Why the audit firms should implement and maintain quality control policies and procedures?

Audit firms should maintain a system of quality control in order to provide reasonable assurance that:

  1. The audit firm and its staff comply with professional standards.
  2. Individual audits comply with professional standards and- legal
  3. Audit reports issued are appropriate.

Discuss engagement partner’s responsibilities, under the following subheadings, as regards quality control system:

  1. Leadership responsibilities.
  2. Ethical requirements.
  3. Acceptance and continuation of client relationship.
  4. Human resources.
  5. Engagement performance.
  6. Monitoring.

  1. Leadership responsibilities:

    The above refers to importance given by the engagement partner as regards quality control procedures.

  2. Compliance with ethical requirements:

    – Integrity
    – Objectivity
    – Professional competence and due care
    – Confidentiality
    – Professional behavior
    – Independence

  3. Acceptance and continuation of client relationship:

    – Integrity of client
    – Ability to serve the client
    – Compliance of ethical requirements including independence
    – Significant matters that have arisen during previous audit and their implication to accept or continue the audit.

  4. Human resource management:
    Assignment of competent and appropriate staff to engagement:

    (i) Practical experience with similar industry
    (ii) Knowledge of professional standards
    (iii) Ability to apply professional standards to the given situation
    (iv) IT background

  5. Engagement performance:

    (a) Direction

    Direction involves informing engagement team about:

    (i) Responsibilities
    (ii) Compliance of ethical requirements
    (iii) Professional skepticism
    (iv) Objectives of procedures to be performed
    (v) Risk related factors.

    (b) Supervision

    (i) Continuous track on progress
    (ii) Resolving significant matters raised during audit
    (iii) Identifying matters requiring consultation.

    (c) Review

    (i) Audit procedures were performed in accordance with professional standards.
    (ii) Where required, appropriate consultation have taken place
    (iii) Unresolved significant matters have been noted for further consideration
    (iv) Conclusions are consistent with results of work performed
    (v) Sufficient and appropriate evidences have been obtained
    (vi) Significant risk have been considered
    (vii) Areas requiring judgments have been identified.

    (d) Consultation

    (i) Consultation on technical and ethical issues within the firm
    (ii) If adequate expertise is not available within the firm, consultation from outsider will be appropriate.

    (e) Arrange engagement quality control review.

  6. Monitoring

    Monitoring involves continuous process to provide reasonable assurance that quality control system is effectively operating.

What matters are considered in engagement quality control review?

For listed companies, engagement quality review involves:

  1. Review financial statements.
  2. Review purposed audit report.
  3. Review significant judgments of engagement team.
  4. Significant risks and responses to those risks.
  5. Discussions with engagement partner.
  6. Independence requirements.
  7. How there corrected and uncorrected misstatements have been resolved.
  8. Matters to be communicated to management and those charged with governance.

State the objectives of quality control policies and procedures that are adapted by an audit firm.

Audit firms should maintain a system of quality controls in order t
provide reasonable assurance that:

  1. The audit firm and its staff comply with professional standards.
  2. Individual audits comply with professional standards and legal requirements.
  3. Audit reports issued are appropriate.

Wood Limited (WL) is a listed company. SMSF Chartered Accountant have been the auditors of the company for the three years. In November 2007, with substantial change in shareholding a new Board of Direct was elected. The new Board made significant changes in the semi management within a week of taking charge.

On February 10, 2008, after completing the filed work, the auditors the financial statements along with initialed draft audit report, to WL board for its approval. On “thesame date, a  Senior partner was assigned carry out an engagement quality control review. During the review noted the following:

