Definition of “Firm”, “Network” and “Network Firm” (Ref: Para. 9-11)
A5. The definitions of “firm”, “network” or “network firm” in relevant ethical requirements may differ from those set out in this SA. For example, the Code of Ethics of the Institute of Chartered Accountants of India (ICAI) defines the “Network Firm” as: “Networking amongst two or more firms under common control, ownership or management with the firm or having affiliation with an accounting entity or any entity that a reasonable and informed third party having knowledge of all relevant information would reasonably conclude as being part of the firm nationally”. In complying with the requirements in paragraphs 9-11, the definitions used in the relevant ethical requirements apply in so far as is necessary to interpret those ethical requirements.
Threats to Independence (Ref: Para. 11(c))
A6. The engagement partner may identify a threat to independence regarding the audit engagement that safeguards may not be able to eliminate or reduce to an acceptable level. In that case, as required by paragraph 11(c), the engagement partner reports to the relevant person(s) within the firm to determine appropriate action, which may include eliminating the activity or interest that creates the threat, or withdrawing from the audit engagement, where withdrawal is legally permitted.
A7. In case of certain entities, such as, Central/State governments and related government entities (for example, agencies, boards, commissions), statutory measures may provide safeguards for the independence of auditors of certain entities. However, such auditors or audit firms carrying out audits on behalf of the statutory auditor may, depending on the terms of the applicable legal or regulatory framework, need to adapt their approach in order to promote compliance with the spirit of paragraph 11. This may include, where the auditor’s applicable law or regulation does not permit withdrawal of the auditor from the engagement, disclosure through a public report, of circumstances that have arisen that would, have otherwise lead the auditor to withdraw.
Acceptance and Continuance of Client Relationships and Audit
Engagements (Ref: Para. 12)
A8. SQC 1 requires the firm to obtain information considered necessary in the circumstances before accepting an engagement with a new client, when deciding whether to continue an existing engagement, and when considering acceptance of a new engagement with an existing client5. Information such as the following assists the engagement partner in determining whether the conclusions reached regarding the acceptance and continuance of client relationships and audit engagements are appropriate: The integrity of the principal owners, key management and those charged with governance of the entity;
Whether the engagement team is competent to perform the audit
engagement and has the necessary capabilities, including time and resources; Whether the firm and the engagement team can comply with relevant ethical requirements; and Significant matters that have arisen during the current or previous audit engagement, and their implications for continuing the relationship.
A9. In case of certain entities, such as, Central/State governments and related government entities (for example, agencies, boards, commissions), auditors may be appointed in accordance with statutory procedures. Accordingly, certain of the 5 SQC 1, paragraph 28. requirements and considerations regarding the acceptance and continuance of client relationships and audit engagements as set out in paragraphs 12, 13 and A7 may not be relevant. Nonetheless, information gathered as a result of the process described may be valuable to the auditors of such entities in performing risk assessments and in carrying out reporting responsibilities.
Assignment of Engagement Teams (Ref: Para. 14)
A10. An engagement team also includes a member using expertise in a specialised area of accounting or auditing, whether engaged or employed by the firm, if any, who performs audit procedures on the engagement.
A11. When considering the appropriate competence and capabilities expected of the engagement team as a whole, the engagement partner may take into consideration such matters as the team’s: Understanding of, and practical experience with, audit engagements of a similar nature and complexity through appropriate training and participation.
Understanding of professional standards and regulatory and legal
Technical expertise, including expertise with relevant information
technology and specialised areas of accounting or auditing. Knowledge of relevant industries in which the client operates. Ability to apply professional judgment. Understanding of the firm’s quality control policies and procedures.
A12. In case of certain entities, such as, Central/State governments and related government entities (for example, agencies, boards, commissions), additional appropriate competence may include skills that are necessary to discharge the terms of the audit mandate in a particular jurisdiction. Such competence may include an understanding of the applicable reporting arrangements, including reporting to the legislature or other governing body or in the public interest. The wider scope of audit of such entities may include, for example, some aspects of performance auditing or a comprehensive assessment of compliance with legislative authorities and preventing and detecting fraud and corruption.
Direction, Supervision and Performance (Ref: Para. 15(a))
A13. Direction of the engagement team involves informing the members of the engagement team of matters such as: Their responsibilities, including the need to comply with relevant ethical requirements, and to plan and perform an audit with professional skepticism as required by SA 2006.
Responsibilities of respective partners where more than one partner is
involved in the conduct of an audit engagement. The objectives of the work to be performed. The nature of the entity’s business. Risk-related issues. Problems that may arise. The detailed approach to the performance of the engagement. Discussion among members of the engagement team allows less experienced team members to raise questions with more experienced team members so that appropriate communication can occur within the engagement team.
