AUDITING THEORY As such, the firm shall document its SQM that is sufficient to:

TOPIC 15: SYSTEM OF QUALITY CONTROL ∟ Support a consistent understanding of the SQM by its
personnel
∟ Support the consistent implementation and operation of the
SYSTEM OF QUALITY MANAGEMENT
responses
The system designed, implemented, and operated by a ∟ Provide evidence of the DIO of the responses, to support the
firm to provide the firm with reasonable assurance that: evaluation of the SQM by the individual(s) assigned ultimate
∟ The firm and its personnel fulfill their responsibilities in responsibility and accountability for the system.
accordance with professional standard and applicable legal
and regulatory requirements COMPONENTS OF SQM
∟ Engagements reports by the firm or engagement partner are
A. Risk Assessment Process
appropriate
Sets out the process the firm is required to follow in
Standards:
implementing a risk-based approach across the
1. PSQM 1 SQM.
2. PSQM 2
Risk-based Approach
3. PSA 220 (Revised)
1. Establishing quality objectives
Scope: Quality Objectives: The desired outcome in relation to
1. Audit of FS the components of the SQM to be achieved by the firm.
2. Review of FS 2. Identifying and assessing risks to the
3. Other assurances services achievement of the quality objectives
4. Related services Quality Risks: A risk that has a responsible possibility
of:
Effective Date: December 15, 2022
Occurring; and individually or in combination with other
FIRMS SYSTEM OF QUALITY MANAGEMENT risks, adversely affecting the achievement of one or
Objective: more quality objectives
1. Obtain an understanding of the conditions, events,
1. Design, implement, and operate a system of quality
and circumstances, actions, or inactions that may
management
affect the achievement of QM
∟ Compliance with standards
2. Consider how the degree of conditions, events,
∟ Appropriateness of reports
circumstances, actions may affect achievements
2. Serve the public interest of QO.
Components of SQM: 3. Designing and implementing responses to
1. Operates in a continual and iterative process address the quality risks
2. Components of SQM [GM REPAIR] Responses: Policies or procedures designed and
∟ Governance and leadership implemented by the firm to address one or more quality
∟ The Monitoring and remediation process risks
∟ Firm’s Risk Assessment
Specified Responses:
∟ Relevant Ethical standards
∟ Compliance with ethical requirements & breaches
∟ Engagement Performance
∟ Annual independence declaration
∟ Acceptance and continuance of client relationship
∟ Addressing complaints
and specific engagements
∟ Changes in client acceptance or continuance
∟ Information and communication
∟ Computation with external parties
∟ Resources
∟ Engagement quality reviews
3. ISQM requires the application of the risk-based
approach in DIO of SQM in an interconnected and B. Governance and Leadership
coordinated manner QO that the firm has an organizational structure and
assignment of roles, responsibilities, and authority
Design, implementation, and operation of SQM:
that is appropriate to enable the DIO of firm’s SQM.
1. Firm shall design, implement, and operate a SQM
2. Firm shall exercise professional judgment Quality Objectives [CARABAOS]
∟ Firm demonstrates a commitment to quality through a
3. Firm shall comply each requirement of ISQM
culture that exists throughout the firm
4. Individuals assigned in the following shall have an
∟ Leadership is responsible and accountable for quality.
understanding of ISQM, ∟ Leadership demonstrates a commitment to quality
∟ Ultimately responsibility and accountability for through their actions and behaviors.
the firm’s SQM ∟ Organizational structure and assignment of roles,
∟ Operational responsibility for the firm’s SQM responsibilities, and authority are appropriate.
NOTE: ∟ Allocation of resources, planned, assigned in a manner
∟ QM is not separate function of the firm; integration of a that is consistent with the firm's commitment to quality
culture; ISQM, at least annually requires the individuals Commitment to Quality
assigned ultimate responsibility and accountability of SQM Culture should exist throughout the firm and must recognize
and reinforce:
DOCUMENTATION OF SQM
∟ Firm's role in serving the public interest
Firm’s policies and procedures for its SQM must be well ∟ Importance of professional ethics, values, and attitudes
documented. Documentation provides evidence of the Professional values and attributes may include the following:
firm's commitment to quality and serves as the basis for its ∟ Responsibility of all personnel for quality relating to the
compliance with engagement standards, laws, performance of engagements or activities
∟ Importance of quality in the firm's strategic decisions and
regulations, or relevant ethical requirements.
