C1 - Quality Control Notes
C1 - Quality Control Notes
SQC 1 - Quality Control for Firms that Perform Audits and Reviews of
Historical Financial Information, and Other Assurance and Related Services
Engagements
Introduction
● Every CA Firm must have a system of quality control for audits and reviews of historical financial
information, and for other assurance and related services engagements.
● The firm should establish a system of quality control designed to provide it with reasonable assurance that
○ the firm and its personnel comply with professional standards and regulatory and legal requirements,
and
○ that reports issued by the firm or engagement partner(s) are appropriate in the circumstances.
● A system of quality control consists of policies
○ designed to achieve the objectives.
● SQC 1 applies to all firms irrespective of their constitution.
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elements:
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a. Leadership responsibilities for quality within the firm.
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b. Ethical requirements.
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c. Acceptance and continuance of client relationships and specific engagements.
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d. Human resources.
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e. Engagement performance.
f. Monitoring.
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● The quality control policies and procedures should be
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○ documented and
○ communicated to the firm’s personnel.
● Such communication
○ describes the quality control policies and procedures and (What are the Policies & Procedures)
○ the objectives they are designed to achieve, and (What objectives will be achieved)
○ includes the message
■ that each individual has a personal responsibility for quality and
■ is expected to comply with these policies and procedures. (Quality is personal responsibility
and compliance is expected)
● The firm should encourages its personnel to communicate their feedback on quality control matters and
consider feedback as an integral part of system of quality control.
Key elements that highlight the importance of quality in a firm's business strategy
Of particular importance is the need for the firm’s leadership to recognize that the firm’s business strategy is
subject to the overriding requirement for the firm to achieve quality in all the engagements that the firm performs.
Accordingly:
a. The firm assigns its management responsibilities so that commercial considerations do not override the
quality of work performed;
b. The firm’s policies and procedures addressing performance evaluation, compensation, and promotion
(including incentive systems) with regard to its personnel, are designed to demonstrate the firm’s overriding
commitment to quality; and
c. The firm devotes sufficient resources for the development, documentation and support of its quality control
policies and procedures.
Ethical Requirements
● The firm should establish policies and procedures designed to provide it with reasonable assurance that the
firm and its personnel comply with relevant ethical requirements.
● Ethical requirements relating to audits and reviews of historical financial information, and other assurance
and related services engagements are contained in the Code.
● The Code establishes the fundamental principles of professional ethics, which include:
a. Integrity;
b. Objectivity;
c. Professional competence and due care;
d. Confidentiality; and
e. Professional behavior
● Fundamental principles should be emphasized by
○ Actions of the leadership of the firm
○ spreading awareness and training
○ Monitoring
○ A process for dealing with non-compliance.
Independence
Establish policies and procedures
The firm should establish policies and procedures designed to provide it with reasonable assurance that the firm
and its personnel (including experts contracted by the firm and network firm personnel), maintain independence
where required by the Code.
c. 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.(Action to eliminate and
reduce)
● 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 the
internal control environment.
● The nature of the client's operations, including its business practices.
● Whether the client is aggressively concerned with maintaining the firm's fees as low as possible.
● Indications of an inappropriate limitation in the scope of work.
● Indications that the client might be involved in money laundering or other criminal activities.
● The reasons for the proposed appointment of the firm and non-reappointment of the previous firm.
The extent of knowledge a firm will have regarding the integrity of a client will generally grow within the context of
an ongoing relationship with that client.
Matters the firm considers while evaluating capabilities, competence, time and resources to undertake a new
engagement from a new or an existing client.
● Firm personnel have knowledge of relevant industries or subject matters;
● Firm personnel have experience with relevant regulatory or reporting requirements, or the ability to gain the
necessary skills and knowledge effectively;
● The firm has sufficient personnel with the necessary capabilities and competence;
● Experts are available, if needed;
● Individuals meeting the criteria and eligibility requirements to perform engagement quality control review
are available, where applicable; and
● The firm would be able to complete the engagement within the reporting deadline.
