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Chapter 5 Auditing and Assurance Principles Note Chapter

Auditing (Silliman University)

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CHAPTER 5
QUALITY CONTROL FOR AUDITORS
The sustainability of the accounting profession depends on the quality of service rendered by the
auditors. And the quality of service in turn, is affected by disruptive and preserving factors. This
chapter discusses the preserving and enhancing factors to quality of service.
Among the topics we will be discussing are the PRESERVING and ENHANCING factors
mentioned in chapter two, that is the regulatory and professional ethics framework, and
accounting and auditing standards. In the Philippines, these are embodied in Republic Act 9298,
also known as the Accountancy Law of 2004, and the Philippine Standards of Quality Control
which is adapted from the International Standards for a Quality Control. And of course, we have
the governance policies that audit firms impose upon themselves for the purpose of regulating
their actions, so that they measure up to or even exceed the quality standards clients can expect
from professional service firms.
As always, in the practice of accountancy, we should remember to be professional, perform
effectively and efficiently, follow standards and document our work adequately and properly.
The THREE PRIMARY SOURCES OF QUALITY STANDARDS for Filipino public
accountants are from:
1. LEGISLATION. This is represented by RA 9298, as already mentioned, in that document
is states in section two, declaration of policy that the state acknowledges that accountants
have an important role in nation building and development. Hence, it commits itself to
legislation of this act, to develop a nurture competent, virtuous, productive and well-
rounded professional accountants whose standards of practice and service shall be
excellent, qualitative, world class and globally competitive. Listed among the three
objectives of RA 9298 are the “supervision, control and regulation of the practice of
accountancy in the Philippines” through the professional regulatory Board of
Accountancy, the body that the law gave oversight function to.
2. PROFESSIONAL STANDARDS (PSQC 1 ad PSA 220) As we know, these are the
standards that CPAs all around the world imposed upon themselves, not by the government,
its agencies or any organization. Each professional discipline almost has its own
professional standard. There is one for teachers, another one for nurses, and there's also for
engineers, law enforcers, social workers, and of course, you also have several for
accountants.
The Philippines Standards for Quality Control or PSQC and the Professional Code of
Ethics for Accountants are two of these. The former, the PSQC, will be discussed in this
presentation and the latter, the Code of Ethics, in the next topic discussion videos.
The PSQC deals with a firm’s responsibilities for each system of quality control for audits and
reviews of financial statements consisting of policies and procedures or processes. The policies
are designed to achieve the objective of the audit firm to establish and maintain a system of quality
control that provides reasonable assurance that

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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.
On the other hand, the PROCEDURES outlined in the PSQC are designed to assure
implementation and monitor compliance with those policies.
3. FIRM'S INTERNAL STANDARDS (Governance) usually embodied in its governance
policies. Such policies may provide for processes through which corporations objectives
are set and pursued in the context of the social, regulatory and market environment. These
include monitoring actions, policies, practices, and decisions of corporations, their
agencies, and affected stakeholders to ensure that a high level of objectivity permeates the
firm's culture.

LEGISLATION
Some of the relevant provisions of Republic Act 9298 that affect the quality control standards
of the accounting profession are set out in Slides 5 to 15.
These slides contain screen captures of sections of RA 9298, namely
1. Section nine (Section 9 + Annex B) Powers and Functions of the Board of Accountancy,
and the related Annex B of the IMPLEMENTING RULES AND REGULATIONS or IRR
related to quality review of the work of the audit firm.
(h) To conduct an oversight into the quality of audits of financial statements through a
review of the quality control measures instituted by auditors in order to ensure compliance
with the accounting and auditing standards and practices.
Quality Review is defined as a study, appraisal or review by the board or its duly authorized
representatives of the quality of audit of financial statements through a review of the quality control
measures instituted by an individual CPA firm, or partnership of CPAs engaged in the public
practice of accountancy, to ascertain compliance with prescribe professional, ethical and technical
standards of public practice. The general provisions of the law states that law grants the Board of
Accountancy to conduct an oversight into the quality of audits or financial statements. The IRR of
RA 9298 also states that as a condition to registration or any renewal to practice public
accountancy, a registrant shall undergo a quality review conducted by the Quality Review
Committee or QRC.
2. Section 26. Prohibition in the Practice of Accountancy. This prohibition contributes to
quality control standards by ensuring that only individuals may use the title Certified Public
Accountant after they have undergone rigorous training and screening in the academe and
pass the licensure examinations for accountants. Thus, this provision ensures that even
before one can practice public accountancy, he or she has already acquired a vast deal of
knowledge and is already highly skilled to practice the profession.
3. Section 28. Limitation in the practice of accountancy. This provision of RA 9298
contributes to quality control standards in that it requires the single practitioner and partner

