Standard 101: SQC 1 — Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements

Standard 101: SQC 1 — Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements · Complied AI

(c)

Can comply with the ethical requirements. The firm should obtain such information as it considers 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 client. Where issues have been identified, and the firm decides to accept or continue the client relationship or a specific engagement, it should document how the issues were resolved.

29. With regard to the integrity of a client, matters that the firm considers include, for example:  The identity and business reputation of the client’s principal owners, key management, related parties and those charged with its governance.  The nature of the client’s operations, including its business practices.  Information concerning the attitude of the client’s principal owners, key management and those charged with its governance towards such matters as aggressive interpretation of accounting standards and the internal control environment.  Whether the client is aggressively concerned with maintaining the firm’s fees as low as possible.  Indications of an inappropriate limitation in the scope of work.  Indications that the client might be involved in money laundering or other criminal activities.  The reasons for the proposed appointment of the firm and non- reappointment of the previous firm. The extent of knowledge a firm will have regarding the integrity of a client will generally grow within the context of an ongoing relationship with that client.

30. Information on such matters that the firm obtains may come from, for example: 

Communications with existing or previous providers of professional

accountancy services to the client in accordance with the Code, and discussions with other third parties.  Inquiry of other firm personnel or third parties such as bankers, legal counsel and industry peers.  Background searches of relevant databases.

31. In considering whether the firm has the capabilities, competence, time and resources to undertake a new engagement from a new or an existing client, the firm reviews the specific requirements of the engagement and existing partner and staff profiles at all relevant levels. Matters the firm considers include whether:  Firm personnel have knowledge of relevant industries or subject matters; 

Firm personnel have experience with relevant regulatory or reporting

requirements, or the ability to gain the necessary skills and knowledge effectively; 

The firm has sufficient personnel with the necessary capabilities and

competence;  Experts are available, if needed;  Individuals meeting the criteria and eligibility requirements to perform engagement quality control review are available, where applicable; and  The firm would be able to complete the engagement within the reporting deadline.

32. The firm also considers whether accepting an engagement from a new or an existing client may give rise to an actual or perceived conflict of interest7. Where a potential conflict is identified, the firm considers whether it is appropriate to accept the engagement.

33. Deciding whether to continue a client relationship includes consideration of significant matters that have arisen during the current or previous engagements, and their implications for continuing the relationship. For example, a client may have started to expand its business operations into an area where the firm does not possess the necessary knowledge or expertise.

34. Where the firm obtains information that would have caused it to decline an engagement if that information had been available earlier, policies and procedures on the continuance of the engagement and the client relationship should include consideration of:

(c)

The responsibilities of the engagement partner are clearly defined and communicated to that partner.

43. Policies and procedures include systems to monitor the workload and availability of engagement partners so as to enable these individuals to have sufficient time to adequately discharge their responsibilities.

44. The firm should also assign appropriate staff with the necessary capabilities, competence and time to perform engagements in accordance with professional standards and regulatory and legal requirements, and to enable the firm or engagement partners to issue reports that are appropriate in the circumstances.

45. The firm establishes procedures to assess its staff’s capabilities and competence. The capabilities and competence considered when assigning engagement teams, and in determining the level of supervision required, include the following: 

An understanding of, and practical experience with, engagements of a

similar nature and complexity through appropriate training and participation. 

An understanding of professional standards and regulatory and legal

requirements. 

Appropriate technical knowledge, including knowledge of relevant

information technology.  Knowledge of the relevant industries in which the clients operate.  Ability to apply professional judgment.  An understanding of the firm’s quality control policies and procedures.

Engagement Performance

46. The firm should establish policies and procedures designed to provide it with reasonable assurance that engagements are performed in accordance with professional standards and regulatory and legal requirements, and that the firm or the engagement partner issues reports that are appropriate in the circumstances.

47. Through its policies and procedures, the firm seeks to establish consistency in the quality of engagement performance. This is often accomplished through written or electronic manuals, software tools or other forms of standardized documentation, and industry or subject matter-specific guidance materials. Matters addressed include the following:  How engagement teams are briefed on the engagement to obtain an understanding of the objectives of their work.  Processes for complying with applicable engagement standards.  Processes of engagement supervision, staff training and coaching.  Methods of reviewing the work performed, the significant judgments made and the form of report being issued.  Appropriate documentation of the work performed and of the timing and extent of the review.  Processes to keep all policies and procedures current.

