Quality Control and accepting engagements

Question 1

Importance for a audit to be of a good quality

Answer 1

Protects the reputation of the firm and of the profession
Provides defence in the event of being sued for negligence
In the public interest as well as that of specific users

Question 2

Internal systems to identify quality failures

Answer 2

ISQM 1 raises areas of quality for firms to consider at a firm level
ISA 220 requires auditors to implement performance related quality measures on individual audits

Question 3

External systems to identify quality failures

Answer 3

Listed company audit files reviewed by the Audit Inspection Unit part of the FRC Executive Committee
Regulatory reviews of non-listed audits reviewed by the ICAEW

Question 4

A firm is required to implement a system on quality management (QMS) that gives the firm reasonable assurance that…

Answer 4

The firm and its personnel fulfil professional, legal and regulatory requirements
Engagement Reports issued are appropriate
CEO / managing partner responsible for QMS

Question 5

Elements addressed by QMS

Answer 5

Risk assessment
Governance and leadership
Ethical requirements
Continuance and acceptance
Engagement performance
Resources
Information and communication
Monitoring and remediation process

Question 6

Engagement partner responsibilities

Answer 6

Managing and achieving quality on an audit engagement
Knowing the relevant ethical requirements and ensuring that they are fulfilled
Evaluating threats and taking appropriate actions

Question 7

Purpose of staff work being reviewed by senior staff is to consider whether…

Answer 7

The work has been performed in accordance with professional standards
Significant matter have been raised
Appropriate consultations have taken place
Objectives of the engagement have been achieved
The work performed supports the conclusions reached
The evidence obtained is sufficient and appropriate
There is a need to revise the nature, timing and extent of the work performed

Question 8

Hot file reviews

Answer 8

Provides an objective evaluation of the significant judgements made and conclusions reached in formulating an auditor’s report
Involves reviews and evaluations
Mandatory for audits of listed / high risk entities
Performed on or before the date of the auditor’s report

Question 9

Cold file reviews

Answer 9

Provides reasonable assurance that its QMS is operating effectively
Conducted by a Quality Partner
Performed on a sample of audit files
Considers compliance
Mandatory requirement of ISQM 1
Performed after the date of the auditor’s report

Question 10

Documentation

Answer 10

Should contain what would be necessary to provide an experiences auditor, with no previous connection to the audit, with an understanding of the nature / timing / extent / result of audit procedures, the audit evidence obtained and the conclusions reached

Question 11

Consultation

Answer 11

Obtained by the engagement partner for technical, difficult or contentious issues to ensure good quality judgements are made
Audit engagement partner responsible for
- following the firm’s procedures to resolve differing opinions before signing the auditor’s report
- addressing issues arising from the monitoring and remediation process as they apply to the audit

Question 12

UK Corporate Governance Code

Answer 12

Requires the Audit Committee to scrutinise the quality of the external audit

Question 13

Audit committee responsibilities

Answer 13

Recommending the appointment / reappointment / removal
Approving fees
Agreeing on the terms of engagement
Putting the audit out to tender every 10 years
Annually assessing the independence, objectivity and effectiveness of the external audit process - report to shareholders once done so

Question 14

Audit Committee planning considerations

Answer 14

Audit strategy and plan
Materiality
Resources and expertise of the audit team

Question 15

Audit Committee review during the audit

Answer 15

Findings and discuss major issues encountered
Key accounting and audit judgements
Errors identified

Question 16

Audit Committee assessment on completion

Answer 16

Review
- whether the auditor has met the agreed audit plan
- the content of the external auditor’s management letter
Consider
- the scepticism of the auditors in their handling of the key accounting and audit judgements identified
- the cost effectiveness and value for money of the audit

Question 17

How might an assurance firm obtain an engagement?

Answer 17

Being approached by a potential / existing client and being asked to accept / tender for the engagement

Question 18

Factors considered by a client when evaluating the tender

Answer 18

Quality of service prospective auditors are likely to provide
Knowledge of the business they possess
Experience of the industry they have
Proposed personnel on the audit team
References obtained about the audit firm

Question 19

Lowballing

Answer 19

Charging less than the market rate for the audit
Not unethical but ethical safeguards should be considered - increases self-interest threat

Question 20

Fees should be determined with reference to the…

Answer 20

Seniority / experience / time of employees engaged on the work
Degree of risk and responsibility the work entails
Nature / complexity of the client’s business
Priority and importance of the work to the client
Expenses properly incurred

Question 21

Code of Ethics suggests basis for fee computation should…

Answer 21

Be disclosed and discussed with the client as soon as possible
- incorporated into tendering document

Question 22

Assurance risk analysis considers whether the company has…

Answer 22

Directors / management with integrity
A good financial record
Good internal control
Unusual transactions or a complex structure

Question 23

Auditor considerations when deciding whether to accept an assurance engagement

Answer 23

Results of risk analysis
Any ethical issues which prevent acceptance
Whether the firm has sufficient experience and resources to undertake the engagement
If all the legal requirements associated with the appointment of the incoming auditors and removal / resignation of outgoing auditors have been met

Question 24

Ethical issues steps

Answer 24

Prospective auditor receives written authority from the client to communicate with the existing auditor
- writes to existing auditor, seeking information which could influence the decision to accept the audit
Existing auditor receives written authority from the client to respond to the prospective auditor
- Informs prospective auditor of any unlawful acts by the client / unpaid fees / differences of opinion with the client

Question 25

Appointment of auditors by the members

Answer 25

Auditor appointed by ordinary resolution
Members (shareholders) appoint the auditor at a general meeting at which the financial statements are put forward for approval by members
Appointment made within 28 days after the last date on which the account must be filed - in not, existing auditor deemed reappointed

Question 26

Removed auditors

Answer 26

Must write a statement of circumstances and deposit it at the company’s registered office explaining circumstances of removal
Have the right to
- receive notice, attend and speak at the meeting appointing the new auditor
- have written representations circulated to all the members

Question 27

Resigned auditors

Answer 27

Must submit written notice to the company’s registered office and submit a statement of circumstances explaining the circumstances of their resignation
Has the right to
- request that the directors convene a general meeting, allowing auditors to explain the circumstances
- require the directors circulate the statement of circumstances before the meeting

Question 28

Pre-conditions of an audit

Answer 28

Establish whether the financial reporting framework to be applied is acceptable
Ensure that management understands its responsibilities to
- prepare financial statements
- maintain a system of internal control
- provide information and access to auditors

Question 29

The Letter of Engagement (ISA 210) covers…

Answer 29

The objective and scope of the audit of financial statements
Management’s responsibilities
The auditor’s responsibilities
The form and content of reports and communications
The unavoidable risk of material misstatement due to limitations of an audit
The fact that auditors are entitled to unrestricted access to records and documents connected to the audit
The expectation that management will provide written representations

Question 30

Recurring audits

Answer 30

Auditors should consider every year whether a new Letter of Engagement

Question 32

Changes indicating a new Letter of Engagement is required

Answer 32

Terms of engagement
Senior management
Directors
Ownership
Financial reporting framework
Legal or regulatory requirements