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of partnership firms organized for the practice of accountancy acquire a minimum of three
years meaningful experience in any of the areas of public practice, including taxation. In
Section 28 A, the law further qualifies meaningful experience in the areas of commerce,
industry, academe or education, government and public practice.
4. Section 30. Accredited Professional Organization or APO. This provision contributes to
quality control standards by allowing only one integrated an accredited national
professional organization to represent all the CPAs in the country. This accredited
professional organization or APO is the Philippine Institute of Certified Public
Accountants or PICPA, through which the members shall receive benefits and privileges
appurtenant thereto.
The bylaws of PICPA further states that the organization adheres to the highest ideals of
professionalism and commitment to service and uphold such values, integrity, professional
excellence, innovation, discipline, teamwork, social responsibility and commitment. It all also
provides a channel to which individual CPAs may acquire, CPD or Continuing Professional
Development units and be updated of pronouncements from the Board of Accountancy.
Seminars that credit CPD units are usually advertised at the organization's website, the PICPA
website. Announcement by the Board of Accountancy as well as other organizations related to
accountants and accountancy, are also announced on the website. A screenshot of the PICPA
website can be seen in slide 12.
5. Section 31. Accreditation to Public Practice of Accountancy. The laws, provision for
penalties, violations of the implementing rules and regulations of RA 9298 contribute to
quality control standards by ensuring that erring accountants are sanctioned. Some of the
violations that accountants may commit and subject to penalties are those listed in Annex
B, ITEM 5 of the Implementing Rules and Regulations.
6. Section 32. Continuing Professional Education or CPE Program, now called the
Continuing Professional Development or CPD program and the related Annex C of the
implementing rules and regulations.
Perhaps the most important contribution of RA 9298 to the Quality Control Standards for
accountants is it's a requirement that all accountants participate in the CPD program
designed to meet the requirements of voluntarily maintaining and improving the
professional standards and ethics of the profession, thereby ensuring competence, integrity
and global competitiveness of professionals in order to allow them to continue the practice
of their profession.
ANNEX C of the IRR details the various aspects of the CPD program for accountants in the
Philippines.

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PROFESSIONAL STANDARDS (PSQC 1 ad PSA 220)

The SECOND source of quality control standards for professional accountants in the
Philippines is the Philippines Standards for Quality Control document or the PSQC. This
quality control document is for accounting and audit firms that perform audits and reviews of
financial statements and other assurance and related services engagements. PSQC is based on the
International Standards on Quality Control or ISQC issued by the International Auditing and
Assurance Standards Board or IAASB. There are no significant differences between PSQC and
ISQC.
ISQC or the PSQC was unanimously approved for adoption on January 12 2009, by the
members of the Auditing and Assurance Standards Council.
This PSQC applies to all firms of Professional Accountancy 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 audit 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 of firms.
Paragraph 11, The Objective of the firm as set forth by PSQC 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.
Paragraph six (Paragraph 6) of the PSQC, the objective provides the context in which the
requirement of this PSQC is set and use intended to assist the firm in understanding what needs to
be accomplished and deciding whether more needs to be done to achieve the objective.
So, what are the requirements of PSQC that firms must follow when establishing their quality
control standards?
REQUIREMENTS OF PSQC THAT FIRMS MUST FOLLOW WHEN ESTABLISHING
THEIR QUALITY CONTROL STANDARDS
It requires the firm establish a system of quality control policies and procedures that covers the
following areas listed on the slide at the list,
ELEMENTS OF A SYSTEM OF QUALITY CONTROL
a. leadership responsibilities for quality within the firm
b. relevant ethical requirements,
c. acceptance and continuance of client relationships and specific engagements,
d. human resources,
e. engagement performance,
f. monitoring, and
g. documentation of the SQC.

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And paragraph 17 also requires the firm to document and communicate its policies and
procedures to all firm’s personnel. 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 to achieve, they are designed to achieve and the
-message that each individual has a personnel 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 systems of quality
control.