48. It is important that all members of the engagement team understand the objectives of the work they are to perform. Appropriate team-working and training are necessary to assist less experienced members of the engagement team to clearly understand the objectives of the assigned work.

49. Supervision includes the following:  Tracking the progress of the engagement.  Considering the capabilities and competence of individual members of the engagement team, 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 engagement.  Addressing significant issues arising during the engagement, considering their significance and appropriately modifying the planned approach appropriately.  Identifying matters for consultation or consideration by more experienced engagement team members during the engagement.

50. Review responsibilities are determined on the basis that more experienced engagement team members, including the engagement partner, review work performed by less experienced team members. Reviewers consider whether:

(c)

Documentation requirements for an engagement quality control review.

Nature, Timing and Extent of the Engagement Quality Control Review

64. An engagement quality control review ordinarily involves discussion with the engagement partner, a review of the financial statements or other subject matter information and the report, and, in particular, consideration of whether the report is appropriate. It also involves a review of selected working papers relating to the significant judgments that the engagement team made and the conclusions they reached. The extent of the review depends on the complexity of the engagement and the risk that the report might not be appropriate in the circumstances. The review does not reduce the responsibilities of the engagement partner.

65. An engagement quality control review for audits of financial statements of listed entities includes considering the following:  The engagement team’s evaluation of the firm’s independence in relation to the specific engagement.  Significant risks identified during the engagement and the responses to those risks.  Judgments made, particularly with respect to materiality and significant risks. 

Whether appropriate consultation has taken place on matters involving

differences of opinion or other difficult or contentious matters, and the conclusions arising from those consultations. 

The significance and disposition of corrected and uncorrected

misstatements identified during the engagement.  The matters to be communicated to management and those charged with governance and, where applicable, other parties such as regulatory bodies.  Whether working papers selected for review reflect the work performed in relation to the significant judgments and support the conclusions reached.  The appropriateness of the report to be issued. Engagement quality control reviews for engagements other than audits of financial statements of listed entities may, depending on the circumstances, include some or all of these considerations.

66. The engagement quality control reviewer conducts the review in a timely manner at appropriate stages during the engagement so that significant matters may be promptly resolved to the reviewer’s satisfaction before the report is issued.

67. Where the engagement quality control reviewer makes recommendations that the engagement partner does not accept and the matter is not resolved to the reviewer’s satisfaction, the report is not issued until the matter is resolved by following the firm’s procedures for dealing with differences of opinion.

Criteria for the Eligibility of Engagement Quality Control Reviewers

68. The firm’s policies and procedures should address the appointment of engagement quality control reviewers and establish their eligibility through:

(c)

The reviewer is not aware of any unresolved matters that would cause the reviewer to believe that the significant judgments the engagement team made and the conclusions they reached were not appropriate.

Engagement Documentation

Completion of the Assembly of Final Engagement Files

74. The firm should establish policies and procedures for engagement teams to complete the assembly of final engagement files on a timely basis after the engagement reports have been finalized.

75. Law or regulation may prescribe the time limits by which the assembly of final engagement files for specific types of engagement should be completed. Where no such time limits are prescribed in law or regulation, the firm establishes time limits appropriate to the nature of the engagements that reflect the need to complete the assembly of final engagement files on a timely basis. In the case of an audit, for example, such a time limit is ordinarily not more than 60 days after the date of the auditor’s report.

76. Where two or more different reports are issued in respect of the same subject matter information of an entity, the firm’s policies and procedures relating to time limits for the assembly of final engagement files address each report as if it were for a separate engagement. This may, for example, be the case when the firm issues an auditor’s report on a component’s financial information for group consolidation purposes and, at a subsequent date, an auditor’s report on the same financial information for statutory purposes. Confidentiality, Safe Custody, Integrity, Accessibility and Retrievability of

Engagement Documentation

77. The firm should establish policies and procedures designed to maintain the confidentiality, safe custody, integrity, accessibility and retrievability of engagement documentation.

78. Relevant ethical requirements establish an obligation for the firm’s personnel to observe at all times the confidentiality of information contained in engagement documentation, unless specific client authority has been given to disclose information, or there is a legal or professional duty to do so. Specific laws or regulations may impose additional obligations on the firm’s personnel to maintain client confidentiality, particularly where data of a personal nature are concerned.

