AUDITING THEORY - MODULE

4 QUALITY CONTROL SYSTEM

Quality Control to Provide Audit, Review and other Assurance Engagements

The firm should establish a system of quality control which consist of policies 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 partners are appropriate in the
circumstances and the procedures necessary to implement and monitor compliance with those policies.
The quality control policies and procedures should be documented and communicated to the firm’s
personnel.

Elements of Quality Control

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

a. Leadership responsibilities for quality within the firm

1. The firm should establish policies and procedures designed to promote an internal culture based on the
recognition that quality is essential in performing engagements. Such policies and procedures should
require the firm’s chief executive officer (or equivalent) or, if appropriate, the firm’s managing board
of partners (or equivalent), to assume ultimate responsibility for the firm’s system of quality control.
2. Any person or persons assigned operational responsibility for the firm’s quality control system by the
firm’s chief executive officer or managing board of partners should have sufficient and appropriate
experience and ability, and the necessary authority, to assume that responsibility.

b. Ethical Requirements

1. 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.

Independence
1. The firm should establish policies and procedures designed to provide it with reasonable assurance
that the firm, its personnel and, where applicable, others subject to independence requirements
(including experts contracted by the firm and network firm personnel), maintain independence
where required by the Philippine Code. Such policies and procedures should enable the firm to:
a. Communicate its independence requirements to its personnel and, where applicable, others subject to
them; 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.

Page|2
c. Acceptance and Continuance of Client Relationships and Specific Engagements

1. The firm should establish policies and procedures for the acceptance and continuance of client
relationships and specific engagements, designed to provide it with reasonable assurance that it will
only undertake or continue relationships and engagements where it:
a. Has considered the integrity of the client and does not have the information that would lead it to
conclude that the client lacks integrity;
b. Is competent to perform the engagement and has the capabilities, time and resources to do so; and
c. Can comply with ethical requirements

d. Human Resources

1. The firm should establish policies and procedures designed to provide it with reasonable assurance
that it has sufficient personnel with the capabilities, competence, and commitment to ethical
principles necessary to perform its engagements in accordance with professional standards and
regulatory and legal requirements and to enable the firm or engagement partners to issue reports that
are appropriate in the circumstances.

Such policies and procedures address the following personal issues:

1. Recruitment;
2. Performance evaluation;
3. Capabilities;
4. Competence;
5. Career development;
6. Promotion;
7. Compensation; and
8. The estimation of personnel needs

e. Engagement Performance

1. 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 issue reports that are appropriate in the
circumstances.

f. Monitoring

1. The firm should establish policies and procedures designed to provide it with reasonable assurance that
the policies and procedures relating to the system of quality control are relevant, adequate, operating
effectively and complied with its 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.

Page|3
2. The purpose of monitoring compliance with quality control policies and procedures is to provide an
evaluation of:
a. Adherence to professional standards and regulatory and legal requirements;
b. Whether the quality control system has been appropriately designed and effectively implemented;
and
c. Whether the firm’s quality control policies and procedures have been appropriately applied, so that
reports that are issued by the firm or engagement partners are appropriate in the circumstances.

Engagement Quality Control Review

An engagement quality control review ordinarily involves discussion with the engagement partner, a
review of the financial statements or other subject matter information and the report, and, in particular,
consideration of whether the report is appropriate. It also involves a review of selected working papers
relating to the significant judgments the engagement team made and the conclusions they reached. The
extent of the review depends on the complexity of the engagement and the risk that the report might not be
appropriate in the circumstances. The review does not reduce the responsibilities of the engagement
partner.

An engagement quality control review for audits of financial statements of listed entities includes
considering the following:

a. The engagement team’s evaluation of the firm’s independence in relation to the specific engagement
b. Significant risks identified during the engagement and the responses to those risks
c. Judgments made, particularly with respect to materiality and significant risks
d. Whether appropriate consultation has taken place on matters involving differences of opinion or other
difficult or contentious matters, and the conclusions arising from those consultations
e. The significance and disposition of corrected and uncorrected misstatements identified during the
engagement
f. The matters to be communicated to management and those charged with governance and, where
applicable, other parties such as regulatory bodies
g. Whether working papers selected for review reflect the work performed in relation to the significant
judgments and support the conclusions reached.
h. The appropriateness of the report to be issued.

The firm’s policies and procedures are designed to maintain the objectivity of the engagement quality
control reviewer. For example, the engagement quality control reviewer:

a. Is not selected by the engagement partner;

b. Does not otherwise participate in the engagement during the period of review;
c. Does not make decisions for the engagement team;
d. Is not subject to other consideration that would threaten the reviewer’s objectivity

Page|4
Complaints and Allegation

The firm should establish policies and procedures designed to provide it with reasonable at it deals
appropriately with
a. Complaints and allegations that the work performed by the firm fails to comply with professional
standards and regulatory and legal requirements, and
b. Allegations of non-compliance with the firm’s system of quality control.

Documentation

The firm should establish policies and procedures requiring appropriate documentation to provide evidence
of the operation of each element of its system of quality control.

Factors to consider when determining the form and content of documentation evidencing the operation of
each of the elements of the system of quality control include the following:
a. The size of the firm and the number of offices.
b. The degree of authority both personnel and offices have.
c. The nature and complexity of the firm’s practice and organization.

Page|5