ELEMENT 1: LEADERSHIP RESPONSIBILITIES

What are the requirements of PSQC as regards the element of leadership responsibilities in the
firm’s System of Quality Control or SQC?
1. It requires that the SQC policies and procedures required at the highest position, Again, the
highest position in the firm, the top management assumed the ultimate responsibility for
the SQC.
2. It requires that the SQC be designed in a way that it requires top management to set an
example in promoting an internal culture of quality. This is anchored on the need for the
firm's leadership to recognize that the firm’s businesses strategy is subject to the
overriding requirement for the firm to achieve quality in all the engagements that the
firm performs.
PROMOTING A QUALITY CULTURE includes:
A. Establishing of policies and procedures that address performance evaluation, compensation
and promotion, including incentive systems with regard to its personnel in order to
demonstrate the firm's overriding commitment to quality
B. Assignment of management responsibilities so that commercial considerations do not
override the quality of work performed, and
C. Provision of sufficient resources for the development, documentation and support of its
quality control policies and procedures.
The promotion of a quality oriented internal culture depends on a clear, consistent and frequent
actions and messages from all levels of the firm’s management that emphasize the firm's quality
control policies and procedures and the requirement to
a. perform work that complies with professional standards and regulatory and legal
requirements and
b. issues support that are appropriate inter circumstances.

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Such actions and messages encourage a culture that recognizes and rewards high quality work.
ELEMENT 2: ETHICAL REQUIREMENTS
Element two is the requirement for an SQC’s policies and procedures designed to provide
it with reasonable assurance that the firm and its personnel comply with relevant ethical
requirements, especially that of being independent (independence is paramount). Such policies
and procedures on Independence shall enable the firm to identify and evaluate circumstances and
relationships that create threats to independence, and to take appropriate action to either
1. eliminate those threats or reduced them to an acceptable level by applying safeguards
or, if considered appropriate
2. to do withdraw from the engagement, where withdraw is permitted by law or
regulation.
Paragraph 22: Such policies procedures shall require
a. engagement partners to provide the firm with relevant information about client
engagements, including the scope of services to enable the firm to evaluate the overall
impact, if any, on Independence requirements,
b. personnel to promptly notify the firm of circumstances and relationships that create a threat
to independence, so that appropriate action can be taken and
c. the accumulation and communication of relevant information to appropriate personnel so
that the firm and its personnel can readily determine whether they satisfy independence
requirements. And so that the firm can maintain and update its records relating to
independence and lastly,
d. so that the firm can take appropriate action regarding identified threats to independence
that are not at an acceptable level.
Paragraph 23. The firm shall establish policies and procedures designed to provide it with
reasonable assurance that it is notified of breaches of independence requirements, and to enable it
to take actions to resolve such situations.
Paragraph 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 by obtaining confirmation and taking appropriate action on
information indicating non-compliance, the firm demonstrates the importance that it attaches to
independence and makes the issue current for and visible to its personnel.
What is a FAMILIARITY THREAT?
The Philippine ethics code discusses the familiarity threat that may be created by using the same
senior personnel on an engagement over a long period of time and the safeguards that might be
appropriate to address such threats and they will be discussed in great detail in the following
topic discussion videos.
Paragraph 25. The firm shall also set out criteria for determining the need for safeguards to reduce
the familiarity threat to an acceptable level when using the same senior personnel on the children's

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engagement over a long period of time, and the 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 reputation requirements after a
specific period in compliance with relevant ethical requirements set forth in the International Code
of Ethics for professional accountants, when again that will be discussed in great detail enough in
the next topic, discussion videos.
Compliance with other ethical requirements.
Aside from the all-important element of independence, the Philippine Ethics Code establishes the
fundamental principles of professional ethics, which include integrity, objectivity, professional
competence, and due care, confidentiality and professional behavior.
Part B of the Philippine Ethics Code illustrates how the conceptual framework is to be applied
in specific situations. It provides example of SAY COURSE that may be appropriate to address
threats to compliance with the fundamental principles mentioned and also provide examples of
situations where safeguards are not available to address the threats. For example, in the case of a
non-compliance to laws and regulations or what is popularly known as NOCLAR. The
fundamental principles are reinforced in particular by the leadership of the firm, the education and
training, monitoring, and a process for dealing with non-compliance.
How does a firm evaluate whether to accept a new client or continue a relationship with an
existing client?
ELEMENT 3: ACCEPTANCE AND CONTINUANCE OF CLIENT RELATIONSHIPS
AND SPECIFIC ENGAGEMENTS
The third element that the firm's SQC should have is the requirement of policies and procedures
for acceptance and continuance of client relationships and specific engagements. Such policies
and procedures should be designed to provide the firm with reasonable assurance that it will only
undertake or continue relationships and engagements where the firm
a. is competent to perform the engagement and has the capabilities including time and
resources to do so, (competence and resources)
b. where the firm can comply with relevant ethical requirements (compliant with ethical
requirements) and
c. where the firm has considered the integrity of the client and does not have information that
would lead it to conclude that the client lacks integrity (client has integrity)
COMPETENCE AND RESOURCES, this involves reviewing the specific requirements of the
engagement, again, it involves
-reviewing the specific requirement of engagements and
-reviewing existing partner and staff profiles at all relevant levels and including whether
the firm’s personnel have knowledge of relevant industries or subject matter, and whether the
firm personnel have experience with relevant regulatory or reporting requirements or the ability
to gain the necessary skills and knowledge effectively, and whether the firm has sufficient

