities
includes considering the following:

(i) The work has been performed in accordance with professional standards and regulatory and
legal requirements;
(ii) Significant matters have been raised for further consideration;
(iii) Appropriate consultations have taken place and the resulting conclusions have been documented
and implemented;
(iv) There is a need to revise the nature, timing and extent of work performed;
(v) The work performed supports the conclusions reached and is appropriately documented;
(vi) The evidence obtained is sufficient and appropriate to support the report; and
(vii) The objectives of the engagement procedures have been achieved.

The firm should establish policies and procedures:

(i) Setting out criteria for determining the need for safeguards to reduce the familiarity threat
to an acceptable level when using the same senior personnel on an assurance engagement over a
long period of time; and
(ii) For all audits of financial statements of listed entities, requiring the rotation of the
engagement partner after a specified period in compliance with the Code.

The familiarity threat is particularly relevant in the context of financial statement audits of listed
entities. For these audits, the engagement partner should be rotated after a pre- defined period,
normally not more than seven years.

From the facts given in the Question and from the above stated paras of SQC 1, it can be concluded
that firm is not complying with SQC 1 as Engagement Partner H is continuing for more than 7 years.

Engagement documentation

Question 12

TPX & Co., Chartered Accountants is a large audit firm. It maintains audit documentation both
electronically and in physical form (hard files). The physical files are neither scanned and incorporated
into electronic files nor cross-referenced to the electronic files. Further, there are many instances
where audit working papers do not contain details as to whether information was obtained from client or

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prepared by engagement team. How do you view above situation from point of view of quality control
system in audit firm? Analyse. (MTP Mar‘24)

Answer

In accordance with SQC 1,‖ Quality Control for Firms that Perform Audits and Reviews of Historical
Financial Information and Other Assurance and Related Services Engagements‖ the firm should
establish policies and procedures designed to maintain confidentiality, safe custody, integrity,
accessibility and retrievability of engagement documentation.

In the given situation, the physical files are neither scanned and incorporated in the electronic files nor
cross-referenced to the electronic files. Inability to do so shows that firm has not established policies
and procedures to maintain integrity of engagement documentation. Lack of ensuring the same makes it
difficult to demonstrate completeness of audit files and whether these were assembled within 60 days
timeframe stipulated in SQC 1.

Where engagement documentation is in paper, electronic, or other media, the integrity, accessibility or
retrievability of the underlying data may be compromised if the documentation could be altered,
added to or deleted without the firm‘s knowledge, or if it could be permanently lost or damaged. One
of the reasons for designing and implementing appropriate controls for engagement documentation in
this regard is the protection of the integrity of information at all stages of engagement.

For the practical reasons, original paper documentation may be electronically scanned for inclusion in
engagement files. In that case, the firm implements appropriate procedures requiring engagement teams
to:

a. Generate scanned copies that reflect the entire content of the original paper documentation,
including manual signatures, cross references and annotations;
b. Integrate the scanned copies into the engagement files, including indexing and signing off on
the scanned copies as necessary; and
c. Enable the scanned copies to be retrieved and printed as necessary.

It has also been stated that there are many instances where audit working papers do not contain details
as to whether information was obtained from the client or prepared by the engagement team. It is
important to identify the source of the document and the information used as audit evidence to
ensure its reliability. It could have potential risks of non-compliance with standards on auditing.

Comprehensive

Question 13

MNP & Co., a firm of auditors, is appointed by a bank to conduct stock audit of a borrower. It deputes
one of its paid Chartered accountant employees, Sudhanshu, to conduct above said stock audit. He
leverages it as an opportunity to prevail upon the client to get the accounts audited from their firm. He
also assures the client of a clean stock audit report without adverse comments as a quid pro quo. Is

approach of Sudhanshu proper? How does it reflect upon quality control system of firm? (ICAI Module
TYU)

Answer

Approach of Sudhanshu is not proper. Such practices blatantly violate code of ethics and its spirit. It
reflects poorly upon quality control system of firm envisaged in SQC 1 which requires that quality

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control policies and procedures should be documented and communicated to the firm‘s personnel. It
shows that firm‘s personnel are not properly sensitized regarding requirements of SQC 1.

Question 14

RST & Co., a firm of Chartered accountants, are auditors of a listed company engaged in manufacturing
of heavy machinery components. The audit report for year 2021-22 also included report on matters
listed in CARO,2020. While reporting under clause vii(a) of the said order relating

to regularity of undisputed statutory dues by the company, the auditors have commented that company
is ―generally regular‖ in depositing statutory dues to appropriate authorities. Is above reporting
qualitative and in line with requirements of SA 220? (ICAI Module TYU)

Answer

Such type of reporting is not qualitative. It is not in accordance with SA 220. One of the objectives of
the auditor, as per SA 220, 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
regulatory and legal requirements. The reporting under CARO, 2020 is not proper. Hence, the audit
does not comply with regulatory and legal requirements.

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