22

Professional Standards and

 Quality Control

Quality is everything---not profit! Profit should only be the by-product of quality service.

This chapter presents the professional standards and the quality control that ensures compliance
with these standards. 

LEARNING OBJECTIVES

After studying this chapter, you should be able to: 

1. Know the applicable professional, ethical, legal, and regulatory requirements applicable to

engagements that practitioners perform. 

2. Enumerate the pronouncements of AASC, including their applicability to relevant

engagements, and the process of adopting the Philippine Standards and Statements. 

3. Explain the nature and purpose of a CPA firm's system of quality control. 

4. Enumerate, and discuss each of, the elements of a system of quality control. 

5. Discuss the requirements to document and communicate the policies and procedures

relating to elements of a system of quality control. 
PROFESSIONAL, ETHICAL, LEGAL, AND REGULATORY CONSIDERATIONS AN OVERVIEW (Learning
Objective 1)

Exhibit 22.1–Professional, Ethical, Legal, and Regulatory Requirements 

PROFESSIONAL STANDARDS (Learning Objective 2) 

When a practitioner renders the engagements discussed in previous chapters, certain

professional standards must be adhered to; these standards serve as a measure of quality in the
performance of engagements. It must be noted that standards serve as the minimum
requirements. 

Engagements performed that lack quality exposes the practitioner to professional liability such as
potential litigation, fines, damaged reputation, worst, and bankruptcy. It is held that a
practitioner's best defense, let's say, in case o litigation of auditor's alleged negligence of being
unable to detect fraud in the is that the audit had been conducted in accordance with the
auditing standards. 

The Auditing and Assurance Standards Council (AASC), Created by the Professional Regulation
Commission (PRC) upon the recommendation of the BOA, assist the BOA in the
promulgation of auditing (including assurance and related services) standards in the Philippines.
The exhibit below lists pronouncement of AASC.

Exhibit 22.2—AASC Pronouncements

Philippines Standards Practice Statements Applicable to:

Engagement Standards:
Philippine Standards on Philippine Auditing Practice Audit of historical financial
Auditing (PSAEs) Statements (PAPSAs) information.

Philippine Standards on Philippine Review Engagement Review of historical financial

Review Engagements Practice Statements (PREPSs) information.
(PSREs)

Philippine Standards on Philippine Assurance Assurance engagements

Review Engagements Engagement Practice dealing with subject matters
(PSREs) Statements (PAEPSs) other than historical
financial information.
Philippine Standards on Philippine Related Service Compilation, AUP and other
Assurance (PSRSs) Practice Statements (PAEPSs) related services
engagements
Philippine Standards on All service covered by
Quality Control (PSQCs) Engagement Standards

In exceptional circumstances, it may be necessary to depart from a basic principle or essential

procedure of an Engagement Standard to achieve more effectively the objective of the
engagement. When such a situation arises, the practitioner should be prepared to justify the
departure. 

Practice Statements are issued to provide interpretive guidance and practical assistance to
professional accountants in implementing the standards and to promote good practice.
Professional accountants should be aware of and consider Practice Statements applicable to the
engagement. A professional accountant who does not consider and apply the guidance included
in a relevant Practice Statement should be prepared to explain how the basic principles and
essential procedures in the Engagement Standard(s) addressed by the Practice Statement have
been complied with. 
Adoption of the Philippine Standards and Practice Statements 

The policy of the AASC is to make the International Standards and Practice Statements issued by
the International Auditing and Assurance Standards Board (IAASB) applicable in the Philippines.
In doing so, the AASC follows a due process presented in the next exhibit.

Exhibit 22.3-AASC Due Process of Adopting Standards and Statement

Refer to Appendix 22.A for the specific list of standards issued by AASC.

QUALITY CONTROL (Learning Objective 3) 

In a CPA firm, quality control comprises the methods (i.e., policies and procedures) that ensure
that it meets its professional responsibilities to clients and others. 

Objectives of a System of Quality Control 

The objectives of the firm are to establish and maintain a system of quality control to provide it
with reasonable assurance (not a guarantee) that: 

• The firm and its personnel comply with professional standards and regulatory and legal
requirements (PSRLR); and

 Reports issued are appropriate in the circumstances. 

Relevant Quality Control Standards 

Under the current AASC pronouncements, there are two quality control standards. The scopes of
these standards are discussed in the exhibit below. 

Exhibit 22.4-Quality Control Standards 

PSQC 1 Deals with a firms responsibilities for its system of quality control and applies
to all firms of professional accountants in respect of (1) audits and review of
historical financial information, (2) other assurance engagements, and (3)
related services engagements.