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personnel with the necessary competence and capabilities, whether the firm experts are
available if needed, whether individuals meeting the criteria and eligibility requirements to
perform engagement quality control review are available, where applicable, and whether the
firm is able to complete the engagement within the reporting deadline.
When evaluating the integrity of a NEW CLIENT, the firm has to consider policies and
procedures that will take into account a lot of things about the client, including
-the identity and business reputation of the clients, principal owners’ key management and
those charged with governance.
-The nature of the client's operations, including its business practices,
-information concerning the attitude of the clients, principal owners, key management and
those charged with its governance towards such matters as aggressive interpretation of accounting
standards in the internal control environment
-Whether the client is aggressively concerned with maintaining the firm’s fees as low as
possible
-In whether there are indications of inappropriate limitation in the scope of the auditor's
work,
-indications that the client might be involved in money laundering or other criminal
activities.
-The reason for the proposed appointment of the firm and non-reappointment of the
previews on detour and
-the identity and business reputation of related parties.
As to REPEAT CLIENTS, policies and procedures on deciding whether to continue a client
relationship includes
-consideration of significant matters that have arisen during the current or previous
engagement and their implications for continuing the relationship. For example, a client may have
started to expand its business operations into an area where the firm does not possess the necessary
expertise.
-Of course, there will be times when the relationship or an engagement has to be
withdrawn, withdrawn, and this must be when the client or the engagement is considered to be of
very high risk,
Policies and procedures on withdrawal from an engagement or from both the engagement and
that client relationship, address issues that include the following:
-discussing with the appropriate level of client’s management and those charged with
governance, the appropriate action that the firm might take based on the relevant facts and
circumstances.

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-If the firm determines if it is appropriate to withdraw, discuss with the appropriate level
of the client’s management and those charged with its governance, withdrawal from an
engagement or from both the engagement and the client relationship and the reasons for the
withdrawal
-considering whether there is a professional regulatory or legal requirement for the firm to
remain in place or for the firm to report the withdrawal from the engagement or from both the
engagement and client relationship together with the reasons for the withdrawal to regulatory
authorities. So, this is the case if the engagement cannot be withdrawn when unilaterally by the
auditor.
-And lastly documenting significant matters, consultations conclusions, and the basis for
the conclusions.
How does the firm choose the appropriate engagement partner and the right composition of the
engagement team?
ELEMENT 4: HUMAN RESOURCES
The fourth element that PSQC requires is the area of human resources of the audit firm. The firm
is required to sublease policies and procedures designed to provide it with reasonable assurance
that it has sufficient personnel with the confidence, capabilities and commitment to ethical
principles necessary to perform engagements in accordance with professional standards and
regulatory and legal requirements and enable the firm or engagement partner to issue reports that
are appropriate in thorough circumstances.
1. ENGAGEMENT PARTNER
It also requires that responsibility for each engagement be assigned to:
a. partner ensuring that the identity and role of the engagement partner are communicated
to key members of client management and those charged with governance.
b. the engagement partner has the appropriate competence, capabilities and authority to
perform the role. (Competent, capable, and has explicit authority)
c. the responsibilities of the engagement partner are clearly defined and communicated to
that partner. (Responsibilities clearly defined and communicated)
Policies and procedures may include systems to monitor the workload and availability of
Engagement Partners, so as to enable these individuals to have sufficient time to adequately
discharge their responsibilities.
2. ENGAGEMENT TEAM
As to engagement team, the firm's assignment of engagement teams in the determination of the
level of supervision required, include, for example,
a. consideration of the engagement team's understanding of and practical experience with
engagements of a similar nature and complexity through appropriate training and
participation. The engagement team's understanding of professional standards and