79. Whether engagement documentation is in paper, electronic or other media, the integrity, accessibility or retrievability of the underlying data may be compromised if the documentation could be altered, added to or deleted without the firm’s knowledge, or if it could be permanently lost or damaged. Accordingly, the firm designs and implements appropriate controls for engagement documentation to:

(c)

Enable the scanned copies to be retrieved and printed as necessary. The firm considers whether to retain original paper documentation that has been scanned for legal, regulatory or other reasons.

Retention of Engagement Documentation

82. The firm should establish policies and procedures for the retention of engagement documentation for a period sufficient to meet the needs of the firm or as required by law or regulation.

83. The needs of the firm for retention of engagement documentation, and the period of such retention, will vary with the nature of the engagement and the firm’s circumstances, for example, whether the engagement documentation is needed to provide a record of matters of continuing significance to future engagements. The retention period may also depend on other factors, such as whether local law or regulation prescribes specific retention periods for certain types of engagements, or whether there are generally accepted retention periods in the jurisdiction in the absence of specific legal or regulatory requirements. In the specific case of audit engagements, the retention period ordinarily is no shorter than seven years8 from the date of the auditor’s report, or, if later, the date of the group auditor’s report.

84. Procedures that the firm adopts for retention of engagement documentation include those that: 

Enable the retrieval of, and access to, the engagement documentation

during the retention period, particularly in the case of electronic documentation since the underlying technology may be upgraded or changed over time. 

Provide, where necessary, a record of changes made to engagement

documentation after the engagement files have been completed. 

Enable authorized external parties to access and review specific

engagement documentation for quality control or other purposes. 8 The Council of the Institute had in August 2009, pursuant to the provisions of Rule 12 of the Chartered Accountants (Procedures of Investigations of Professional and Other Misconduct and Cases) Rules, 2007 had amended the audit documentation retention period appearing as ten years in paragraph 83 of SQC 1 to seven years. As a consequence of above decision of the Council, the audit documentation retention period appearing as ten years in paragraph A23 of SA 230, ‘Audit Documentation’, issued in January 2009, shall also stand amended to seven years. The complete text of the Announcement is published in Paragraph ‘C’, “Announcements/Clarifications” of Section 1, “Announcements of the Council regarding Status of Various Documents issued by the Institute of Chartered Accountants of India”, included in Volume I.A of the Handbook.

Ownership of Engagement Documentation

85. Unless otherwise specified by law or regulation, engagement documentation is the property of the firm. The firm may, at its discretion, make portions of, or extracts from, engagement documentation available to clients, provided such disclosure does not undermine the validity of the work performed, or, in the case of assurance engagements, the independence of the firm or its personnel.

Monitoring

86. The firm should establish policies and procedures designed to provide it with reasonable assurance that the policies and procedures relating to the system of quality control are relevant, adequate, operating effectively and complied with in practice. Such policies and procedures should include an ongoing consideration and evaluation of the firm’s system of quality control, including a periodic inspection of a selection of completed engagements.

87. The purpose of monitoring compliance with quality control policies and procedures is to provide an evaluation of:

(c)

Whether the firm’s quality control policies and procedures have been appropriately applied, so that reports that are issued by the firm or engagement partners are appropriate in the circumstances.

88. The firm entrusts responsibility for the monitoring process to a partner or partners or other persons with sufficient and appropriate experience and authority in the firm to assume that responsibility. Monitoring of the firm’s system of quality control is performed by competent individuals and covers both the appropriateness of the design and the effectiveness of the operation of the system of quality control.

89. Ongoing consideration and evaluation of the system of quality control includes matters such as the following:  Analysis of: o New developments in professional standards and regulatory and legal requirements, and how they are reflected in the firm’s policies and procedures where appropriate; o Written confirmation of compliance with policies and procedures on independence; o Continuing professional development, including training; and o Decisions related to acceptance and continuance of client relationships and specific engagements.  Determination of corrective actions to be taken and improvements to be made in the system, including the provision of feedback into the firm’s policies and procedures relating to education and training.  Communication to appropriate firm personnel of weaknesses identified in the system, in the level of understanding of the system, or compliance with it.  Follow-up by appropriate firm personnel so that necessary modifications are promptly made to the quality control policies and procedures.