  1. Management representation letter contains a paragraph that “We have taken charge from the previous  management on 28 November 2007 and after taking charge, we commenced valuation exercise in respect of plant and machinery in various factories owned by WL. To date, thirty percent of plant and machinery has been valued. The exercise carried out so far shows that fair value of the assets is 20% less than the carrying value, for which an impairment loss has been accounted for. In view of this situation, we are not confident about the fair value
    of the plant and machinery as presented in the financial statements”.
  2. The valuation is being carried out by the production manager who is a qualified engineer. He had been responsible for year end valuation review for many years. This is the first time ‘when he has reported impairment.
  3. The issue of impairment loss, which is of material  amount, was a contentious matter between a team member and the job in charge. On inquiry Mr. Manzoor Nazar, the engagement partner, informed that he had accepted the job in charge’s view point. 
  4. This matter was also reported to the stock exchanges on
    December 5, 2007 resulting in a sharp decline in share  prices of WL, which otherwise had a good price-growth history.
  5. Subsequent to year end, WL has been awarded a very  profitable long-term supply contract by Timber Limited (TL) , a reputable industrial undertaking. No direct confirmation was obtained from TL.
  6. WL announced a 100% right issue in December 2007 at market price. Because of discouraging response from the minority shareholders, the directors and their associates purchased a large number of right letters from the open market.
  7. The firm’s record reveals that Mr. Manzoor had applied twice for ajob in WL during last one and half years. However, there is no current information about his intention.


Write a review report on behalf of the reviewer indicating the deficiencies noted in the audit as well as the policies of the firm and submit your recommendations.

Inadequate Quality Control

  1. Mr. Manzoor Nazar intended to join WL as an employee. He should not have been engagement team member for the audit of WL.
  2. Mr. Manzoor should have informed the firm of his intention to join WL.
  3. Engagement partners should have arranged engagement reviewer.
  4. Consultation was required regarding impairment loss.

Risk factors not considered

  1. Change in the composition of management.
  2. Valuation of plant by an employee.
  3. Deliberate action of directors to lower down market price of shares by reporting impairment loss to stock exchange.

Deficiencies in audit approach

  1. Reliability of management representation is significantly decreased because director’s action to decline market price.
  2. Opinion of internal expert should not have been relied upon.
  3. Previous working paper files were not adequately studied.
  4. Audit opinion was issued obtaining sufficient and appropriate audit evidence on impairment.


Valuation of plant should be made by independent valuers.

Raza & Company, Chartered Accountants is an old and well reputed audit firm. It has been growing at a rapid pace with the result that the partners of the firm had been unable to devote much time to various important issues. In view of your experience, they have inducted you as a partner, with the primary responsibility of improving the firm’s systems and procedures.

The major issues that have attracted your immediate attention relate to human resources, audit documentation and client acceptance and retention procedures.


a) How would you evaluate the firm’s HR requirements and what steps would you take to ensure that adequate human resources are available within the firm?

b) Identify the situations under which you would recommend declining an assurance engagement or consider resigning from the current engagement.

c) Recommend how an engagement team member should evaluate as to what type of audit documentation is required to be prepared in a particular situation.

  1. The firm should establish procedures to ensure that:

    – Only competent staff is appointed.
    – Adequate recruitment and training policies
    – Adequate on – the – job training
    – Effective remuneration and promotion procedures.

  2. Audit should not be accepted or resignation should be considered in case of:

    – on availability of adequate resources
    – Integrity of the management is questionable
    – Threats to independence and objectivity
    – Inability to obtain required evidences
    – High risk client

  3. For evaluation as to what type of audit documentation would be required in particular situation, following matters should be considered.

    – Risk assessment
    – Nature of audit procedures
    – Audit methodology and tools used
    – Degree of judgment required
    – Audit evidences obtained
    – Total population
    – Sample size
    – Basis of selection
    – Errors found
    – Conclusion.

While reviewing the working papers to assess compliance with the Code of Corporate Governance, the auditors of Fair Limited (FL), a listed company, came across the following information:

(i) The Board of Directors of FL comprises of ten directors. Mr. Muneer and Mr. Sualah are the only non-executive directors on the Board. The chairman of the Board is Mr. Saleem, who is also the chief executive of the company.

(ii) During the year, the board met four times. Due to his preoccupation, Mr. Kamal who is the chief financial officer of the company could not attend an important board meeting in
which the half yearly accounts were approved. 

(iii) One of the directors purchased 16% of FL’ s shares on March 17, 2009. He communicated this information to the Board of Directors in the meeting held on March 26,2009.

(iv) FL has an audit committee which comprises of three members, including its chairman, Mr. Waqar. The company’s internal audit department I s headed by a Charted Accountant who reports to the audit committee.