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regulatory and legal requirements. (Have understanding of and experience with

engagements of similar nature and industry)
b. The engagement team's technical knowledge and expertise including knowledge of
relevant information technology, the engagement team's knowledge of relevant
industries in which the clients operate. (Technical knowledge and expertise including
knowledge of information technology)
c. The engagement team's ability to apply professional judgment and the engagement
team's understanding of the quality control policies and procedures. (can apply
professional judgment)
ELEMENT 5: ENGAGEMENT PERFORMANCE
The Fifth Element that PS QC requires relates to how the firm can perform a quality engagement
involving matters related to supervision, review and consultation.
CONSISTENCY OF QUALITY THROUGH DOCUMENTATION
The firm promotes consistency in the quality of an engagement performance through its
policies and procedures. 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 may include:
- ENGAGEMENT TEAM BRIEFING. How engagement teams are briefed on the
engagement to obtain an understanding of their objectives of their work.
- And matters address may also include PROCESSES FOR COMPLYING WITH
APPLICABLE ENGAGEMENT STANDARDS.
- May it also may include PROCESSES OF ENGAGEMENT SUPERVISIONS STAFF
TRAINING AND COACHING.
- Again, it may include METHODS OF REVIEWING THE WORK PERFORMED, THE
SIGNIFICANT JUDGMENTS MADE IN THE FORM OF REPORT BEING ISSUED.
- It also may include APPROPRIATE DOCUMENTATION OF THE WORK
PERFORMED AND OF THE TIMING AND EXTENT OF THE REVIEW.
- And lastly, it may also include PROCESSES TO KEEP ALL POLICIES AND
PROCEDURES CURRENT.
SUPERVISION
Appropriate teamwork and training assist less experienced members of the engagement team to
clearly understand the objectives of the assigned work.
In the area of supervision engagement supervision includes the following:
1. Tracking the progress of the engagement
2. Considering the competence and capabilities of individual members of the engagement
team, whether they are or whether they have sufficient time to carry out their work, whether

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they understand their instructions and whether the work is being carried out in accordance
with the plan approach to the engagement
3. addressing significant matters arising during the engagement considering their
significance, and modifying the plan approach appropriately.
4. identifying matters for consultation or consideration by more experienced engagement
team members during the engagement.
REVIEW
The function of review shall include policies and procedures that consider
- whether the work has been performed in accordance with professional standards and
regulatory and legal requirements.
-Whether significant matters have been raised for further consideration,
- whether appropriate consultation had taken place and the resulting conclusions have been
documented and implemented,
- whether there is a need to revise the nature, timing and extent of work performed. –
- whether the work performed supports the conclusion which to me is appropriately
documented.
- whether the evidence obtained is sufficient and appropriate to support the report and
- whether the objectives of engagement procedures have been achieved.
CONSULTATION (in and out)
Consultation includes discussion at the appropriate professional level inside the firm or with
individuals within or outside firm who have specialized expertise. Appropriate recognition of
consultation interference, 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.
Effective consultation on significant technical, ethical and other matters within the firm or where
applicable, outside the firm can be achieved when those consulted are
- given all the relevant facts that will enable them to provide informed advice and when those
consulted
- have appropriate knowledge, security and experience and when conclusions resulting from
consultations are appropriately documented and implemented.
ELEMENT 6: MONITORING OF THE SQC
EVALUATION
The purpose of monitoring compliance with quality control policies and procedures is to provide
an evaluation of
1. adherence to professional standards and regulatory and legal requirements

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2. whether this system of quality control has been appropriately designed and effectively
implemented and
3. 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.

COMMUNICATION
PSQC requires an audit firm to also develop policies and procedures aimed at monitoring that
SQC, providing it with reasonable assurance that the policies and procedures are relating to the
system of quality control are relevant, adequate and operating effectively.
This process shall:
a. include an ongoing consideration and evaluation of the firm's system of quality control,
including on a cyclical basis, inspection of at least one complete engagement for each
engagement partner.
b. require responsibility for the monitoring process to be assigned to a partner or partners or
other persons with sufficient and appropriate experience and authority in the firm to assume
that responsibility.
c. require that those performing the engagement of the engagement quality control review are
not involved in inspecting the engagements.
ENGAGEMENT INSPECTION
With regards to the inspection of engagements, inspections, cycle policies, and procedures may
for examples specified 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:
a. the size of the firm,
b. the number and geographical location of offices,
c. the results of previous monitoring procedures,
d. 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 and
e. the nature and complexity of the firm's practice and organization, and lastly,
f. the risks associated with the firm's clients and specific engagements.
The inspection process includes the selection of individual engagements, some of which may be
selected without prior notification to that 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. Again, an independent external
inspection program does not act as a substitute for the firm's own internal monitoring program.

