CHAPTER 5 QUALITY CONTROLS

TRUE OR FALSE

1. TRUE - PSQC1 (Redrafted) Application and Other Explanatory Material (A2)

In general, communication of quality control policies and procedures to firm personnel includes a
description of the quality control policies and procedures and the objectives they are designed to
achieve, and the message that each individual has a personal responsibility for quality and is expected
to comply with these policies and procedures. Encouraging firm personnel to communicate their views
or concerns on quality control matters recognizes the importance of obtaining feedback on the firm’s
system of quality control.

2. FALSE - PSQC1 (Redrafted) par. 18 and 19

The firm shall establish policies and procedures designed to promote an internal culture recognizing that
quality is essential in performing engagements. Such policies and procedures shall require the firm’s
chief executive officer (or equivalent) or, if appropriate, the firm’s managing board of partners (or
equivalent) to assume ultimate responsibility for the firm’s system of quality control.

The firm shall establish policies and procedures such that any person or persons assigned operational
responsibility for the firm’s system of quality control by the firm’s chief executive officer or managing
board of partners has sufficient and appropriate experience and ability, and the necessary authority, to
assume that responsibility

3. FALSE – PSQC1 (Redrafted) par 24 with Application and Other Explanatory

Material (A11)

At least annually, the firm shall obtain written confirmation of compliance with its policies and
procedures on independence from all firm personnel required to be independent by relevant ethical
requirements.

Written confirmation may be in paper or electronic form. By obtaining confirmation and taking
appropriate action on information indicating noncompliance, the firm demonstrates the importance
that it attaches to independence and makes the issue current for, and visible to, its personnel.

4. FALSE – IESBA Code of Ethics Section 100 par 12(d) and PSQC1 (Redrafted) par
25

Familiarity threat ─ the threat that due to a long or close relationship with a client or employer, a
professional accountant will be too sympathetic to their interests or too accepting of their work.

The firm shall establish policies and procedures: (a) 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 (b) Requiring, for audits of financial
statements of listed entities, the rotation of the engagement partner and the individuals responsible for
 CHAPTER 5 QUALITY CONTROLS

engagement quality control review, and where applicable, others subject to rotation requirements, after
a specified period in compliance with relevant ethical requirements.

5. TRUE – PSQC1 (Redrafted) Application and Other Explanatory Material (A29)

The size and circumstances of the firm will influence the structure of the firm’s performance evaluation
process. Smaller firms, in particular, may employ less formal methods of evaluating the performance
of their personnel.

6. TRUE - PSQC1 (Redrafted) par 33

The firm’s review responsibility policies and procedures shall be determined on the basis that work of
less experienced team members is reviewed by more experienced engagement team members.

7. FALSE – PSQC1 (Redrafted) Application and Other Explanatory Material (A37)

Consultation uses appropriate research resources as well as the collective experience and technical
expertise of the firm. Consultation helps to promote quality and improves the application of
professional judgment. Appropriate recognition of consultation in the firm’s policies and procedures
helps to promote a culture in which consultation is recognized as a strength and encourages personnel
to consult on difficult or contentious matters.

8. TRUE – PSQC1 (Redrafted) par. 43 and 44

The firm shall establish policies and procedures for dealing with and resolving differences of opinion
within the engagement team, with those consulted and, where applicable, between the engagement
partner and the engagement quality control reviewer.

Such policies and procedures shall require that: (a) Conclusions reached be documented and
implemented; and (b) The report not be dated until the matter is resolved.

9. FALSE – PSQC1 (Redrafted) par 12(d) and Application and Other Explanatory
Material (A46)

Engagement quality control review – A process designed to provide an objective evaluation, on or

before the date of the report, of the significant judgments the engagement team made and the
conclusions it reached in formulating the report. The engagement quality control review process is for
audits of financial statements of listed entities, and those other engagements, if any, for which the
firm has determined an engagement quality control review, is required.

Although not referred to as listed entities, as described in paragraph A16, certain public sector entities
may be of sufficient significance to warrant performance of an engagement quality control review.

10. FALSE – PSQC1 (Redrafted) Application and Other Explanatory Material (A48)
 CHAPTER 5 QUALITY CONTROLS

The engagement partner may consult the engagement quality control reviewer during the
engagement, for example, to establish that a judgment made by the engagement partner will be
acceptable to the engagement quality control reviewer. Such consultation avoids identification of
differences of opinion at a late stage of the engagement and need not compromise the engagement
quality control reviewer’s eligibility to perform the role. Where the nature and extent of the
consultations become significant the reviewer’s objectivity may be compromised unless care is taken by
both the engagement team and the reviewer to maintain the reviewer’s objectivity. Where this is not
possible, another individual within the firm or a suitably qualified external person may be appointed to
take on the role of either the engagement quality control reviewer or the person to be consulted on the
engagement.

11. FALSE – PSQC1 (Redrafted) par 48(a) and Application and other Explanatory
Material (A67)

Include an ongoing consideration and evaluation of the firm’s system of quality control including, on a
cyclical basis, inspection of at least one completed engagement for each engagement partner.