90. The inspection of a selection of completed engagements is ordinarily performed on a cyclical basis. Engagements selected for inspection include at least one engagement for each engagement partner over an inspection cycle, which ordinarily spans no more than three years. The manner in which the inspection cycle is organized, including the timing of selection of individual engagements, depends on many factors, including the following:  The size of the firm.  The number and geographical location of offices.  The results of previous monitoring procedures.  The degree of authority both personnel and offices have (for example, whether individual offices are authorized to conduct their own inspections or whether only the head office may conduct them).  The nature and complexity of the firm’s practice and organization.  The risks associated with the firm’s clients and specific engagements.

Notes, amendments & references (63)

91. The inspection process includes the selection of individual engagements, some of which may be selected without prior notification to the engagement team. Those inspecting the engagements are not involved in performing the engagement or the engagement quality control review. In determining the scope of the inspections, the firm may take into account the scope or conclusions of an independent external inspection program. However, an independent external inspection program does not act as a substitute for the firm’s own internal monitoring program.

92. Small firms and sole practitioners may wish to use a suitably qualified external person or another firm to carry out engagement inspections and other monitoring procedures. Alternatively, they may wish to establish arrangements to share resources with other appropriate organizations to facilitate monitoring activities.

93. The firm should evaluate the effect of deficiencies noted as a result of the monitoring process and should determine whether they are either:

(a) Instances that do not necessarily indicate that the firm’s system of quality control is insufficient to provide it with reasonable assurance that it complies with professional standards and regulatory and legal requirements, and that the reports issued by the firm or engagement partners are appropriate in the circumstances; or

(b) Systemic, repetitive or other significant deficiencies that require prompt corrective action.

94. The firm should communicate to relevant engagement partners and other appropriate personnel deficiencies noted as a result of the monitoring process and recommendations for appropriate remedial action.

95. The firm’s evaluation of each type of deficiency should result in recommendations for one or more of the following:

(a) Taking appropriate remedial action in relation to an individual engagement or member of personnel;

(b) The communication of the findings to those responsible for training and professional development;

(d) Disciplinary action against those who fail to comply with the policies and procedures of the firm, especially those who do so repeatedly.

96. Where the results of the monitoring procedures indicate that a report may be inappropriate or that procedures were omitted during the performance of the engagement, the firm should determine what further action is appropriate to comply with relevant professional standards and regulatory and legal requirements. It should also consider obtaining legal advice.

97. At least annually, the firm should communicate the results of the monitoring of its quality control system to engagement partners and other appropriate individuals within the firm, including the firm’s chief executive officer or, if appropriate, its managing partner(s). Such communication should enable the firm and these individuals to take prompt and appropriate action where necessary in accordance with their defined roles and responsibilities. Information communicated should include the following:

(a) A description of the monitoring procedures performed.

(b) The conclusions drawn from the monitoring procedures.

(c)

Where relevant, a description of systemic, repetitive or other

significant deficiencies and of the actions taken to resolve or amend those deficiencies.

98. The reporting of identified deficiencies to individuals other than the relevant engagement partners ordinarily does not include an identification of the specific engagements concerned, unless such identification is necessary for the proper discharge of the responsibilities of the individuals other than the engagement partners.

99. Some firms operate as part of a network and, for consistency, may implement some or all of their monitoring procedures on a network basis. Where firms within a network operate under common monitoring policies and procedures designed to comply with this SQC, and these firms place reliance on such a monitoring system:

(a) At least annually, the network communicates the overall scope, extent and results of the monitoring process to appropriate individuals within the network firms;

(b) The network communicates promptly any identified deficiencies in the quality control system to appropriate individuals within the relevant network firm or firms so that the necessary action can be taken; and

(c) Engagement partners in the network firms are entitled to rely on the results of the monitoring process implemented within the network, unless the firms or the network advises otherwise.

100. Appropriate documentation relating to monitoring:

(a) Sets out monitoring procedures, including the procedure for selecting completed engagements to be inspected;

(b) Records the evaluation of:

(i)

Adherence to professional standards and regulatory and legal

requirements;

(ii) Whether the quality control system has been appropriately designed and effectively implemented; and

(iii) Whether the firm’s quality control policies and procedures have been appropriately applied, so that reports that are issued by the firm or engagement partners are appropriate in the circumstances; and

(c) Identifies the deficiencies noted, evaluates their effect, and sets out the basis for determining whether and what further action is necessary.