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REMEDIATION OF DEFICIENCIES
When deficiencies to the quality control are discovered, there must also be policies and procedures
for evaluating, communicating and remedying the deficiencies.
The evaluation process should provide a conclusion whether the deficiency is an insignificant
nature that does not indicate that the SQC is inadequate, or whether the deficiency is of
significant nature that requires prompt corrective action.
When the deficiency is of a significant nature, it shall be communicated to relevant Engagement
Partners and other appropriate personnel along with recommendations for appropriate remedial
action, which might include one or more of the following
a. taking appropriate remedial action in relation to an individual engagement or member or
the engagement team
b. the communication of the findings those responsible for training and professional
development, so that the deficiency is also addressed during the orientation and training of
new hires
c. changes to the quality control policies and procedures to prevent the same deficiency from
recurring in the future, and
d. disciplinary action against those who fail to comply with the policies and procedures of the
fair, especially those who do so repeatedly.
ANNUAL MONITORING REPORT
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 this individuals to take
prompt and appropriate action, where necessary, in accordance with their defined roles and
responsibilities. Information communicated shall include the following three items,
1. a description of the monitoring procedures performed
2. the conclusions drawn from the monitoring procedures, and
3. where relevant, a description of systemic repetitive or under significant deficiencies, and
of the actions taken to resolve or amend those deficiencies.
COMPLAINTS AND ALLEGIATIONS
The firm shall establish policies and procedures designed to provide it with reasonable
assurance that it deals appropriately with complaints and allegations that the work performed
by the firm and fails to comply with professional standards and regulatory and legal
requirements and allegations of non-compliance with a firm system of quality control. As part
of this process, the firm shall establish clearly defined channels for firm personnel to raise any
concerns in a manner that enables them to come forward without fear of reprisals. Complaints
and allegations which do not include those that are clearly frivolous, may originate from within

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or outside the fair. They may be made by the firm in personnel, clients or other third parties.
They may be received by engagement team members or other firm personnel.
Policies and procedures established for the investigation of these complaints and allegations
may include for example, that the partner supervising the investigation
- has sufficient and appropriate experience
- has authority within the firm and
- is otherwise not involved in the engagement.
The partners who provide him the investigation may involve legal counsel as necessary. If doing
the investigations into complaints and allegations, deficiencies in the design or operation of the
firm's quality control policies and procedures or non-compliance with a firm system of quality
control by an individual or individuals are identified, the firms shall take appropriate actions as set
out in paragraph 51.
ELEMENT 7: DOCUMENTATION OF THE SQC
This element of documentation is not a requirement per se, since it is expected and it is a given
that all quality control systems are adequately and properly documented, or else how would
the personnel implement the system?
Paragraphs 57 to 59 discusses with regard to documentation, PSQC requires firms to stablished
by certain procedures requiring that appropriate documentation to provide
- evidence of the operation of each element of its system of quality control.
- retention of (policies) documentation for a period of time, sufficient to permit those
performing monitoring procedures to evaluate the firm's compliance with its system of
quality control or for a longer period, if required by law, or regulation.
- documentation of complaints and allegations and the responses to them.
The form and content of documentation evidencing the operation of each of the elements of the
system of quality control is a matter of judgment in depends on a number of factors which includes
the size of the firms and the number of offices, the nature and complexity of the firm's
practice and organization. For example, large firms may use electronic databases to document
matters such as independence, confirmations, performance evaluations, and the results of
monitoring inspections.
Appropriate documentations relating to monitoring includes, for example,
- monitoring procedures, including the procedure for selecting completed engagements to
be inspected, may also include a
- record of the evaluation of adherence to professional standards and regulatory and legal
requirements. Also, record of the wash relation of whether the system of quality control
has been appropriately designed and effectively implemented and a record in of the
evaluation of whether the firm's quality control policies and procedures have been
appropriately applied so that the reports that are issued by the firm or Engagement Partners
are appropriate in the circumstances.

