Requirements in ISQC1 clarified
The International Standard on Quality Control (ISQC) 1, Quality Controls for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements, which requires compliant systems of quality control to be established by 15 December 2009, defines the objective and prescribes the responsibilities and requirements of a system of quality control for firms of professional accountants rendering such services.
Standards are drafted, we are led to believe, in very precise and unambiguous language which should imply that these can, and should, be understood by practically anyone. However, only the most enthusiastic person will claim a body of standards to be an exciting read. At seminars dealing with auditing and financial reporting standards, invariably, one cannot but help notice, after a while, the glassy eyes of participants. This article is an attempt to simplify one of the most important standards – a standard which defines who we, i.e. professional accountants, should be and what we should be doing.
ISQC1 states that “The objective of the (professional accounting) firm is to establish and maintain a system of quality control to provide it with reasonable assurance that:
- The firm and its personnel comply with professional standards and applicable legal and regulatory requirements;
- Reports issued by the firm or engagement partners are appropriate in the circumstances.
So what should quality imply to all of us? ISQC1 mandates several areas which need to be addressed by firms and practitioners and this article will take you through these areas one by one, starting with what may be considered the most important one …
Tone at the top
Having manuals stating all the right things is only one part of the story (albeit important since, if followed, these promote consistency in the quality of engagement performance). It is necessary therefore, that these manuals make it clear that the Managing Partner/Partners assume responsibility for compliance with established quality and ethical standards, and have the necessary authority to do so. But going beyond this, the Managing Partner/Partners need to emphasize the message in their actions and dealings with internal and external stakeholders i.e. they need to walk their talk. They need to make it clear that they have a definitive viewpoint on how things should be run in the firm. How would they do this? They would do this through:
- the message in the firm’s vision and mission statements;
- the type of company i.e. in terms of clients, they keep
- avoiding aggressive interpretation of standards;
- emphasizing that commercial consideration never outweigh the quality of work;
- not giving an impression that they are “easy” on clients;
- the type of people they employ for the various positions within the firm;
- the message (emphasizing, independence, integrity and ethical behavior, and adherence to quality) they convey to their new employees on their first day at the firm and later, throughout the period of such staff’s service with the firm, through periodic interaction;
- communicating requirements in this respect to staff through their appointment letters;
- reinforcing the message in newsletters and in-house memos and journals;
- providing periodic training focused on professional development;
- performing periodic and formal staff appraisals which give importance to quality and integrity issues in addition to performance;
- how they dress and behave and how they expect their staff to dress and behave;
- how they expect the office to be laid out and operate;
- how they interact, and how they expect their staff to interact, with clients;
- how they expect documentation relating to professional work carried out by the firm to be presented to them for review;
- how they expect client deliverables to be packaged and presented;
And so on and so forth… the whole nine yards in short!
Taking on new clients/ servicing existing clients
The Engagement Partner (EP) will need to establish that there are no integrity issues with the prospect’s ownership, management and business which, therefore, are acceptable to the firm, and the firm and its personnel are not conflicted or objectivity compromised in any manner and, also, other things being equal, that the firm has the capability and the resources to take up and complete the engagement in the agreed time. Most professional firms use some form of a “Prospect Meeting Record” and an “Acceptance Checklist” to capture the relevant information and arrive at and record the appropriate decision.
In case of a continuing engagement, firms make use of a “Client Continuation Checklist”, which would include relevant matters from the “Acceptance Checklist” in addition to experience gained in the performance of the initial engagement. Here again, relevant information is recorded after due thought to enable an appropriate decision.
In either case, the firm will need to establish policies and procedures for withdrawing from the engagement where warranted.
In case of clients of long-standing who are listed entities it will be necessary to rotate the EP and other senior personnel after the end of the specified period, which should not be more than seven yearS, in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (the IESBA Code).
All personnel from the “assurance and related services” side of the practice will need to re-confirm periodically in writing, at least annually, their compliance with the firms’ established policies and procedures relating to independence.
Agreeing the scope and other terms and conditions of the engagement in writing is the first step in case of new engagements or in case of existing engagements where there is a change in the scope or terms. Most firms have their own form of engagement letter generally based on the requirements in ISA 210: Agreeing the Terms of Audit Engagements. ISQC1 requires that the EP is named and his role identified in the Engagement Letter. Many firms also identify and delineate the role of other senior member of the assigned audit team in their Engagement Letter. It goes without saying that it is expected that the EP and other senior personnel assigned have the necessary capability and experience to service the client.
It is necessary that the engagement team is briefed and responsibility set for supervision (of the performance and the progress of the engagement) and review of work carried out, before the audit commences. Firms would generally address these matters in their audit planning documentation.
Engagement teams carrying out complex audits or audits where complex or contentious issues are encountered may need consultation and any consultation carried out and the conclusion thereof should be documented in writing and agreed by both, the seeker and the provider in a “Consultation Memo”. In case the consultation is internal, the consultant should be independent of the engagement to ensure objectivity.
While firms would generally have their own documentation retention policy, more likely than not the retention period would be mandated by law in most countries, and more so in those with a tax regime.
Monitoring the firm’s quality control
Given human nature, it would be but natural to expect that complacency would set in over a period of time which could result in a dilution in quality. ISQC1 therefore, mandates a monitoring process, over and beyond the reviews carried out internally. Firms with multiple offices should carry out inter-office reviews by partners independent of the engagement while network firms should carry out inter-firm reviews. Results of such reviews will need to get communicated to applicable personnel and remedial action may include changes to the system of planning, supervision and reviews in addition to disciplinary action, if the reported deficiencies are systemic in nature. In such a case it may be necessary to evaluate whether the reports issued by the firm are appropriate. In all cases, it is necessary that the firm communicates the results of the monitoring to all partners and senior staff within the firm.
Complaints and allegations
These may be internal or external. It may be useful to define a “whistle blower” policy for internal complaints and allegations so that staff is encouraged to report without fear of reprisals. In either case, the firm is required to investigate whether:
- the work performed complies with professional standards and relevant regulatory requirements; and
- there has been non-compliance with the firms system of quality control
The requirements in ISQC1 mandate that compliant firms have in place policies and procedures to demonstrate their commitment to quality. The standard will assist professional firms in focusing their attention on matters which need to get addressed in their quest for quality. While this may not in itself address perceptions formed regarding the audit process whenever there is a corporate failure, these would generally go a long way in establishing the concerned firm’s credentials with regulators and other investigating agencies.
(This article has been contributed by our Abu Dhabi partner, Mr. B.R.Sudhir).