PSA 220 Deals with the specific responsibilities of the auditor regarding quality control
and EQCR for an audit of historical financial information.

ELEMENTS OF A SYSTEM OF QUALITYCONTROL (Learning Objectives 4)

The six elements of a system of a quality control, which must work together to be effective, is
depicted below.

Exhibit 22.5-The elements and Objective of Quality Control System

The nature and extent of such policies and procedures depend on factors such as (1) its size, (2)
operating characteristics; and (3) whether it is part of a network. Hence, the policies and
procedures of an international firm with complex multinational clients differ considerably from
those of a five-person firm specializing in small audits. The firm also considers the cost of
designing and maintaining its system of quality control. The next exhibit provides examples of
policies and procedures on each element of a system of quality control that the firm may
institute.

Exhibit 22.6-Elements and Objectives of Quality Control System

1. Leadership responsibilities for quality within the firm 

 Tone at the top (partner attitudes, behaviors, and staff messages) 
 Support for quality work and quality-oriented control culture 
 CEO or managing partners (firm level)

2. Ethical requirements 
 Foundation of long-term success of the firm's practice 
 Compliance with fundamental principle
 Written confirmation of compliance (at least annually)

3. Acceptance and continuance of client relationships and specific engagements 

 Competence, capabilities, and resources to deliver quality service 
 Compliance with relevant ethical requirements Integrity of client 
 Decline engagement if unable to deliver quality or exposed to great risks
4. Human resources 
 Recruitment and retention to have sufficient personnel 
 CPD to achieve and maintain competence 
 Assignment of engagement teams that delivers quality service 
 Policies that discipline noncompliance and rewards compliance
5. Engagement performance 
 Responsibility of engagement partner for quality of each engagement 
 Planning, supervision, and review to enable quality service 
 Consultation, differences of opinion, and EQCR
6. Monitoring 
 Determines whether quality controls are relevant, adequate, and effective 
 Cyclical inspection over 3-year period, at least 1 engagement per partner 
 Communicate results monitoring process at least annually
 Evaluate, communicate, and remedy deficiencies, complaints and allegations 

Leadership Responsibilities for Quality within the Firm 

This element requires the firm to establish policies and procedures designed to promote an
internal culture that quality is essential in performing engagements. 
The firm's leadership and the examples it sets significantly influence the internal culture of the
firm. Promotion of quality-oriented culture depends on clear, consistent and frequent actions
and messages from all levels that recognizes and rewards high quality work. These actions and
messages may be communicated are not limited to, training seminars, meetings, formal or
informal mission statements, newsletters or briefing memoranda. 

Promotion of internal culture of quality is the ultimate responsibility of the firm's or managing
board of partners. On each audit engagement, the assigned engagement partner shall take
responsibility for the overall quality; nonetheless, audit engagement team members have a
responsibility to implement quality col that are applicable to the audit engagement, 

Ethical Requirements 

This element requires the firm to establish policies and procedures designed to provide
reasonable assurance that the firm and its personnel comply with relevant ethical requirements.
Relevant ethical requirements to which the engagement team and EQCR are subject ordinarily
comprise Parts A and B of the Code of Ethics for Professional Accountants in the Philippines (see
Chapter 23) together with national requirements that are more restrictive. 

The fundamental principles are reinforced in particular by: 

• The leadership of the firm; 
• Education and training; 
• Monitoring; and 
• A process for dealing with non-compliance. 

Throughout the audit engagement, the engagement partner shall remain alert, through
observation and making inquiries as necessary, for evidence of non-compliance with relevant
ethical requirements by members of the engagement team. 

Independence 

The firm shall establish policies and procedures designed to provide it with reasonable assurance
that the firm, its personnel subject to independence requirements (including network firm
personnel) maintain independence in cases of assurance engagements. Such policies and
procedures shall enable the firm to:

a) Communicate its independence requirements to its personnel; and 

b) 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. 
At least annually, the firm should obtain written confirmation of compliance with its policies and
procedures on from all firm personnel require be independent. Written confirmation may be in
paper or electronic form and typically in a form of independence questionnaire /checklist.” 

Long Association on Audit Engagements for Public Interest Entries

 
The firm shall establish policies and procedures:

a) Setting out criteria for determining the need 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 F/S of listed entities, the rotation of engagement partner and EQC
reviewer, and others subject to rotation requirements, after a specified period in compliance
with relevant ethical requirements.
 
Acceptance and Continuance of Client Relationships and Specific Engagements 

This element requires the firm to establish policies and procedures designed to provide
reasonable assurance that the firm will only undertake or continue relationships and
engagements where the firm: 

• has competence, capabilities, time, and resources to perform the engagement;

 can comply with relevant ethical requirements; and 

•' has considered the integrity of the client. 