actions

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 Responsibility Assignment E. Engagement Performance
Ultimate and responsibility of Firm’s CEO or firm’s managing
Firm shall establish the ff. quality objectives that
the SQM BOD
Partner of the firm who has address the engagement quality performance
Operational responsibility for
the SQM
appropriate influence and [ReD PJ COD]
authority a. Engagement teams understand and fulfill their
OR for specific aspects of the responsibilities; headed by engagement partners
SQM
Partner of the firm who has b. Nature, timing, & extent of direction and supervision of
 Compliance w/ independent
appropriate influence and engagement teams (direction, supervision, review)
requirements
authority c. ET exercise appropriate professional judgment and
 Monitoring and remediation
process applicable type of engagement, professional skepticism
Organizational Structure d. Consultation on different or contentious matters
∟ Firm assigns roles, responsibilities, and authority within e. Difference of opinion with the engagement team
the firm may vary. f. Engagement documentation is assembled on a timely
∟ Affected by law or regulation that may impose certain basis (working papers/work papers)
requirements in the assignment of responsibilities. Engagement Documentation
Resources Engagement documentation must be completed within a
∟ Firm's resources needs should be addressed. reasonable time from the date of the engagement report.
∟ Determining the resources currently required: References Deadline of Assembly
∟ Forecasting the firm's future resource needs; and PSAs; PSAEs 60 days after report date
∟ Establishing processes to deal with unanticipated PSAs; PSAEs 5 years from report date
resource needs when they arise. SRC Rule 68, Part 1(3)(B) (vii)(g) 10 years from report date

C. Relevant Ethical Requirements F. Resources (HIT)

Establish the following: Human Resources (HR)
∟ Fundamental Ethical Principles ∟ Hired, developed, retained, and competence &
∟ International Independence Standards capabilities
∟ Law and Regulations ∟ Demonstrate a commitment to quality through their
actions and behavior (trainings)
Establish the following quality objectives that ∟ Obtained from external sources
address the fulfillment of responsibilities: ∟ ET members are assigned to each engagement
∟ Firms and its personnel ∟ Individuals are assigned to performed activities w/n the
∟ Others (network, network firms, indi. in the system of QM
network/network firms or service providers) who are Intellectual Resources (IR)
subject to the relevant ethical requirements to the firm
∟ Obtained or developed, implemented, maintained to
D. Acceptance and Continuance of Client enable the operation of firm’s SQM & consistent
performance of QM
Relationship and Specific Engagements
∟ Written policies or procedures
∟ Judgments by the firm about whether to accept or
∟ Methodology
continue the client relationship
∟ Industry or subject matter-specific guides
∟ Financial & operational priorities of the firm do not lead to
∟ Accounting guides
inappropriate judgments about whether to accept or
∟ Standardized documentation and processes
continue a client relationship
Technological Resources (TR)
Nature & Circumstances of the Engagement
∟ Directly used in DIO the firm’s SQM
∟ Industry of the entity w/c engagement being undertaken
∟ Directly used by ET in performance engagements
∟ Nature of the entity
∟ Essential enabling the effective operation of firm’s IT
∟ Nature of underlying subject matter & applicable criteria
environment
Integrity and Ethical Values
∟ Nature of the entity w/c engagement being performed G. Information and Communication
∟ Nature of client’s operation Pervasive in all components of SQM
∟ Info concerning the client’s attitude principal owners Firm’s Information System
∟ Client’s aggressively concerned w/ maintaining firm’s fees ∟ Use of manual or IT elements, which affect the manner in
∟ Indications of client may be involved in money laundering w/c information is identified, captured, processed,
∟ Reasons for the proposed appointment of the firm maintained, and communicated.
∟ Identity and business reputation of related parties ∟ Digital records may replace or supplemental to physical
records.
Firm’s Ability to Perform the Engagement
Communication within the Firm
∟ Availability of appropriate resources to perform the
Establishing communication channels to facilitate
engagement
communication across the firm.
