CHAPTER-5

QUALITY CONTROL &PRACTICE

MANAGEMENT

ISQC 1

ISQC 1 Quality Control for Firms that Perform Audits and Reviews of Financial
Statements, and Other Assurance and Related Services Engagements, ISQC 1 identifies
six key principles:
 Leadership: Strong and ethical leadership demonstrated by the managing
partners.
 Ethics: Firms comply with ethical requirements such as the Code of Ethics.
 Acceptance and continuance: Only suitable clients and engagements are
accepted and retained.
 Human resources: A firm and its employees have the necessary knowledge,
technical competence, and experience.
 Engagement performance: Engagements are performed in an effective manner.
 Monitoring: Evaluating the quality control procedures to ensure they are
effective.

Documentation

ISA 220 Quality Control for an Audit of Financial Statements also requires.
auditors to document certain matters:
 Issues with respect to ethical requirements and how they were resolved.
 Conclusions on compliance with independence requirements.
 Conclusions reached regarding the acceptance and continuance of engagements.
 The nature, scope and conclusions resulting from consultations undertaken
during the course of the audit.

During completion of the audit the engagement quality reviewer has to document:
 That the procedures required by the firm's engagement quality review procedures
have been performed.
 That the engagement quality review has been completed (on or before the date
of the auditor's report).
 That the reviewer is not aware of any unresolved matters that would cause the
reviewer to believe that the significant judgments of the team were not
appropriate.
WHY CHANGE AUDITORS?

Why Step Down?

Audit firms may not seek re-appointment for many reasons. Examples include:
 Independence issues which cannot be safeguarded
 Doubts regarding the integrity of the company’s management
 Strategic decision to concentrate on other services or markets.

Tendering

Tendering is the process of quoting a fee for work before the work is carried out.
Most tenders include a formal written document supported by an oral presentation. All
presentations should be dynamic, professional and within the limits of the ethical
framework.

Matters To Consider Before Tendering

When invited to tender, a firm must decide whether it wishes to take part in the tendering
process.
Specific risks of being involved with the tender include:
 Wasted time if the audit tender is not accepted. The firm will not be paid for the
time spent putting the tender proposal together.
 Setting an uncommercial fee in order to win the contract (lowballing covered
later in this chapter).
 Making unrealistic claims or promises in order to win the contract.
Information Required For The Proposal

Prior to drafting any proposals an audit firm should consider the following:
 What does the potential client expect from its auditors?
 What timetable does the client expect: an interim audit followed by a final audit
or a longer final audit after the year-end?
 By which date are the audited financial statements required?
 What are the company’s future plans, e.g., public flotation, expansion,
contraction, concentration on certain markets?
 Are there any perceived problems with the potential client's current auditors?
 The format required by the prospective client.

The Content Of The Proposal

 The fee and how it has been calculated.

 Proposed audit partner and key members of the audit team
 Capacity of the audit partner to commit sufficient time to the audit.
 Relevant experience of the industry and type of company e.g., experience of
auditing a listed company
 Ability of the firm to bring insight, add value, and show understanding of the
company’s values, strategies, and objectives.
 The proposed approach to the audit or audit methodology including the firm’s
use of technology and innovation such as data analytics.
 The firm’s audit quality track record and demonstration to the commitment to
quality
 Ability of the firm to maintain independence, challenge management on
judgemental areas and bring an alternative viewpoint.
 The nature, purpose, and legal requirements of an audit (particularly useful if this
is the first time the entity is being audited)
 An assessment of the requirements of the client

Benefits And Drawbacks Of Tendering Process

Benefits

 Firms are forced to look at ways of doing the work more efficiently in order to
compete with other firms.
 Companies may look to improve controls and increase the scope of their internal
audit departments in order to reduce external audit costs.
 Companies may simplify their group structures to reduce audit costs (among
other reasons).
 The threat of familiarity will reduce if tendering results in a change of audit firm
as the new firm will bring a fresh insight.

Drawbacks
  Greater market concentration, which has reduced market choice.
 Loss of long-term relationships with auditors.
 Focus on cost of the audit not quality resulting in lowballing issues.
 The costs involved with the tendering process which affect both the company
and the audit firm.