Continuance of Client Relationship 

Deciding whether to continue a client relationship includes consideration of significant matters

that have arisen during the current or previous engagements, 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. 

Declining an Engagement 

Where the firm obtains information that would have caused it to decline an engagement earlier,
policies and procedures may include:
 Discuss with appropriate level of client's management and TCWG regarding appropriate
action to take; 

 If appropriate, determine and discuss reasons for withdrawal from both engagement and
client relationships; .

 Consider professional, regulatory or, legal requirements for the firm; and 

 Document significant issues, consultations, conclusions and basis. 

Human Resources 
This element requires the firm to establish policies and procedures designed to provide
reasonable assurance that the firm has sufficient personnel with the competence, capabilities,
and commitment to ethical principles necessary to: 

• perform engagements in accordance with PSRLR; and 

• enable the firm or engagement partners to issue appropriate reports. 

Personnel issues relevant to policies and procedures on human resources include: 

• Recruitment, retention, and performance evaluation. 

• Capabilities, including time to perform assignments, and competence. 

• Career development and promotion. 

• Compensation. 

• The estimation of personnel needs. 

Effective recruitment helps the firm select individuals of integrity who have the capacity to
develop the competence and capabilities and possess the appropriate characteristics to enable
them to perform competently. 

Capabilities and competence are developed through: 

• Professional education. 

• Continuing professional development, including training. 

• Work experience. 
• Coaching by more experienced staff for example, other members of the team.

 Independence education for personnel who are required to be independent. 

Engagement Performance 
This element requires the firm to establish policies and procedures designed to provide
reasonable assurance that engagements are performed in: 

• Accordance with PSRLR, 

• Reports issued that are appropriate in the circumstances. 

Policies and procedures on engagement performance should deal with:

 
• Promotion of consistency in the quality of engagement performance 

• Supervision responsibilities 

• Review responsibilities 

• Consultation 

• EQCR 

• Differences of opinion 

• Engagement documentation 

The next exhibit shows examples of policies and procedures relating to items above.
Exhibit 22.7—Policies and Procedures on Engagement Performance
Consistency in the Quality of Engagement Performance 
This is often accomplished through written or electronic manuals, software tools or other
forms of standardized documentation, and industry or subject matter specific guidance
materials. Matters addressed may include:
 How engagement teams are briefed on the engagement to obtain an understanding of the
objectives of their work.
 Processes for complying with applicable engagement standards.
 Processes of engagement supervision, staff training and coaching. Methods of reviewing
the work performed, the significant judgments made and the form of report being issued.
 Documentation of work performed and of the timing and extent of review.
 Processes to keep all policies and procedures current. 

Appropriate teamwork and training assist less experienced members of the engagement team
to clearly understand the objectives of the assigned work. 

Supervision
Engagement supervision includes the following:
 
 Tracking the progress of the engagement;
 Considering the competence and capabilities of members of engagement team;
 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. 

Review
A review consists of consideration of whether: 

 The work has been performed in accordance with professional standards and applicable
legal and regulatory 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 conclusions reached and is documented; 
 The evidence obtained is sufficient and appropriate to support the report; and 
 The objectives of the engagement procedures have been achieved

A more experienced team member reviews the work of a less experienced team member. 

Consultation
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;
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. 

Consultation includes discussion at the appropriate professional level, with individuals within
or outside the firm who have specialized expertise. 

Consultation helps to promote quality and improves the application of professional judgment. 

EQCR
Criteria for determining which engagements are subject to an EQCR may include: 
 The nature of engagement, including whether involves public interest; 
 The identification of unusual circumstances or risks in an engagement; and 
 Whether laws or regulations require an EQCR. 

Differences of Opinion
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 EQCR. 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. 

Effective procedures encourage identification of differences of opinion at an early stage,

provide clear guidelines as to the successive steps to be taken thereafter, and require
documentation regarding the resolution of the differences and the implementation of the
conclusions reached. 

Procedures to resolve such differences may include consulting with another practitioner or
firm, or a professional or regulatory body. 

Engagement Documentation
The firm shall establish policies and procedures for engagement teams to complete the
assembly of final engagement files on a timely basis after the engagement reports have been
finalized. 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. 

The firm shall establish policies and procedures designed to maintain the confidentiality, safe
custody, integrity, accessibility and retrievability of engagement documentation.
. 
The firm shall establish policies and procedures for the retention of engagement
documentation for a period sufficient to meet the needs of the firm or as required by law or
regulation. 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. 