A14. Appropriate teamwork and training assist less experienced members of the engagement team to clearly understand the objectives of the assigned work.
A15. Supervision includes matters such as: Tracking the progress of the audit engagement. Considering the competence and capabilities of individual members of the engagement team, including whether they have sufficient time to carry out their work, whether they understand their instructions, and whether the work is being carried out in accordance with the planned approach to the audit engagement. Addressing significant matters arising during the audit engagement, considering their significance and modifying the planned approach appropriately. Identifying matters for consultation or consideration by more experienced engagement team members during the audit engagement.
Review Responsibilities (Ref: Para. 16)
A16. Under SQC 1, the firm’s review responsibility policies and procedures are determined on the basis that work of less experienced team members is reviewed by more experienced team members7.
A17. A review consists of consideration whether, for example: 6 SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing”, paragraph 15. 7 SQC 1, paragraph 50.
The work has been performed in accordance with professional standards
and regulatory and legal requirements; Significant matters have been raised for further consideration; Appropriate consultations have taken place and the resulting conclusions have been documented and implemented; There is a need to revise the nature, timing and extent of work performed; The work performed supports the conclusions reached and is appropriately documented; The evidence obtained is sufficient and appropriate to support the auditor’s report; and The objectives of the engagement procedures have been achieved.
The Engagement Partner’s Review of Work Performed (Ref: Para. 17)
A18. Timely reviews of the following by the engagement partner at appropriate stages during the engagement allow significant matters to be resolved on a timely basis to the engagement partner’s satisfaction on or before the date of the auditor’s report:
Critical areas of judgment, especially those relating to difficult or
contentious matters identified during the course of the engagement;
Other areas the engagement partner considers important. The engagement partner need not review all audit documentation, but may do so. However, as required by SA 230, the partner documents the extent and timing of the reviews8.
A19. An engagement partner taking over an audit during the engagement may apply the review procedures as described in paragraphs A17 to review the work performed to the date of a change in order to assume the responsibilities of an engagement partner.
Considerations Relevant Where a Member of the Engagement Team with
Expertise in a Specialised Area of Accounting or Auditing Is Used (Ref:
A20. Where a member of the engagement team with expertise in a specialised area of accounting or auditing is used, direction, supervision and review of that engagement team member’s work may include matters such as: 8 SA 230, “Audit Documentation”, paragraph 9(c). Agreeing with that member the nature, scope and objectives of that member’s work; and the respective roles of, and the nature, timing and extent of communication between that member and other members of the engagement team. Evaluating the adequacy of that member’s work including the relevance and reasonableness of that member’s findings or conclusions and their consistency with other audit evidence.
Consultation (Ref: Para. 18)
A21. Effective consultation on significant technical, ethical, and other matters within the firm or, where applicable, outside the firm can be achieved when those consulted: Are given all the relevant facts that will enable them to provide informed advice; and Have appropriate knowledge, seniority and experience.
A22. It may be appropriate for the engagement team to consult outside the firm, for example, where the firm lacks appropriate internal resources. They may take advantage of advisory services provided by other firms, professional and regulatory bodies, or commercial organisations that provide relevant quality control services.
Engagement Quality Control Review
Completion of the Engagement Quality Control Review before Dating of the
Auditor’s Report (Ref: Para. 19(c))
A23. SA 700(Revised) requires the auditor’s report to be dated no earlier than the date on which the auditor has obtained sufficient appropriate evidence on which to base the auditor’s opinion on the financial statements9. In cases of an audit of financial statements of listed entities or when an engagement meets the criteria for an engagement quality control review, such a review assists the auditor in determining whether sufficient appropriate evidence has been obtained.
A24. Conducting the engagement quality control review in a timely manner at appropriate stages during the engagement allows significant matters to be promptly resolved to the engagement quality control reviewer’s satisfaction on or before the date of the auditor’s report.
A25. Completion of the engagement quality control review means the completion by the engagement quality control reviewer of the requirements in paragraphs 9 SA 700(Revised), “Forming an Opinion and Reporting on Financial Statements”, paragraph 48. 20-21, and where applicable, compliance with paragraph 22. Documentation of the engagement quality control review may be completed after the date of the auditor’s report as part of the assembly of the final audit file. SA 230 establishes requirements and provides guidance in this regard10. Nature, Extent and Timing of Engagement Quality Control Review (Ref: Para. 20)
A26. Remaining alert for changes in circumstances allows the engagement partner to identify situations in which an engagement quality control review is necessary, even though at the start of the engagement, such a review was not required.
A27. The extent of the engagement quality control review may depend, among other things, on the complexity of the audit engagement, whether the entity is a listed entity, and the risk that the auditor’s report might not be appropriate in the circumstances. The performance of an engagement quality control review does not reduce the responsibilities of the engagement partner for the audit engagement and its performance.