The inspection process includes the selection of individual engagements, some of which may be selected
without prior notification to the engagement team. In determining the scope of the inspections, the firm
may take into account the scope or conclusions of an independent external inspection program.
However, an independent external inspection program does not act as a substitute for the firm’s own
internal monitoring program.

12. FALSE –
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14. FALSE – PSA 220 (Redrafted) Application and other Explanatory Material (A1)

PSQC 1 (Redrafted), or national requirements that are at least as demanding, 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.

National requirements that deal with the firm’s responsibilities to establish and maintain a system of
quality control are at least as demanding as PSQC 1 (Redrafted) when they address all the elements
referred to in this paragraph and impose obligations on the firm that achieve the aims of the
requirements set out in PSQC 1 (Redrafted).

15. FALSE – PSQC1 (Redrafted) par. 4

 CHAPTER 5 QUALITY CONTROLS

This PSQC applies to all firms of professional accountants in respect of audits and reviews of financial
statements, and other assurance and related services engagements. The nature and extent of the
policies and procedures developed by an individual firm to comply with this PSQC will depend on various
factors such as the size and operating characteristics of the firm, and whether it is part of a network.

MULTIPLE CHOICE QUESTIONS

1. D – PSQC1 (Redrafted) par. 11

The objective of the firm is to establish and maintain a system of quality control to provide it with
reasonable assurance that: (a) The firm and its personnel comply with professional standards and
regulatory and legal requirements; and (b) Reports issued by the firm or engagement partners are
appropriate in the circumstances.

2. B – PSQC1 (Redrafted) par. 12(d)

Engagement quality control review – A process designed to provide an objective evaluation, on or

before the date of the report, of the significant judgments the engagement team made and the
conclusions it reached in formulating the report.

3. C – PSQC1 (Redrafted) par. 12(h)

Inspection – In relation to completed engagements, procedures designed to provide evidence of

compliance by engagement teams with the firm’s quality control policies and procedures.

4. B – PSQC1 (Redrafted) par. 12(i)

Listed entity – An entity whose shares, stock or debt are quoted or listed on a recognized stock
exchange, or are marketed under the regulations of a recognized stock exchange or other equivalent
body.

5. D – PSQC1 (Redrafted) par. 12(j)

Monitoring – A process comprising an ongoing consideration and evaluation of the firm’s system of
quality control, including a periodic inspection of a selection of completed engagements, designed to
provide the firm with reasonable assurance that its system of quality control is operating effectively.

6. C – PSQC1 (Redrafted) par. 11

The objective of the firm is to establish and maintain a system of quality control to provide it with
reasonable assurance that: (a) The firm and its personnel comply with professional standards and
regulatory and legal requirements; and (b) Reports issued by the firm or engagement partners are
appropriate in the circumstances.

7. D – PSQC1 (Redrafted) Application and other Explanatory Material (A4)

 CHAPTER 5 QUALITY CONTROLS

Such actions and messages encourage a culture that recognizes and rewards high quality work. These
actions and messages may be communicated by, but are not limited to, training seminars, meetings,
formal or informal dialogue, mission statements, newsletters, or briefing memoranda. They may be
incorporated in the firm’s internal documentation and training materials, and in partner and staff
appraisal procedures such that they will support and reinforce the firm’s view on the importance of
quality and how, practically, it is to be achieved.

8. C – IESBA Code of Ethics Section 290 par. 7

The conceptual framework approach shall be applied by professional accountants to: (a) Identify threats
to independence; (b) Evaluate the significance of the threats identified; and (c) Apply safeguards,
when necessary, to eliminate the threats or reduce them to an acceptable level. When the professional
accountant determines that appropriate safeguards are not available or cannot be applied to eliminate
the threats or reduce them to an acceptable level, the professional accountant shall eliminate the
circumstance or relationship creating the threats or decline or terminate the audit engagement.

9. A - PSQC1 (Redrafted) par. 24

At least annually, the firm shall obtain written confirmation of compliance with its policies and
procedures on independence from all firm personnel required to be independent by relevant ethical
requirements.

10. C – PSQC1 (Redrafted) par. 25

The firm shall establish policies and procedures: (a) 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 (b) Requiring, for audits of financial
statements of listed entities, the rotation of the engagement partner and the individuals responsible
for engagement quality control review, and where applicable, others subject to rotation requirements,
after a specified period in compliance with relevant ethical requirements.

11. D – PSQC1 (Redrafted) par. 27

Such policies and procedures shall require: (a) The firm to 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. (b) If a potential conflict of interest is identified in accepting an engagement
from a new or an existing client, the firm to determine whether it is appropriate to accept the
engagement. (c) If issues have been identified, and the firm decides to accept or continue the client
relationship or a specific engagement, the firm to document how the issues were resolved.