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- Identification of the deficiencies noted and evaluation of the effect and the basis for
determining whether and what further action is necessary is also a factor in the form
determining the form and content of documentation of the SQC.
FIRM'S GOVERNANCE POLICIES
The last source of quality standards for audit firms, as mentioned at the outset is the FIRM'S
GOVERNANCE POLICIES that firm imposes upon itself. The personnel, especially those in
higher positions, for the purpose of regulating their actions, so that they measure up to or even
exceed the quality standards clients can expect from professional service firms.
In addition to the regulation and the PSQC standards, the firm does can add governance policies
in various areas of their organizations such as
- human resource governance,
- finance governance,
- IT governance and so on and so forth that do not relate to the firm's qualification to
engagements, client selection and retention or engagement performance.
Of course, as already pointed out, these policies will be unique and highly specific to the firm and
even to each area of governance. Moreover, governance principles are discussed in your other
general education subjects or might also be a major subject.
In summary, there are three primary sources of quality control that the auditor or the firm may
build his own quality standards. Whatever controls he or the firm may adopt, the firm or the
auditor makes sure that it is fitting for the organization and to the client and the engagement he
takes in. They must also ensure that such quality standards are accompanied by sound and
efficient processes that incorporate the standards as well as controls that ensure that such standards
are complied with monitored, and deviations to them are documented. Lastly, the quality
control standards must be documented, signed by appropriate authorities within the organization
and clearly communicated to all members of the organization.

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ISA/ASA 220 Quality Control on Audits EXPLAINED

In this video, I'm going to look at ASA/ISA, 220 and 220 is quite important because it looks at
quality control and there's certainly been a lot in the press recently about the quality of audits. So
remember that our Australian standards are internationally harmonized. So if you're an
international student, and you're using ISOs, then this video will apply to you just as well. Now
remember, we also have standards on quality control. So ASQC or ISQC, on quality control, and
APES 110, also has specific requirements about quality, they actually refer you back to ISA/ASA
220. Now, why is audit quality important? Well, the idea of an audit and audit standards is that
everybody is supposed to be doing the same minimum level of an audit. So if we have audit quality,
I'll draw this on a scale, audit quality. Okay, and here at different companies. what the standards
are supposed to do is that the Ishs asase, are meant to give us a minimum basic level of quality. So
all audit should be at least at this level. Sometimes, you might have audits that are of a slightly
higher quality. The research shows us a couple of different things, the sorts of things that might
lead to higher quality audits could be industry specialists, if you're using an industry specialist,
that could lead to a high quality audit, or if you're using a big full firm, quite often their audits are
of higher quality. So as QC, and ASI sa 210 are here to make sure that we know what is the
minimum level of things we should be doing for quality control, as well as following generally at
AASA. So this is a specially about quality control within the audit firms, and on the specific audit
engagement. So let's skip through to our contents. And we'll have a quick overview of our contents.
Nothing really unusual here, the objective of the standard is to promote audit quality, some
requirements, remember, these are the legally enforceable components that we have to do. And
then our explanatory material is just that other stuff that will help us interpret what's up here in the
requirements. In my videos, I don't go into the explanatory material, I just go into the requirements.
These are conformity with international standards. So you'll see here we are compliant with ISO a
220 on quality control. Well, let's jump into the introduction. So the introduction is very clear. This
standard deals with specific responsibilities of the auditor regarding quality control procedures for
the audit of a financial report, so what sort of quality control does the firm need to have at their
firm level at the individual engagement. And it also, I mentioned as QC one as well. Now, our
objective of our standard is always really critical. Go back if you're wondering what a standard is
about the objective is always critical, implement quality control procedures for the engagement,
that provide the auditor with reasonable assurance that we are following the auditing standards.
And then we're issuing the report inappropriate standard circumstances. Now this is because audits
are done by teams of people. Now, lots of people working together, we need to make sure that we
have good policies and procedures to make sure that everybody in that team is doing the right
thing. And we have some definitions. You can read through those definitions yourself. Within the
standard. There's lots of information on the definitions, but let's jump into the requirements.
Remember, the requirements here in Australia are the parts that are legally enforceable. So there
has to be leadership. We have an engagement partner upon who's responsible for signing the audit,
and they are responsible for the overall audit quality so if something goes wrong in the audit, that
partner is going to be legally
responsible Okay, so it's really important, there's a lot of pressure on that audit partner to get it
right. The second area is ethical requirements. So it says we have to comply with our ethical