Advertising And Publicity

The ACCA Rulebook (section B13) states that it is acceptable in principle for ACCA
members to advertise their services, but there is a requirement that the advertising must
not reflect adversely on:
 the member
 the ACCA, or
 the accountancy profession as a whole.
 The aim of adverts should be ‘to inform, rather than impress’.
 The rules state that advertisements and promotional material should not:
 bring the ACCA into disrepute or bring discredit to the member, firm or the
accountancy profession.
 discredit the services offered by others whether by claiming superiority for the
member’s own services or otherwise.
 be misleading, either directly or by implication.
 fall short of the requirements of any relevant national Advertising Standards
Authority’s Code of Advertising Practice, notably as to legality, decency, clarity,
honesty, and truthfulness.
 Firms should be careful that the limited space available in an advertisement does
not result in misleading information being communicated.
 Promotional material may contain any factual statement which can be justified,
but it should not make unflattering references to, or unflattering comparisons
with, the services of others.

Restrictions On Practice Names And Descriptions

Members’ descriptions:

Members of the ACCA are entitled to call themselves Chartered Certified Accountants
or just Certified Accountants and may use the letters ACCA (as members) or FCCA (if
they are fellows).

These descriptions may not be used in the registered names of companies. For example,
you may not set up a company called John Smith Certified Accountant Ltd.

Practice Descriptions
 An accountancy firm may describe itself as a ‘firm of Chartered Certified
Accountants’, or a ‘firm of Certified Accountants’, or an ‘ACCA practice’
provided that:
 at least half of the partners (or directors) are ACCA members, and
  these partners (or directors) control at least 51% of the voting rights under
the firm’s partnership agreement (or constitution).
 A firm in which all partners are ACCA members may use the description
‘Members of the Association of Chartered Certified Accountants’ on its
professional stationery.
 In the case of a mixed firm (e.g., some partners are ACCA members and others
are members of other Chartered Accountancy bodies), the firm should not use
the description ‘Certified Accountants and Chartered Accountants’ or similar,
since this could be misleading. Instead, they may print the following statement
on their stationery: ‘The partners of this firm are members of either the
Association of Chartered Certified Accountants or (e.g.) the Institute of
Chartered Accountants in England and Wales’

Tendering is the process of quoting a fee for work before the work is carried out.
Most tenders include a formal written document supported by an oral
presentation. All presentations should be dynamic, professional and within the
limits of the ethical framework.

Matters To Consider Before Tendering

When invited to tender, a firm must decide whether it wishes to take part in the tendering
process.
Specific risks of being involved with the tender include:
 Wasted time if the audit tender is not accepted. The firm will not be paid for the
time spent putting the tender proposal together.
 Setting an uncommercial fee in order to win the contract (lowballing covered
later in this chapter).
 Making unrealistic claims or promises in order to win the contract.

Information Required For The Proposal

Prior to drafting any proposals an audit firm should consider the following:
 What does the potential client expect from its auditors?
 What timetable does the client expect: an interim audit followed by a final audit
or a longer final audit after the year-end?
 By which date are the audited financial statements required?
 What are the company’s future plans, e.g., public flotation, expansion,
contraction, concentration on certain markets?
 Are there any perceived problems with the potential client's current auditors?
 The format required by the prospective client.

The Content Of The Proposal

 The fee and how it has been calculated.

 Proposed audit partner and key members of the audit team
 Capacity of the audit partner to commit sufficient time to the audit.
  Relevant experience of the industry and type of company e.g., experience of
auditing a listed company
 Ability of the firm to bring insight, add value, and show understanding of the
company’s values, strategies, and objectives.
 The proposed approach to the audit or audit methodology including the firm’s
use of technology and innovation such as data analytics.
 The firm’s audit quality track record and demonstration to the commitment to
quality
 Ability of the firm to maintain independence, challenge management on
judgemental areas and bring an alternative viewpoint.
 The nature, purpose, and legal requirements of an audit (particularly useful if this
is the first time the entity is being audited)
 An assessment of the requirements of the client

Benefits And Drawbacks Of Tendering Process

Benefits
 Firms are forced to look at ways of doing the work more efficiently in order to
compete with other firms.
 Companies may look to improve controls and increase the scope of their internal
audit departments in order to reduce external audit costs.
 Companies may simplify their group structures to reduce audit costs (among
other reasons).
 The threat of familiarity will reduce if tendering results in a change of audit firm
as the new firm will bring a fresh insight.

Drawbacks

 Greater market concentration, which has reduced market choice.

 Loss of long-term relationships with auditorsBenefits And Drawbacks Of
Tendering Process
Benefits

 Firms are forced to look at ways of doing the work more efficiently in order to
compete with other firms.
 Companies may look to improve controls and increase the scope of their internal
audit departments in order to reduce external audit costs.
 Companies may simplify their group structures to reduce audit costs (among
other reasons).
 The threat of familiarity will reduce if tendering results in a change of audit firm
as the new firm will bring a fresh insight..
 Focus on cost of the audit not quality resulting in lowballing issues.
 The costs involved with the tendering process which affect both the company
and the audit firm.