Human Resources
● The firm should establish policies and procedures designed to provide it with
○ reasonable assurance that it has sufficient personnel with
■ capabilities,
■ competence, and
■ commitment to ethical principles
○ necessary to perform its engagements in accordance with
Engagement Performance
● The firm should establish policies and procedures designed to provide it with reasonable assurance that
engagements are performed in accordance with professional standards and regulatory and legal
requirements, and that the firm or the engagement partner issues reports that are appropriate in the
circumstances.
● Through its policies and procedures, the firm seeks to establish 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.
Consultation
The firm should 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 to take place;
c. The nature and scope of such consultations are documented; and
d. Conclusions resulting from consultations are documented and implemented.
Differences of Opinion
● There might be difference of opinion within
○ engagement team,
○ with those consulted and
○ between engagement partner and engagement quality control reviewer.
● The report should only be issued after resolution of such differences.
● In case, recommendations of engagement quality control reviewer are not accepted by engagement
partner and matter is not resolved to reviewer’s satisfaction, the matter should be resolved by following
established procedures of firm like by consulting with another practitioner or firm, or a professional or
regulatory body.
Engagement Documentation
● The firm should 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.
● Engagement files should be completed in not more than 60 days after date of auditor’s report.
● Where two or more different reports are issued in respect of the same subject matter information of an
entity, the firm’s policies and procedures relating to time limits for the assembly of final engagement files
should be considered for each report as if it were for a separate engagement. This may be the case when
the firm issues an auditor’s report on a component’s financial information for group consolidation purposes
and, at a subsequent date, an auditor’s report on the same financial information for statutory purposes.
● The firm should establish policies and procedures designed to maintain the confidentiality, safe custody,
integrity, accessibility and retrievability of engagement documentation.
● The firm should 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 ordinarily is no shorter than 7 years from the
date of the auditor's report, or, if later, the date of the group auditor's report.
● Unless otherwise specified by law or regulation, engagement documentation is the property of the firm.
● The firm may, at its discretion, make portions of, or extracts from, engagement documentation available to
clients, provided such disclosure does not undermine the validity of the work performed, or, in the case of
assurance engagements, the independence of the firm or its personnel.
Monitoring
● The firm should ensure that policies and procedures relating to the system of quality control are relevant,
adequate, operating effectively and complied within practice.
● Such policies and procedures should include an ongoing consideration and evaluation of the firm’s system
of quality control, including a periodic inspection of a selection of completed engagements.
Factors need to be considered in monitoring the quality control of engagements within a firm
● Deciding whether the quality control system of the firm has been appropriately designed and effectively
implemented.
● Examining whether new developments in the professional standards, legal and regulatory requirements have
been reflected in the quality control policies.
● Conducting monitoring by entrusting responsibility of monitoring process to a partner or other persons with
sufficient and appropriate experience and authority in the firm.
● Dealing with complaints and allegations against the firm or any employees of it of non‒ compliance with
professional standards or appropriate regulatory requirements by a person within or outside the firm.
● Taking appropriate remedial actions against the personnel who did not conform to quality control policies.
● Taking action when deficiencies in the design or operation of the firm’s quality control policies and
procedures, or non-compliance with the firm’s system of quality control are identified
Basics
● This Standard on Auditing (SA) deals with the specific responsibilities of the auditor regarding quality
control procedures for an audit of financial statements.
● It also addresses, where applicable, the responsibilities of the engagement quality control reviewer. This SA
is to be read in conjunction with relevant ethical requirements
● Quality control systems, policies and procedures are the responsibility of the audit firm.
If the engagement partner obtains information that would have caused the firm to decline the audit engagement
had that information been available earlier, the engagement partner shall communicate that information promptly
to the firm, so that the firm and the engagement partner can take the necessary action.
Engagement Performance
Topics to covered
● Direction, Supervision and Performance
● Reviews
● Engagement Quality Control Review
● Consultation
● Differences of Opinion
Reviews
● The engagement partner shall take responsibility for reviews being performed in accordance with the firm’s
review policies and procedures.