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requirements. And those ethical requirements for us are going to be APS 110. So they have to
make sure that they follow the ethical requirements. Now, it goes into some detail here, specifically
about independence, because remember, independence is the cornerstone of an audit. So we
should, as the partner, look at independence, and make sure that we followed the requirements in
APS 110. And in Australia, also, our Corporations Act. Alright, so we have to follow all of those
particular requirements. Now, we have to check that everybody is independent, even if you're using
our other firms, that if we have a breach, we know what to do. And if we have threats to
independence, then we have to reduce them by applying safeguards. Those safeguards, of course,
come from AP Yes, 110. And I'll make another video on APS 110. It's a Mega Huge standard.
Now, what if we have client engagements? Well, if we accept or continue an existing engagement,
then we need to make sure that we followed all of the requirements from AASA iaasa to 10, about
establishing a relationship. Now, if we scroll up, not going to go through every single paragraph,
but I'm going to go through key ones. So here, assignment of engagement teams is really important
about making sure that we have the right personnel, they are appropriately competent, they've got
the right industry knowledge. So that skill could be related to a particular industry, they might need
to have a certain amount of audit experience in general, to meet those requirements. So we have
to have the right people on the team, which wouldn't accept a job if we can't, then when we do the
audit, we have to make sure that when we have the performance of the audit or the execution, when
we're executing the audit, or we're going out and we're collecting evidence, we do a few specific
things. Number one, the partner is responsible for supervising, directing, supervising and
performance of the audit. So they have to make sure that the right plan is put in place. They
supervise managers, managers supervise senior auditor, senior auditors supervise Junior auditors.
And of course, I mentioned they give the right report, there has to be a process of review. Alright,
so this is a really important process where someone senior checks, a junior staff members work.
Oops, I can't spell member there. So this is really important because of the teamwork aspect. So
that means Junior auditors work is checked by the senior senior auditors work is checked by the
manager managers work might be checked by the partner. Now those reviews could be looking at
specific documents and saying, Okay, what sort of work is this person doing? Are they doing the
right thing? Yep, they're doing the right thing. Or it could even be an interview, where two people
sit down, perhaps with a little beverage, each hot cup of tea, and they talk about what has been
going on in the audit. One thing that was common and popular at PwC, where I was, was this
review by interview approach. And we should also have consultation. So if there is something that
needs to be talked about with the team, we should be communicating with that team. This is really
important. So communication between all of the team members about the audit, the partner just
doesn't leave them to it, they actually have to go and set a plan, check in regularly about how things
are going, what work is being done. Now, once we've done the audit, there needs to be a quality
control review. Alright, so somebody
should check that there is an engagement control quality reviewer, that typically this is a second
partner, different partner who checks that everything has been done in accordance with the isi
asase. So their job is to perform an objective evaluation of the judgments made by the team and
their conclusions to make sure that they're appropriate. All right. So what they're going to do is
they're going to do a few different things. They're going to talk with the partner. They're going to
look at documents, including audit documentation to make sure it's all done correctly. In

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accordance with policy and with the standards, alright, to make sure that there are no loopholes.
This is like a second check. Now, this is my very poor attempt at a magnifying glass. But that's
what that is right there. So we have to have this second pair of eyes to check. Now, if there are
differences, what happens if two partners disagree? Well, then they might need to follow the firm's
policies and procedures to figure out and resolve that difference of opinion. So we have all of these
procedures and this quality checking. Now what the firm should also do is a monitoring process.
So they need to check that their own policies and procedures are operating effectively, all the time.
So that might be some form of, we just change my color pen here. audit firm, regular inspections.
Alright, so that could be regular inspections by some sort of quality control unit, it could be peer
review of audits by another firm. It could even be inspection by a professional association. Now
the next section I want to talk about is really, really critical, because auditors spend a lot of time
doing this, and this is documentation. Now, without documentation, there's no proof that we did
anything. So for the auditor, documentation is proof of our work and supporting our decisions or
our judgments. So if I don't have this documentation in place, there's no proof that we actually did
anything. So what sort of thing should we document and there is actually a whole audit standard
on this AASA 230, which is the next video in this series, we'll talk about documentation. But
important things are like we have to say why we've made our conclusions. How do we make those
conclusions? How did we come about with our evidence for that? And the quality control reviewer
should actually document their work as well. So now we move on to the explanatory material,
which I'm not going to get into but you can certainly look at the explanatory material, I've got a
link in the comments to where you can see the standards. I hope you found this useful. If you have
any questions about quality control, please pop them in the comments. Otherwise, we'd really
appreciate a like of the video if you found it useful. Click to subscribe and certainly check out the
other videos in our auditing standard series. Thanks for watching, and I'll see you in the next video.

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