Engagement documentation is the property of the firm, subject to confidentiality

requirements. 
Monitoring 

Monitoring is 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. The purpose of monitoring is to provide evaluation of: 

 Adherence to professional standards and regulatory and legal requirement, and

 Whether the quality control system has been appropriately designed and effectively
implemented. 

The firm must establish policies and procedures on monitoring may include: 

 Evaluation and remediation of identified deficiencies and non-compliance; 

 Complaints and allegations; 
 Inspection procedures of completed engagements; and 
 Reporting on the results of monitoring. 

These policies and procedures are further discussed in the next exhibit.

Exhibit 22.8—Monitoring Quality Control Policies and Procedures

Evaluation and Remediation of Identified Deficiencies and Non-compliance
The firm should consider significant deficiencies and follow professional standards and
regulatory and legal requirements if it appears it issued an inappropriate engagement report.
In such a circumstance, the firm should also consider obtaining legal advice. Non-compliance
with the firm's quality control system is a serious matter, particularly if a partner or staff
member has willfully refused compliance. 

Since the quality control system is in place to protect the public interest, the firm must
address willful non-compliance, such as instituting a plan to improve performance,
performance reviews and reconsideration of opportunities for promotion and increased
compensation, and employment termination.

Complaints and Allegations

Allegations Firm policy must provide for policies and procedures to deal with various types of
complaints and allegations, including: 
 Claims that the work performed fails to comply with professional standards 
and regulatory and legal requirements; 
 Claims of non-compliance with the firm's quality control system; and 
  Claims that the design or process of the firm's quality control are deficient.

The investigation of such matters is assigned to a partner with sufficient and appropriate
experience and authority unless such partner is also a party to a complaint. 

Inspection Procedures of Completed Engagements

As part of the monitoring program, the firm shall inspect a selection of individual
engagements, which may be chosen without prior notification to the engagement team. On a
cyclical basis, inspection of at least one completed engagement for each engagement partner
over an inspection cycle of three years. 

Ideally, in order to ensure an impartial and objective assessment of a file, those involved in the
engagement team or serving the EQCR function should not be eligible to act as a monitor on
the same file. 

Reporting on the Results of Monitoring

The firm shall communicate to all engagement partners and other appropriate staff, including
the CEO or, if appropriate, managing board of partners, information on the results of the
monitoring process at least annually, including a detailed description of monitoring and its
conclusions on its overall compliance and effectiveness.

DOCUMENTATION AND COMMUNICATION OF THE SYSTEM OF QUALITY CONTROL (Learning

Objective 5) 

The firm should document its quality control policies and procedures to provide evidence of the
operation of each element of its system of quality control. 

In addition, the firm shall communicate to its personnel policies and procedures on quality
control. The firm's communication to its personnel enables each individual in the firm to become
aware that they have a personal responsibility for quality. Encouraging personnel to
communicate their views on quality control matters recognizes the importance of feedback on
the firm's system of quality control. 

CHAPTER PRACTICE QUESTIONS

PART I-TRUE OR FALSE 

1. Practice Statements are form of interpretation issued by the AASC and intended to have the
authority of the standards. 

2. The CPA firm's quality control policies and procedures provide absolute assurance that the
firm will be able to meet all applicable standards, professional and regulatory, and issue
reports appropriate in the circumstances.

3. The professional standards a CPA needs to observe and adhere are limited  only to those
issued by AASC, BOA, PRC and SEC. 

4. The CPA must apply the requirements of Philippine Standards on Review Engagements

(PSREs) when performing a review of a client's prospective financial statements.

5. The requirements of the firm's quality control system based on Philippine  Standards on
Quality Control (PSQC) must be applied to all the firm's services. 

6. The firm shall communicate its quality control system policies and procedures to its
personnel and maintain sufficient documentation of the operation. 

7. The firm's quality control system consists of eight elements such as: a. Leadership
responsibilities for quality within the firm; b. Ethical requirements; C. Acceptance and
continuance of client relationships and specific engagements; d. Human resources; e.
Engagement performance; f. Monitoring; g. Documentation and h. communication.

8. A previous client may always be an acceptable client to the auditor. 

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

10. Anybody in the auditing firm, as long as a Certified Public Accountant, can serve as an
Engagement Quality Control Reviewer if the firm allows such. 

PART ||—MULTIPLE CHOICE 

Professional, Ethical, Legal, and Regulatory Considerations—An Overview

1. There are various professional requirements for CPA firms to help assure audit quality. These
requirements potentially minimize the exposure of public accounting firms and partners to
lawsuits. These requirements include
a. auditor independence requirements.
b. quality-control programs.
 c. review programs.
d. all of the above. 

