AAA – Professional and Ethical

Considerations
Ethics Part 3

PRACTICE MANAGEMENT – QUALITY CONTROL:

It is essential for any type of business, auditors included, to maintain good quality over all of its services in
order to cut down the risk of:

 Clients taking their custom elsewhere;

 Key staff leaving;
 Disciplinary action from the ACCA;
 Potential litigation;
 And most specifically arriving at an inappropriate opinion.

Quality control procedures at the overall audit firm level:

Some quality control procedures exist at the overall audit firm level:

 There needs to be strong leadership. Someone with authority who can delegate and organise effectively.
 The staff that are recruited must be competent and motivated.
 They must also be trained and developed in order to progress to gradually more complex and lucrative
assignments.
 Staff must have regular reviews and perceive there to be a good career path available to them.
 There must be a robust system in place to ensure acceptance and retention of clients is dealt with efficiently.
 The audit firm should appoint an MLRO, an ethics partner and a health and safety officer.

Quality control procedures at the individual assignment level:

As well as procedures operating at the overall firm level, there must be quality control at the individual assignment
stage. These will include:
 Having a clear hierarchy on each assignment, partner, manager, senior and junior.
 Assigning staff to a level of work that is appropriate for their experience and skill.
 Supervising and monitoring all work.
 Documenting and dealing with any problems that arise.

Regular reviews:
Regular reviews need to be carried out, both hot and cold reviews. Hot reviews are done whilst the work is being
completed. This gives management a chance to take corrective action early to avoid inefficient use of resources.
Cold reviews are done when the assignment has been completed. This allows the reviewer to see the whole
picture of what has been done. Both should be done in all cases.

TENDERING:

One of the best ways to obtain new assignments is to go through a tendering process. This is where a client
wishing to find a suitable audit firm will essentially ask the firms to bid for the work. Firms who are approached to
tender for work must consider a number of issues, such as:

 Do they have the necessary skills and competence?

 Are the resources available, do they have enough staff?
 What fee can we charge?
 Will there be the opportunity to provide other services as well as the main one for which we are tendering?

The tender document should also contain certain information, such as the needs of the client and how to meet
them, a breakdown of how the fee has been calculated, a brief outline of the audit firm and of the staff who are
going to carry out the assignment as well as an illustration of the range of services that we can provide.

CONTINGENCY FEE:

These are fees that will vary in amount according to the outcome of the work carried out. For example, an auditor
may want to charge a fee for every material error that they find. Contingency fees are banned by the ACCA.

LOWBALLING:

Lowballing is essentially loss leading. Auditors may quote a very low fee for some work in order to secure that
work. They will make a loss on the assignment but the hope is that a decent reputation will be gained and so more
lucrative work will subsequently be obtained. Lowballing is NOT banned and, in itself, it’s not unethical. It is really
just a natural extension of the tendering process. However, auditors must not be tempted to cut corners when
trying to stick to a tight budget-quality must not suffer as a result of lowballing.

ADVERTISING:
In an increasingly competitive environment, there is a need to advertise for work and auditors are allowed to do
so. They need to make sure that the medium chosen is appropriate-like the student newsletter or a professional
journal. Advertisements must not mislead clients or discredit other audit firms or the profession itself. The
advertisements must also not be indecent or offensive.

EXAMPLE:

Often questions ask about ethical and other professional issues which require coverage of any area from the last
three sessions. So let us consider one of these type of questions.

You are the audit manager responsible for the quality control procedures over new audit clients. You are visiting
the audit team at the head office of A LTD. The audit team includes a manager, a senior and an audit trainee. The
draft accounts show revenue of $20M and total assets of $4m. You have identified the following issues that need
evaluating. Next to the analytical procedures section in the audit planning checklist the audit senior has written not
applicable new client. The audit senior has just completed the non-current assets audit (asset value $1m) whilst
the audit junior is working on receivables (asset value $3m) and has just finished sending out direct confirmation
letters to a sample of customers. The audit manager is due to visit the site for the first time since the audit
commenced three weeks ago.

This is clearly a practice management question, mainly from this session of study. There are many flaws here.
The audit senior should not be involved in the planning of the assignment - that should be down to the manager
or the partner, so there is a misallocation of work.

The audit senior is demonstrating a lack of competence and training by saying that analytical procedures do not
apply to a new client. Analytical procedures are compulsory at the planning stage of an audit and are even more
important for a new client because they are all about identifying trends and relationships. It may be harder to do
for a new assignment but it is still important.

There is more evidence of the poor allocation of work. The audit senior should really be carrying out the receivables
audit because it is a much higher level of materiality.

The audit junior is only just sending out the confirmation requests which is too late for any replies to be meaningful.
Also if the balances are not agreed then follow up work needs to be done and there is little time left for this, the
audit has already taken three weeks!

The audit manager has done no review, hot or cold! So the staff have had no direction for three weeks.

NOTE: As you can see, students are required to identify and explain weaknesses and problems but this can only
be done well if best practice is learned in the first place.