A28. When SA 70111 applies, the conclusions reached by the engagement team in formulating the auditor’s report include determining: The key audit matters to be included in the auditor’s report; The key audit matters that will not be communicated in the auditor’s report in accordance with paragraph 14 of SA 701, if any; and If applicable, depending on the facts and circumstances of the entity and the audit, that there are no key audit matters to communicate in the auditor’s report. In addition, the review of the proposed auditor’s report in accordance with paragraph 20(b) includes consideration of the proposed wording to be included in the Key Audit Matters section.
Engagement Quality Control Review of Listed Entities (Ref: Para. 21)
A29. Other matters relevant to evaluating the significant judgments made by the engagement team that may be considered in an engagement quality control review of a listed entity include: Significant risks identified during the engagement in accordance with SA 10 SA 230, paragraphs 14-16 and A21-A24. 11 SA 701, Communicating Key Audit Matters in the Independent Auditor’s Report. 31512, and the responses to those risks in accordance with SA 33013, including the engagement team’s assessment of, and response to, the risk of fraud in accordance with SA 24014. Judgments made, particularly with respect to materiality and significant risks.
The significance and disposition of corrected and uncorrected
misstatements identified during the audit. The matters to be communicated to management and those charged with governance and, where applicable, other parties such as regulatory bodies. These other matters, depending on the circumstances, may also be applicable for engagement quality control reviews for audits of financial statements of other entities.
Considerations Specific to Smaller Entities (Ref: Para. 20-21)
A30. In addition to the audits of financial statements of listed entities, an engagement quality control review is required for such audit engagements also that meet the criteria established by the firm that subjects engagements to an engagement quality control review. In some cases, none of the firm’s audit engagements may meet the criteria that would subject them to such a review. Considerations Specific to Central/State Governments and Related Government
Entities (Ref: Para. 20-21)
A31. In case of certain entities, such as, Central/State governments and related government entities (for example, agencies, boards, commissions), a statutorily appointed auditor (for example, an Auditor General, or other suitably qualified person appointed on behalf of the Auditor General), may act in a role equivalent to that of engagement partner with overall responsibility for certain entities audits. In such circumstances, where applicable, the selection of the engagement quality control reviewer includes consideration of the need for independence from the audited entity and the ability of the engagement quality control reviewer to provide an objective evaluation.
A32. Certain entities, such as, Central/State governments and related government entities (for example, agencies, boards, commissions), may not necessarily be listed entities yet may be significant due to size, complexity or 12 SA 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment”. 13 SA 330, “The Auditor’s Responses to Assessed Risks”. 14 SA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”. public interest aspects, and which consequently have a wide range of stakeholders. Examples include state owned corporations and public utilities. Ongoing transformations within the certain entities may also give rise to new types of significant entities. There are no fixed objective criteria on which the determination of significance is based. Nonetheless, auditors of such entities evaluate which of these entities may be of sufficient significance to warrant performance of an engagement quality control review.
Monitoring (Ref: Para. 23)
A33. SQC 1 requires the firm to establish a monitoring process designed to provide it with reasonable assurance that the policies and procedures relating to the system of quality control is relevant, adequate and operating effectively15.
A34. In considering deficiencies that may affect the audit engagement, the engagement partner may have regard to measures the firm took to rectify the situation that the engagement partner considers are sufficient in the context of that audit.
A35. A deficiency in the firm’s system of quality control does not necessarily indicate that a particular audit engagement was not performed in accordance with professional standards and regulatory and legal requirements, or that the auditor’s report was not appropriate.
Documentation of Consultations (Ref: Para. 24(d))
A36. Documentation of consultations with other professionals that involve difficult or contentious matters that is sufficiently complete and detailed contributes to an understanding of:
The issue on which consultation was sought; and
The results of the consultation, including any decisions taken, the basis for those decisions and how they were implemented.
Modifications vis-à-vis ISA 220, “Quality Control for an
Audit of Financial Statements”
Paragraphs A7, A9, A12, A31 and A32 of the Application Section of ISA 220 (A7, A9, A12, A31 and A32 of SA 220) dealt with the application of the requirements of ISA 220 to the audits of public sector entities. Since as mentioned in the 15 SQC 1, Paragraph 86. “Preface to the Standards on Quality Control, Auditing, Review, Other Assurance and Related Services”, the Standards issued by the Auditing and Assurance Standards Board, apply equally to all entities, irrespective of their form, nature and size, a specific reference to applicability of the Standard to public sector entities has been deleted. Further, it is also possible that these requirements may also exist in case of non public sector entities pursuant to a requirement under the statute. Accordingly, the spirit of paragraphs A7, A9, A12, A31 and A32 in ISA has, accordingly, been made more generic in its application.
