5. Quality management

Question 1

What is the difference between hot and cold file reviews?

Answer 1

Hot review - objective evaluation of the significant judgements made and conclusions reached in formulating auditors report.
- Review of FS and proposed auditors report
- Takes place on or before issue of audit report
- Mandatory for audits of listed entities

Cold Review - for providing reasonable assurance that its system of quality management is operating effectively, usually conducted by quality partner
- Performed on a sample of audit files, considers compkiance with firms procedures, ISAs and ethical standards etc
- Mandatory requirement of ISQM 1
- Cold review performed after date of auditor’s report

Question 2

What is audit committees responsibility required by UK corporate governance code?

Answer 2

General oversight of auditor
- Recommending appointment, reappointment and removal
- Approving fees and agreeing terms of engagement
- Putting audit out to tender every 10 years
- Assessing objectivity and independnece

Oversight of audit process
- Strategy, plan, materiality and resources
- Review findings and discuss major issues
- Upon competion review if agreed plan was met

Question 3

Why is it important that a good quality audit is carried out?

Answer 3

• Protect reputation of firm and profession
• Provides defence in the event of being sued for negligence
• It is in public interest - can rely on FS

Question 4

What are systems to identify quality failures?

Answer 4

Internal systems at firm level -ISQM 1

External systems - Listed company audit files reviewed by FRC
- Regulatory reviews of non-listed audits by ICAEW