2. In connection with the audit of financial statements, an independent auditor could be

responsible for failure to detect a material fraud if:
a. statistical sampling techniques were not used on the audit engagement.
b. the auditor planned the audit in a negligent manner.
c. accountants performing important parts of the work failed to discover a close
relationship between the treasurer and the cashier.
d. the fraud was perpetrated by one employee who circumvented the existing internal
controls. 

Professional Standards
3. Which of the following mostly describes the function of AASC? 
a. To monitor full compliance by auditors to PSAs
b. To promulgate engagement standards, practices and procedures that shall be generally
accepted by the accounting profession in the Philippines
c. To assist the Board of Accountancy in conducting administrative proceedings on erring
CPAs in public practice d. To undertake continuing research on both auditing and
financial accounting in order to make them responsive to the needs of the public 

4. This document defines the elements and objectives not, by itself, establish standards or
provide procedural requirements for the performance of assurance engagements.
a. Philippine Framework for Assurance Engagements
b. Philippine Standards on Auditing
c. Philippine Standards on Review Engagements
d. Philippine Auditing Practice Statements 

5. The standards of the Auditing and Assurance Standards Council include 

Philippine Standards and Practice Statements on: 
i. Quality control.
ii. Tax Engagements.
iii. Review Engagements. 
iv. Other Assurance Engagements. 
v. Consulting Engagements
vi. Audit Engagements
vii. Related Services

a. I, II, III and VI only.

b. I, IILIV, VI and VII only.
c. C. I,II, IV and VI only.
 d. D. I, II, III, IV and V only.

6. Which of the following is not true of Practice Statements? 

a. These statements are not intended to replace standards
b. These statements are intended to have the authority of the standards
c. These statements are issued to provide practical assistance to auditors in implementing
the standards
d. These are not form of interpretations issued by the AASC

7. A professional accountant who does not consider and apply the guidance included in a
relevant practice statement should be prepared to
a. Explain how the basic principles and essential procedures in the engagement standards
addressed by the practice statements have been complied with
b. Explain to the Board of Accountancy why the practice statement was not complied with
c. Bear the consequences of such non-compliance, such as suspension or revocation of
license plus imprisonment of jot more than two (2) years
d. Face the stockholders of the entity and explain in the meeting why such  practice
statement was not complied with provided that the explanation is also put in writing,
and signed in the presence of the Chairperson of AASC. 

8. Which statement is(are) incorrect regarding the pronouncements of AASC? 

a. Engagement Standards contain basic principles and essential procedures together
with related guidance in the form of explanatory and other material.
b. Engagement Standards need only be applied to material matters.
c. In exceptional circumstances, an auditor may judge it necessary to depart from a
standard in order to more effectively achieve the objective of an audit. When such
situation arises, the auditor is not required to justify the departure.
d. All of the above 

9. Which statement is correct regarding the pronouncements of AASC? 

a. The exposure period allowed for each exposure draft of auditing and other
pronouncements to be considered by the organizations and persons to whom it is sent
for comment is generally 60 days.
b. Each final standard and statement shall be submitted to the PRC through the BOA for
approval after which the pronouncements become operative 6 months from publication
in the official gazette.
c. Practice Statements will have the same authority as the Engagement Standards.
d. PSAs issued by AASC are not the only authoritative source of engagement standards for
members of the accountancy profession in the Philippines. 
Quality Control
10. A CPA firm is reasonably assured of meeting its responsibility to provide services that
conform with professional standards by
a. Adhering to generally accepted auditing standards.
b. Having an appropriate system of quality control.
c. Joining professional societies that enforce ethical conduct.
d. Maintaining an attitude of independence in its engagements. 

11. The objective of the auditor is to implement quality control procedures at the engagement
level that provides the auditor with reasonable assurance that
a. the audit complies with professional standards and regulatory and legal requirement the
auditor's report issued is appropriate in the circumstances
b. both a and b
c. neither a nor b 

12. The nature and extent of a CPA firm's quality control depends on 
The CPA firm’s size The nature of the CPA firm’s Cost-benefit considerations
practice
a yes yes yes
b yes yes No
c Yes no Yes
d no no Yes

13. Control policies and procedures designed to ensure that all audits are conducted in
accordance with PSA's or relevant national standards or practices. These policies and procedures
should be implemented.
a. At the audit firm level only.
b. On individual audits only. 
c. C. Either at the audit firm level or on individual audits
d. Both at the audit firm level and on individual audits. 