● On or before the date of the auditor’s report, the engagement partner shall, through a review of the audit
documentation and discussion with the engagement team, be satisfied that sufficient appropriate audit
evidence has been obtained to support the conclusions reached and for the auditor’s report to be issued.
Consultation
The engagement partner shall:
a. Take responsibility for the engagement team undertaking appropriate consultation on difficult or
contentious matters;
b. Be satisfied that members of the engagement team have undertaken appropriate consultation during the
course of the engagement, both within the engagement team and between the engagement team and
others at the appropriate level within or outside the firm;
c. Be satisfied that the nature and scope of, and conclusions resulting from, such consultations are agreed
with the party consulted; and
d. Determine that conclusions resulting from such consultations have been implemented.
Differences of Opinion
● If differences of opinion arise within
○ engagement team,
○ with those consulted or, where applicable,
○ between engagement partner and engagement quality control reviewer,
● the engagement team shall follow the firm’s policies and procedures for dealing with and resolving
differences of opinion.
Monitoring
● An effective system of quality control includes a monitoring process designed to provide the firm with
reasonable assurance that its policies and procedures relating to the system of quality control are relevant,
adequate, and operating effectively.
● EP shall consider the results of the firm’s monitoring process as evidenced in the latest information
circulated by the firm and, if applicable, other network firms and whether deficiencies noted in that
information may affect the audit engagement.
Documentation
Documentation by auditor
● Issues identified with respect to compliance with relevant ethical requirements and how they were resolved.
● Conclusions on compliance with independence requirements and any relevant discussions with the firm that
support these conclusions.
● Conclusions reached regarding the acceptance and continuance of client relationships and audit
engagements.
● The nature and scope of, and conclusions resulting from, consultations undertaken during the course of the
audit engagement.
SQC 1 vs SA 220
S.No SQC1 SA 220
1 It applies to entire firm and fixes the responsibility of It applies to a particular audit engagement and
firm to be assumed by CEO or managing partners engagement partner takes responsibility of the
same
2 It is applicable to audits, reviews of historical financial It is applicable to audit engagements only
Information, and other assurance and related services
engagements
3 It relates to setting up of a quality control system It deals with responsibilities of engagement teams
consisting of policies and procedures for firm as a to implement quality control procedures that are
whole. applicable to audit engagements
4 It pertains to establishing a system of quality control It is premised on the basis that firm is subject to
designed to provide firm with a reasonable assurance SQC 1. Therefore, SQC 1 is a sine qua non for
that a firm and its personnel comply with professional applicability of SA 220. It is within overall context of
standards and regulatory and legal requirements so a firm’s system of quality control, engagement
that reports issued by firm or engagement partners are teams implement quality control procedures
appropriate in circumstances applicable to audit engagements.
Peer Review
● Peer review involves examining and assessing a Practice Unit's systems and procedures to ensure they
align with the quality standards expected by technical, professional, and ethical guidelines or regulatory
mandates.
● Peer review is meant for the purpose of enhancing the quality of professional work resulting in more reliable
and useful audit reports.
● Once a Practice Unit is subjected to Peer review, its assurance engagement records pertaining to the Peer
review period are subject to examination and review by the Peer Reviewer. On completion of this exercise, a
“peer review certificate” is issued in case of unqualified report issued by Peer Reviewer. In case of a
qualified report, it is informed to the Practice Unit that the same cannot be issued along with the reasons
therefore as well as inform about the due date for conducting a follow-on review as may be decided by the
Board.
The statutory auditors in respect of the companies are identified for their audit quality review based upon
risk-based approach. The review is carried out by technical reviewers who are empanelled by QRB on engagement
basis from across the country.
of companies. Such companies include listed companies, insurance companies, banking companies and
other companies as provided for in rule 3 of NFRA Rules,2018.
● Therefore, overseeing quality of audit services of listed companies falls under the purview of NFRA. QRB
can review quality of audit services provided by the members of the Institute only in respect of entities other
than those specified under Rule 3 of NFRA Rules, 2018 and those referred to QRB by NFRA under relevant
rules