(a) Draft the concluding paragraph of the review report to the members on the company’s Statement of Compliance with the Best Practices of the Code of Corporate Governance, including qualifications (if any). A full report is not required.

(b) Give brief reasons to support your point of view, in respect of matters which have not been considered for reporting as a qualification.


i) The CFO did not attend one of the board’s meeting whereas the Code requires that CFO should attend all the meetings of the Board.

ii) A director purchased 16% of FL’ s shares on March 17, 2009. He
communicated the information on March 26, 2009. The Code requires that the matter should have been communicated immediately in writing.

On the basis of our review, except for the matters stated in paragraphs (i) and (ii) above, noting has come to our attention which causes us to believe that the Statement of Compliance does not appropriately reflect the Company’s compliance, in all material respects, with the best practices contained in the Code of Corporate Governance, effective for year ended June 30, 20x.


(i) Executive directors should preferably be not be more than 75% of the elected directors. Here the executive directors are 80%.

(ii) Mr. Saleem is the-Cfif) and the chairman. The Code prefers that the Chairman should be an independent non executive director.

Beta Construction Company Limited (BCCL) is involved in the construction of large buildings and shopping plazas. The company commenced its business in 2004 by establishing an office in Karachi and has grown rapidly. It currently has offices in five major cities of the country and as many as 25 projects are in various stages of execution.

A substantial portion of the work is done through sub-contractors. payment to sub-contractors is based on certificate of work completion which is issued by the supervisor in charge of each project. The certificate is sent through email to the finance department. The payment is credited directly into the bank accounts of the sub-contractors.

Recently, the management has discovered that the project supervisor of a large project had issued a fraudulent work completion certificate. The preliminary investigation indicated that some other sub-contractors have also been paid fraudulently in the past and the practice was ongoing for the past two years.

The management of BCCL has asked your audit firm to conduct an investigation into the matter. Your initial discussion with the client has revealed the following:

(i) For the past four years the external auditors of the company are Alpha & Co., Chartered Accountants. They had issued unqualified audit reports for all those years and had not reported any internal control weakness in their management letters.

(ii) Prior to approaching your firm, BCCL wanted to give this assignment to Alpha & Co. However, they expressed their inability to undertake the investigation work.


(a) State the matters your firm should consider and the procedures that should be followed prior to the acceptance of this assignment.

(b) State the basic objectives of the above investigation.

(c) Recommend the controls which the management should put in place, to avoid such frauds in future.

  1. Matters to be considered before accepting the assignment are:

    (i) Availability of resources
    (ii) Technical competence
    (iii) Compliance ethical requirements
    (iv) Communication-with existing auditor.

  2. The objectives of the assignment are to determine whether a fraud has taken place, to discover the persons involved in the fraud and quantity the loss.
  3. Recommended controls:

    (i) Up dated list of approved sub contractors should be maintained.
    (ii) The computer system should have built in control to process invoices of approved contractors only.
    (iii) A responsible official should monitor the work which is being performed by sub contractors.
    (iv) Work completion should be certified by the user department.
    (v) Actual costs should be compared with the budgeted costs on a regular basis, and reasons for unusual variances should be investigated.

During the course of the audit, effective consultation helps to address the difficult or contentious matter that may arise within the engagement team or between the engagement team and others, within or outside the firm.


(a) What are the responsibilities of an audit engagement partner in this regard?

(b) How can an auditor ensure that consultations involving difficult or contentious matters have been appropriately documented?

  1. The engagement partner should:

    (i) Take responsibility for the engagement team undertaking appropriate consultation on difficult or contentious matters;
    (ii) Be satisfied that members of engagement team have undertaken appropriate consultation during the course of the engagement;
    (iii) Be satisfied that the nature and scope of, and conclusions resulting from, such consultations are agreed with the party consulted; and
    (iv) determine that conclusions resulting from such consultations have been implemented.

  2. Appropriateness of the documentation can be ensured from the following:
    (i) It should be sufficiently complete.
    (ii) It provides an understanding of the issue on which consultation was sought; and
    (iii) It provides an understanding of the results of the consultation, including:

    • Any decisions taken,
    • The basis for those decisions and
    • How they were implemented.



Posted on November 2, 2015 in Quality Control for an Audit of Financial Statements

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