12. D – PSA 220 (Redrafted) par. 12 and 13

 CHAPTER 5 QUALITY CONTROLS

The engagement partner shall be satisfied that appropriate procedures regarding the acceptance and
continuance of client relationships and audit engagements have been followed, and shall determine that
conclusions reached in this regard are appropriate.

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.

13. C –
14. A – PSQC1 (Redrafted) Application and other Explanatory Material (A34)

Engagement supervision includes the following: • Tracking the progress of the engagement; •
Considering the competence and capabilities of individual members of the engagement team, whether
they have sufficient time to carry out their work, whether they understand their instructions and
whether the work is being carried out in accordance with the planned approach to the engagement; •
Addressing significant matters arising during the engagement, considering their significance and
modifying the planned approach appropriately; and • Identifying matters for consultation or
consideration by more experienced engagement team members during the engagement.

15. B – PSQC1 (Redrafted) par. 33

The firm’s review responsibility policies and procedures shall be determined on the basis that work of
less experienced team members is reviewed by more experienced engagement team members.

16. A. – PSQC1 (Redrafted) par. 34

The firm shall establish policies and procedures designed to provide it with reasonable assurance that:
(a) Appropriate consultation takes place on difficult or contentious matters; (b) Sufficient resources are
available to enable appropriate consultation to take place; (c) The nature and scope of, and conclusions
resulting from, such consultations are documented and are agreed by both the individual seeking
consultation and the individual consulted; and (d) Conclusions resulting from consultations are
implemented.

17. B - PSQC1 (Redrafted) par 12(d)

The engagement quality control review process is for audits of financial statements of listed entities,
and those other engagements, if any, for which the firm has determined an engagement quality control
review, is required.

18. A – PSQC1 (Redrafted) par. 39

The firm shall establish policies and procedures to address the appointment of engagement quality
control reviewers and establish their eligibility through: (a) The technical qualifications required to
perform the role, including the necessary experience and authority; and (b) The degree to which an
 CHAPTER 5 QUALITY CONTROLS

engagement quality control reviewer can be consulted on the engagement without compromising the
reviewer’s objectivity.

19. D – PSQC1 (Redrafted) par. 43 and 44

The firm shall establish policies and procedures for dealing with and resolving differences of opinion
within the engagement team, with those consulted and, where applicable, between the engagement
partner and the engagement quality control reviewer.

Such policies and procedures shall require that: (a) Conclusions reached be documented and
implemented; and (b) The report not be dated until the matter is resolved.

20. A – PSQC1 (Redrafted) Application and other Explanatory Material (A54)

Law or regulation may prescribe the time limits by which the assembly of final engagement files for
specific types of engagement is to be completed. Where no such time limits are prescribed in law or
regulation, paragraph 45 requires the firm to establish time limits that reflect the need to complete the
assembly of final engagement files on a timely basis. In the case of an audit, for example, such a time
limit would ordinarily not be more than 60 days after the date of the auditor’s report.

21. D – PSQC1 (Redrafted) Application and other Explanatory Material (A61)

In the specific case of audit engagements, the retention period would ordinarily be no shorter than
seven years from the date of the auditor’s report, or, if later, the date of the group auditor’s report.

22. C – PSQC1 (Redrafted) Application and other Explanatory Material (A66)

Inspection cycle policies and procedures may, for example, specify a cycle that spans three years. The
manner, in which the inspection cycle is organized, including the timing of selection of individual
engagements, depends on many factors, such as the following: • The size of the firm. • The number and
geographical location of offices. • The results of previous monitoring procedures. • The degree of
authority both personnel and offices have (for example, whether individual offices are authorized to
conduct their own inspections or whether only the head office may conduct them). • The nature and
complexity of the firm’s practice and organization. • The risks associated with the firm’s clients and
specific engagements.

23. C – PSQC1 (Redrafted) Application and other Explanatory Material (A64)

The purpose of monitoring compliance with quality control policies and procedures is to provide an
evaluation of: • Adherence to professional standards and regulatory and legal requirements; • Whether
the system of quality control has been appropriately designed and effectively implemented; and •
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.

24. B – PSQC1 (Redrafted) par. 50 and 53

 CHAPTER 5 QUALITY CONTROLS

The firm shall communicate to relevant engagement partners and other appropriate personnel
deficiencies noted as a result of the monitoring process and recommendations for appropriate remedial
action.

The firm shall communicate at least annually the results of the monitoring of its system of quality
control to engagement partners and other appropriate individuals within the firm, including the firm’s
chief executive officer or, if appropriate, its managing board of partners. This communication shall be
sufficient to enable the firm and these individuals to take prompt and appropriate action where
necessary in accordance with their defined roles and responsibilities. Information communicated shall
include the following: (a) A description of the monitoring procedures performed. (b) The conclusions
drawn from the monitoring procedures. (c) Where relevant, a description of systemic, repetitive or
other significant deficiencies and of the actions taken to resolve or amend those deficiencies.

25. A – PSQC1 (Redrafted) par. 57

The firm shall establish policies and procedures requiring appropriate documentation to provide
evidence of the operation of each element of its system of quality control.