∟ Having access to information to perform the engagement
External Party Information
∟ Firm and engagement are able to fulfill their
Info about client’s ONF, there are
responsibilities Firm’s network/Other
independence requirements affect
network firms
Firm’s Financial and Operational Priorities them
∟ Financial priorities – focus on the profitability of the firm, Client’s non-compliance with laws and
Regulators/Appropriate
regulations;
and fees obtained in performing engagements Authority
Transparency reports
∟ Operational priorities – strategic focus areas (growth of A partner of the firm who has
the firm’s market share TCWG
appropriate influence and authority
∟ Firm must ensure that these priorities do not become
barriers to appropriate acceptance & continuance
decisions

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 H. Monitoring and Remediation Process Engagement Quality Reviewer (EQRer) – partner or other
∟ Provide relevant, reliable, and timely information individual of the firm; not be a member of engagement team
∟ Take appropriate actions to respond to identified Scope:
deficiencies ∟ Appointment & eligibility of EQRer
∟ Purposes: ∟ EQRer’s responsibilities related to EQR
 Enables the evaluation of SQM
Objective:
 Facilitates the proactive and continual improvement of EQR
and SQM ∟ Perform EQR
∟ Appoint an EQRer
Designing and Performing Monitoring Activities
∟ Objective evaluation of significant judgments
Provide a basis for the identification of deficiencies
∟ Deficiency in the firm’s SQM 2. Engagement Quality Review Process
∟ Designing the M&R Process ∟ Audits of financial statements of listed entities
∟ Performing monitoring process ∟ Audits or other engagements for which an EQR is required
∟ Monitoring Activities by law or regulation
 A combination of ∟ Audits or other engagements for which the firm
 Ongoing monitoring activities – routine activities, built determines that an EQR is an appropriate response to
into the firm's processes and performed on a real-time address one or more quality risk(s)
basis, reacting to changing conditions
 Periodic monitoring activities – conducted at certain 3. Engagement Quality Reviewer
intervals by the firm. Appointment
 Inspection of in-process engagements ∟ The firm assigns personnel responsible for appointment of
 The size, structure, and organization of the firm.
EQRer.
 The involvement of the firm's network in monitoring
activities
∟ The assigned personnel appoints EQRer to engagements
 The resources that the firm intends to use to enable ∟ The appointed EQRer take overall responsibility for the
monitoring activities, such as the use of IT applications performance of EQR
Evaluating Findings and Identifying Deficiencies Eligibility
Findings – has been accumulated from the performance of ∟ Has the competence and capabilities, including sufficient
monitoring process, external inspections, & other related time, and the appropriate authority to perform the
services engagement quality review
∟ Identification of the deficiency ∟ Complies with relevant ethical requirements
 Investigating the root cause(s) of the identified ∟ Complies with provisions of law and regulation, if any that
are relevant to the eligibility of the engagement quality
deficiencies
reviewer
 Evaluating the effect of the identified deficiencies
∟ Responding to identified deficiency 4. Performance of Quality Reviews
 Shall evaluate whether the remedial actions EQRs must be incorporated into the overall performance of
∟ Findings about a particular engagement the engagement.
∟ Understand the nature and circumstances of the engagement and
 Taking appropriate action to comply with relevant the entity
professional standards and applicable legal and ∟ Discuss significant matters and judgments.
regulatory requirements ∟ Review selected documentation relating to significant judgments
 When the report is inappropriate, considering the made
implications and taking appropriate action, including ∟ Evaluates the basis and the appropriateness of the conclusions
reached and whether appropriate consultations have taken place
considering whether to obtain legal advice.
Communicate Monitoring and Remediation Related Matters 5. Evaluation and Review
∟ Basis for further communication to personnel about the Audit of FS
importance of quality ∟ Compliance with independence requirements
∟ Hold individuals accountable for the roles assigned to ∟ Sufficiency and appropriateness of the EP’s involvement
them ∟ The financial statements
∟ Identify key concern about the SQM in a timely manner ∟ Auditor's report
Review Engagements
OTHER SIGNIFICANT MATTERS ∟ The financial statements or financial information
Complaints and Allegations ∟ Engagement Report
∟ Identifying and dealing with individuals, including leadership, Other Assurance and Related Service Engagements
who do not act or behave in a manner that demonstrates a ∟ The subject matter information
commitment to quality and supports the firm's commitment to ∟ Engagement report
quality 6. EQRer has concerns regarding the
∟ Identifying deficiencies in the SQM.
appropriateness of significant judgment /
Performance Evaluation
conclusions reached
∟ The results of the firm's monitoring activities for aspects of the
SQM that relate to the responsibility of the individual In some 7. If there are NO concerns, the EQRer shall notify
circumstances, the firm may set targets for the individual and the engagement partner that the EQR is complete
measure the results of the firm's monitoring activities against
8. Documentation of the Engagement Quality
those targets.