Elements of a System of Quality Control

14. Which of the following is not a component of a system of quality control? 
a. Policies and procedures to ensure that the work performed by firm personnel meet
applicable professional standards.
b. Policies to ensure that personnel maintain their independence in fact and in
appearance.
c. C. Policies that ensure that monitoring activities are effectively applied.
d. Policies and procedures to ensure that firm personnel are actively engaged in marketing
strategies. 
15. Which of the following is one of the elements of quality control system under PSQC?
a. Assurance of proper levels of association.
b. Due professional care.
c. C. Engagement performance.
d. Supervision. 

16. Which of the following is not an element of quality control as defined by Philippine Standards
on Quality Control 1?
a. Leadership responsibility for quality
b. Independence a C. Human resources
c. Acceptance and continuance of engagement and client relationship 

17. Which of the following elements of a system of quality control assures that the firm builds a
culture that quality is essential to survival and growth of the firm?
a. Leadership
b. Monitoring
c. C. Client acceptance and continuance
d. Engagement performance 

18. Which element of a system of quality control provides reasonable assurance that the firm has
enough manpower to perform quality engagements?
a. Human resources
b. Lead
c. C. Engagement performance

d. Client acceptance and continuance 

Leadership Responsibilities for Quality within the Firm

19. The firm should establish policies and procedures designed to promote a internal culture that
quality is essential in performing engagements.
a. Ethical requirements
b. Monitoring
c. C. Human resources
d. Leadership responsibilities for quality within the firm 

20. Who should take responsibility for the overall quality on each audit engagement?
a. Engagement quality control review
b. Engagement partner
c. C. Engagement team
d. CEO of the firm or managing board of partners 
21. The implementation of quality control procedures that are applicable to the individual audit
engagement is the responsibility of the
a. CPA firm
b. Engagement quality control review
c. C. Engagement team
d. Expert contracted by the firm in connection with the audit engagement 

Ethical Requirements,
22. In pursuing a CPA firm's quality objectives, a CPA firm should adopt policies and procedures
to enable it to with required independence. Which quality control element would this be most
likely to satisfy?
a. Ethical requirements
b. Monitoring
c. C. Human resources
d. Leadership responsibilities for quality within the firm 

23. In pursuing a CPA firm's quality control objectives, a CPA firm may maintain  records indicating
which partners or employees of the CPA firm were previously employed by the CPA firm's clients.
Which quality control objective would this be most likely to satisfy?
a. Acceptance and continuance of clients and engagements.
b. Monitoring.
c. C. Personnel management.
d. Relevant ethical requirements. 

24. At least _, the firm should obtain written confirmation, in paper or  electronic, of compliance
with its policies and procedures on independence from all firm personnel required to be
independent. 
a. Monthly
b. Annually
c. Semi-annually
d. Three years 

Acceptance and Continuance of Client Relationships and Specific Engagements

25. The engagement partner should be satisfied that appropriate procedures regarding the
acceptance and continuance of client relationships and specific audit engagements have been
followed, and that conclusions reached in this regard are appropriate and have been
documented. Acceptance and continuance of client relationships and specific audit engagements
include considering:
I. The integrity of the principal owners, key management, and those changed with
governance of the entity.
 II. II. Whether the engagement team is competent to perform the audit engagement and
has the necessary time and resources
III. Whether the firm and the team can comply with ethical requirements.
IV. Significant matters that have arisen during the current or previous audit engagement
and the implications for continuing the relationship
a. only
b. I, II and IV only
c. C. and Il only
d. I, II, III and IV 

26. One purpose of establishing quality control policies and procedures for deciding whether to
accept a new client is to
a. Enable the CPA firm to attest to the reliability of the client.
b. Satisfy the CPA firm's duty to the public concerning the acceptance of new clients.
c. C. Provide reasonable assurance that the integrity of the client is considered.
d. Anticipate before performing any field work whether an unqualified opinion can be
issued. 

27. When making a client continuance decision the auditor should evaluate a client based upon
which of the following?
a. Client entity characteristics
b. Independence risk factors
c. C. Financial reporting risks
d. All of the above 

20. Quality control policies for the acceptance and continuance of clients are established to:
a. Enable the auditor to report on management's integrity
b. Comply with standards established by regulatory bodies
c. Minimize the likelihood of associating with management that lack integrity
d. Reduce exposure to litigation from failing to detect fraud 

29. The firm may obtain information to determine integrity of the client from the following,
except:
a. Communications with existing or previous providers of professional accountancy
services to the client in accordance with relevant ethical requirements, and discussions
with other third parties.
b. Inquiry of other firm personnel or third parties such as bankers, legal counsel and
industry peers.
c. Background searches of relevant databases.
d. All of the above. 
30. With regard to the integrity of a client, matters to consider least likely include which one of
the following?
a. The identity and business reputation of the client's principal owners, key management,
and those charged with its governance.
b. The nature of the client's operations, including its business practices.
c. C. Information concerning the attitude of the client's principal owners, key management
and those charged with its governance towards such matters as aggressive
interpretation of accounting standards and internal control.
d. The identity and business reputation of unrelated parties

31. Competence as a certified public accountant includes all of the following except

a. Having the technical qualifications to perform an engagement.
b. Possessing the ability to supervise and evaluate the quality of staff work.
c. C. Warranting the infallibility of the work performed.
d. Consulting others if additional technical information is needed. 