Advertising And Publicity

The ACCA Rulebook (section B13) states that it is acceptable in principle for ACCA
members to advertise their services, but there is a requirement that the advertising must
not reflect adversely on:
 the member
 the ACCA, or
 the accountancy profession as a whole.
 The aim of adverts should be ‘to inform, rather than impress’.
 The rules state that advertisements and promotional material should not:
 bring the ACCA into disrepute or bring discredit to the member, firm or the
accountancy profession.
 discredit the services offered by others whether by claiming superiority for the
member’s own services or otherwise.
 be misleading, either directly or by implication.
 fall short of the requirements of any relevant national Advertising Standards
Authority’s Code of Advertising Practice, notably as to legality, decency, clarity,
honesty, and truthfulness.
 Firms should be careful that the limited space available in an advertisement does
not result in misleading information being communicated.
 Promotional material may contain any factual statement which can be justified,
but it should not make unflattering references to, or unflattering comparisons
with, the services of others.

Restrictions On Practice Names And Descriptions

Members’ descriptions:
Members of the ACCA are entitled to call themselves Chartered Certified Accountants
or just Certified Accountants and may use the letters ACCA (as members) or FCCA (if
they are fellows).

Restrictions On Practice Names And Descriptions

Members’ descriptions:
Members of the ACCA are entitled to call themselves Chartered Certified Accountants
or just Certified Accountants and may use the letters ACCA (as members) or FCCA (if
they are fellows).

Restrictions On Practice Names And Descriptions

 Members’ descriptions:
 Members of the ACCA are entitled to call themselves Chartered Certified
Accountants or just Certified Accountants and may use the letters ACCA (as
members) or FCCA (if they are fellows).

Names Of Practising Firms

Generally, members may practice under whatever name they want, but:
 A practice name should be consistent with the dignity of the profession.
 A practice name should not be misleading (e.g., a firm could not trade as ‘PQ
International Accountants’ if all its offices were in one country).
 A practice name should not run the risk of being confused with the name of
another firm.
 A sole practitioner should not add ‘and partners’ to the name under which he
practices.

Use of the ACCA logo

 A firm that has at least one ACCA member as a partner (or director) may use the
ACCA logo (also called the ACCA ‘mark’) on its professional stationery and on
its website.
 The ACCA logo should be separate from the logo of the firm.
 The positioning, size and colour of the ACCA logo should be chosen so that it is
clearly recognisable.
 The logo can be downloaded by members from the ACCA website in electronic
format.

FEES

The ACCA Rulebook (Section 3 – 330) contains a number of important provisions in

relation to fees in order to:
 Minimise the possibility of a dispute between a member and their clients.
 Ensure that the member behaves at all times in accordance with the fundamental
principles.

Determinants For Fee-Setting

 The fee considered appropriate for the work undertaken.

 The fee in accordance with the basis agreed with the client.
 The fee by reference to custom in certain specialised areas.
 Seniority of the persons necessarily engaged on the work.
 Time spent by each person.
 Degree of risk and responsibility that the work entails
 Urgency of the work to the client
 Importance of the work to the client
 Overhead expenses of the firm.

Lowballing
Lowballing is the setting of a low price at the start of an arrangement in order to secure
the business, with the intention of later raising it or recovering the losses made on that
engagement with other, more lucrative, services.
This could result in a self-interest threat as the auditor may try and keep their client
happy in order to win other contracts with them.

Professional competence and due care may be affected if the low fee leads the firm to
cut corners on the audit to try and minimize losses.

Acceptance Considerations

Engagement Letter- Purpose

Its purpose is to:
 Minimise the risk of any misunderstanding between the practitioner and client.
 Confirm acceptance of the engagement
 Set out the terms and conditions of the engagement.

Engagement Letter- Contents

 The objective and scope of the audit of the financial statements
 The responsibilities of the auditor
 The responsibilities of management
 Identification of the applicable financial reporting framework for the
preparation of the financial statements
 Reference to the expected form and content of any reports to be issued by the
auditor.

Changes To The Engagement Letter

The engagement letter should be reviewed every year to ensure that it is up to date but
does not need to be reissued every year unless there are. changes to the terms of the
engagement.
Reasons for changes would include:
 Changes to statutory duties due to new legislation
 Changes to professional duties, for example, due to new or updated ISAs
 Recent changes in senior management
 A significant change in ownership.