Review
∟ The actions taken by the individual in response to identified
∟ Names of the EQRer and assistants
deficiencies that relate to the responsibility of that individual,
∟ Identification of the engagement documentation reviewed
including the timeliness and effectiveness of such actions.
∟ Basis for the completion of the EQR
ENGAGEMENT OF QUALITY REVIEW ∟ Communications of results to the engagement partner
1. Firms required to design & implement responses ∟ Date of completion of the EQR
to quality risks
Engagement Quality Review (EQR) – performed by EQRer
and submitted on or before the date of engagement report

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 QUALITY MANAGEMENT FOR AN AUDIT OF FS Before dating the audit report, the EP shall also review the
1. Public interest following:
∟ Compliance with requirements ∟ The financial statements
∟ Issuance of appropriate reports ∟ Auditor's report (including key audit matters, as
applicable
2. Audit Quality
Consultation
∟ Input
∟ Determine that members of the engagement team have
∟ Process
undertaken appropriate consultation/s
∟ Output
∟ Agree with the consultant on the nature, scope, and
∟ Key interactions
resulting conclusions from such consultations
∟ Contextual factors
∟ Determine that conclusions agreed have been
3. Attributes of a Quality Audit implemented
∟ Appropriate values, ethics, and attitudes were exhibited
Engagement Quality Review (EQR)
∟ Engagement team are sufficiently knowledgeable, skilled,
∟ Determine that an EQRer has been appointed
and experienced and had sufficient time allocated to
∟ Cooperate with the EQRer and inform other members
perform the audit work
∟ Discuss significant matters and significant judgments
∟ Applied a rigorous audit process and quality control
arising during the audit engagement, including those
procedures that complied with the law, regulation, and
identified during the EQR, with the EQRer and not date
applicable standards
the auditor's report until the completion of the EOR
∟ Provided useful and timely reports
∟ Interacted appropriately with relevant stakeholders F. Monitoring and Remediation
The engagement partner shall take responsibility for:
RESPONSIBILITY FOR AUDIT QUALITY ∟ Obtaining information from the M&R process of the firm
∟ Implementing firm's responses to quality risks that are and its network (if applicable)
applicable to the audit engagement ∟ Determining the relevance and effect of the information
∟ Determining whether to design and implement responses at the obtained in the audit
engagement level beyond those in the firm's policies or ∟ Remaining alert for information that may be relevant for
procedures the firm's M&R process during the audit and communicate
∟ Communicating to the firm information from the audit such information to the firm.
engagement that is required to be communicated by the firm's
policies or procedures to support the DIO of the firm's SQM DOCUMENTATION
1. Matters identified, relevant discussions with personnel, and
MANAGING AND ACHIEVING QUALITY AT THE conclusions reached with respect to the fulfillment of relevant
ENGAGEMENT LEVEL ethical requirements
A. Leadership Responsibilities 2. Acceptance and continuance of the client relationship and
∟ Involvement was sufficient and appropriate to serve as the audit engagement.
basis for determining those significant judgments made 3. Nature and scope of conclusions undertaken and the
∟ Nature and circumstances of the audit engagement and resulting conclusions and manner of implementation.
the firm's related policies were considered in performing 4. Completion of EQR on or before the date of the auditor's
the audit report.
B. Relevant Ethical Requirements
∟ Engagement team have complied with ethical
requirements.
∟ Before dating the auditor's report, the EP shall conclude
whether the relevant ethical requirements were fulfilled
C. Acceptance and Continuance
∟ Satisfied appropriate procedures regarding the
acceptance and continuance of client relationships and
specific audit engagements have been followed
∟ Shall consider information obtained in the acceptance and
continuance process in planning and performing the audit.
D. Engagement Resources
∟ Shall determine that sufficient and appropriate resources
to perform the engagement are assigned or made
available in a timely manner.
E. Engagement Performance
Direction, Supervision, and Review
∟ Properly planned and performed
∟ Responsive to the nature and circumstances of the audit
engagement and the resources assigned
The EP shall review audit documentation at appropriate
points in time:
∟ Significant matters
∟ Significant judgments
∟ External communications
∟ Other relevant matters