32. In pursuing its quality control objectives with respect to acceptance of a client, a CPA firm is
not likely to
a. Make inquiries of the proposed client's legal counsel.
b. Review financial statements of the proposed client.
c. C. Make inquiries of previous auditors.
d. Review the personnel practices of the proposed client. 

33. A CPA firm's quality control procedures pertaining to the acceptance of a prospective audit
client would most likely include
a. Inquiry of management as to whether disagreements between the predecessor auditor
and the prospective client were resolved satisfactorily.
b. Consideration of whether sufficient competent evidential matter may be obtained to
afford a reasonable basis for an opinion.
c. C. Inquiry of third parties, such as the prospective client's bankers and  attorneys, about
information regarding the prospective client and its management. 
d. Consideration of whether the internal control structure is sufficiently effective to permit
a reduction in the extent of required substantive tests. 

34. Among the possible reasons why an auditor will discontinue servicing an audit client is
a. Too many errors have to be adjusted to make the financial statements Ma conform with
PERS
b. The auditor has to use a specialist in verifying inventory valuation
c. C. The auditor is also rendering at the same time, a management advisory engagement
for the same client
 d. A change in the client management and the auditor is worried about the reputation of
the new management 

35. The firm's policies and procedures on auditor withdrawal may include the following, except:
a. Discuss with appropriate level of client's management and those charged with
governance regarding appropriate action to take.
b. Always determine and discuss reasons for withdrawal from engagement or from both
engagement and client relationships.
c. C. Consider professional, regulatory or legal requirements for the firm.
d. Document significant issues, consultations, conclusions and basis. 

Human Resources
36. A requirement to design recruitment processes and procedures to help the firm select
individuals meeting minimum academic requirements established by the firm is an example of a
quality control procedure in the area of:
a. Acceptance and continuance of client relationships and specific engagements.
b. Monitoring
c. C. Human resources.
d. Relevant ethical requirements.

37. In pursuing its quality control objective with respect to assigning personnel ta engagements, a
CPA firm may use policies and procedures such as
a. Rotating employees from assignment to assignment on a random basis aid in the staff
training effort
b. Allowing staff to select the assignments of their choice to promote better client
relationship
c. C. Assigning a number of employees to each engagement in excess of the number
required so as not to overburden the staff and interfere with the quality of the audit
work performed
d. Requiring timely identification of the staffing requirements of specific engagements so
that enough qualified personnel can be made available 

38. The objective of quality control mandates that a public accounting firm should  establish
policies and procedures for professional development that provide reasonable assurance that all
entry-level personnel
a. Prepare working papers that are standardized in form and content
b. Have the knowledge required to enable them to fulfill responsibilities assigned
c. C. Will advance within the organization
d. Develop specialties in specific areas of public accounting Engagement Performance

39. What is the most relevant use of a knowledge management system for an auditor?
 a. Professionals may input client data and have procedures performed automatically.
b. Auditors are not required to make judgments collectively or individually.
c. C. Professionals may share information related to auditing, accounting standards and
risks.
d. Auditors may work entirely from the firm location rather than at the client location. 

40. Engagement supervision includes the following, except: 

a. Tracking the progress of the engagement.
b. Considering the competence and capabilities of individual members of the engagement
team.
c. Addressing significant matters arising during the engagement, considering their
significance and modifying the planned approach appropriately.
d. Discussion at the appropriate professional level, with individuals within or outside the
firm who have specialized expertise. 

41. Review responsibilities are determined on the basis that more experienced  team members
review the work of less experienced team members. Engagement review process includes the
following except:
a. Considering whether the work has been performed in accordance with professional
standards and applicable legal and regulatory requirements.
b. Determining if there is a need to revise the nature, timing and extent of work
performed.
c. C. Contemplating if the work performed supports the conclusions reached and is
appropriately documented.
d. Identifying matters for consultation or consideration by more experienced engagement
team members during the engagement. 

12. The following statements relate to the engagement partner's responsibility to conduct timely
reviews of the audit documentation to be satisfied that sufficient appropriate evidence has been
obtained to support the conclusions reached and for the auditor's report to be issued. Which is
false?
a. The engagement partner's review of the audit documentation allows significant matters
to be resolved on a timely basis to his/her satisfaction before the auditor's report is
issued.
b. The engagement partner should document the extent and timing of the reviews.
c. The reviews cover critical areas of judgment, especially those relating to difficult or
contentious matters, identified during the course of the engagement, significant risks,
and other areas the engagement partner considers important.
d. The engagement partner should review all audit documentation. 
43. The following statements relate to quality control policies and procedures on engagement
performance element. Which is incorrect?
a. The firm shall promote consistency in the quality of engagement performance through
its policies and procedures
b. Appropriate teamwork and training assist less experienced members of the engagement
team to clearly understand the objectives of the assigned work.
c. An engagement team member with equal experience should review the work of an
engagement team members
d. 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, and the report shall not be issued until the matter is resolved. 

44. An additional partner review of the audit and its findings is typically performed by an
experienced member of the firm. Which of the follow individuals is qualified to perform this
concurring partner review?
a. The engagement partner who has worked on the client for three years.
b. An employee of the enforcement division of the SEC.
c. An experienced partner of the firm who did not actively participate on the audit.
d. A partner of another firm or office who knows the client well and who  was a vital
member of the audit team. 

45. If there is a significant difference of opinion between a senior auditor and an audit manager
on an audit engagement, to whose attention should the senior auditor first bring the matter?
a. The managing partner or senior partner of the firm
b. The engagement partner on the engagement
c. The practice advisor in the CPA affiliate office
d. Another audit manager in the firm

46. A difference of opinion over accounting and auditing matters relative to a particular phase of
the audit arises between an assistant auditor and the auditor responsible for the engagement.
After appropriate consultation, the assistant auditor asks to be disassociated from the resolution
of the matter. The working papers would probably be
a. Silent on the matter since it is an internal matter of the firm.
b. Expanded to note that the assistant auditor is completely disassociated from
responsibility for the auditor's opinion.
c. Expanded to document the additional work required since all disagreements of this type
will require expanded substantive testing.
d. Expanded to document the assistant auditor's position and how the difference of
opinion was resolved. 
47. Defensive auditing includes all of the following except 
a. Clarifying the nature of the arrangement through the use of a written engagement
letter.
b. Knowing when your client is about to fire your firm beforehand.
c. Carefully selecting which clients to accept and retain. 
d. Evaluation of a firm's capacity to adequately perform services for a specific client. 

48. Engagement quality control review is a process designed to provide an objective evaluation,
before the auditor's report is issued, of the significant judgments the engagement team made
and the conclusions they reached in formulating the auditor's report. It is normally done to which
of the following engagements?
a. Audit of financial statements listed entities
b. Other audit engagements deemed necessary by the firm
c. C. Non-audit engagements deemed necessary by the firm
d. All of the above. 

49. Which of the following statements relating to policies and procedures on engagement
procedures element of system of quality control is incorrect?
a. The engagement report is not dated until the completion of the engagement quality
control review. However, documentation of the engagement quality control review may
be completed after the date or the report.
b. Technical qualifications and objectivity are the most important aspects to the eligibility
for appointment of engagement quality control reviewers.
c. Both a and b
d. Neither a nor b 

50. The skills and qualities of the engagement team is likely to provide a positive contribution to
audit quality where
a. Partners and staff understand their clients' business and adhere to the principles
underlying auditing and ethical standards.
b. Partners and staff exhibit professional skepticism in their work and are robust in dealing
with issues identified during the audit.
c. Sufficient training is given to audit personnel in audit, accounting and industry specialist
issues.
d. All of the above. 

Monitoring
51. This quality control element is concerned with providing reasonable assurance that policies
and procedures related to the other elements are suitably designed and being effectively
implemented.
a. Monitoring
 b. Engagement performance
c. Human resources
d. Ethical requirements 

52. In relation to completed engagements, these are procedures designed provide evidence of

compliance by engagement teams with the firm's au control policies and procedures.
a. Engagement quality control review
b. Inspection
c. Monitoring
d. Quality control 

53. Inspection cycle is normally done over how many year(s) for each partner of  the firm on one
completed audit engagement?
a. One year
b. Three years
c. Two years
d. Four years Documentation and Communication of the System of Quality Control

54. At least, the firm should communicate the results of the monitoring of its quality control
system to engagement partners and other appropriate individuals within the firm:
a. Monthly
b. Annually
c. Semi-annually
d. Three years 

55. A CPA firm may communicate its quality control policies and procedures to its personnel in
which manner(s): 
Orally Written
a No No
b No Yes
c Yes No
d Yes Yes