Complaints and Allegations

101. The firm should establish policies and procedures designed to provide it with reasonable assurance that it deals appropriately with:

(a) Complaints and allegations that the work performed by the firm fails to comply with professional standards and regulatory and legal requirements; and

(b) Allegations of non-compliance with the firm’s system of quality control.

102. Complaints and allegations (which do not include those that are clearly frivolous) may originate from within or outside the firm. They may be made by firm personnel, clients or other third parties. They may be received by engagement team members or other firm personnel.

103. As part of this process, the firm establishes clearly defined channels for firm personnel to raise any concerns in a manner that enables them to come forward without fear of reprisals.

104. The firm investigates such complaints and allegations in accordance with established policies and procedures. The investigation is supervised by a partner with sufficient and appropriate experience and authority within the firm but who is not otherwise involved in the engagement, and includes involving legal counsel as necessary. Small firms and sole practitioners may use the services of a suitably qualified external person or another firm to carry out the investigation. Complaints, allegations and the responses to them are documented.

105. Where the results of the investigations indicate deficiencies in the design or operation of the firm’s quality control policies and procedures, or non-compliance with the firm’s system of quality control by an individual or individuals, the firm takes appropriate action as discussed in paragraph 95.

Documentation

106. The firm should establish policies and procedures requiring appropriate documentation to provide evidence of the operation of each element of its system of quality control.

107. How such matters are documented is the firm’s decision. For example, large firms may use electronic databases to document matters such as independence confirmations, performance evaluations and the results of monitoring inspections. Smaller firms may use more simpler and informal methods such as manual notes, checklists and forms.

108. Factors to consider when determining the form and content of documentation evidencing the operation of each of the elements of the system of quality control include the following:  The size of the firm and the number of offices.  The degree of authority both personnel and offices have.  The nature and complexity of the firm’s practice and organization.

109. The firm retains this documentation for a period of time sufficient to permit those performing monitoring procedures to evaluate the firm’s compliance with its system of quality control, or for a longer period if required by law or regulation.

Effective Date

110. This Standard on Quality Control is recommendatory for all engagements relating to accounting periods beginning on or after April 1, 2008 and is mandatory for all engagements relating to accounting periods beginning on or after April 1, 2009.

Material Modifications to the International Standard on

Quality Control (ISQC) 1, “Quality Control for Firms that

Perform Audits and Reviews of Historical Financial

Information, and Other Assurance and Related Services

Engagements”

Additions

1. Paragraph 6(d) of the ISQC 1, dealing with the definition of “engagement quality control reviewer” mentions that “other person in the firm” with sufficient and appropriate experience and authority can also act as quality control reviewer. The SQC 1 has retained this concept subject to the condition that such “other person in the firm” should also be a member of the Institute of Chartered Accountants of India.

2. Paragraph 6(d) of the ISQC 1, while defining the “engagement quality control reviewer” provides that the review can be done by a team of individuals comprising the partner, other person in the firm and/or the suitably qualified external person. The SQC 1 has retained this concept subject to the condition that in case of review by a team of individuals, such team should be headed by a member of the Institute.

3. Paragraph 6(f) of the ISQC 1 defines “firm” as “a sole practitioner, partnership, corporation or other entity of professional accountants”. Since in India an individual can practice in his individual name and also in the name of the firm as proprietor of that firm, accordingly, the term ‘Proprietor’ has been added to the definition of the firm.

4. Paragraph 83 of the ISQC 1 prescribes the minimum period of engagement documentation as five years. The SQC 1 prescribes the minimum period of retention of engagement documentation as seven years since, the provisions of the Chartered Accountants Act, 1949, including regulations therein, prescribe the minimum period of retention of working papers as seven years.

Deletions

1. Paragraph 6(f) of the ISQC 1 defines “firm” as “a sole practitioner, partnership, corporation or other entity of professional accountants”. Since in India, the practitioners cannot establish any corporate entity for practice, the word ‘Corporation’ has been deleted from the definition.

2. In terms of paragraph 6(p) of the ISQC 1, defining a “suitably qualified external person” as a partner of another firm, or an employee (with appropriate experience) of either a professional accountancy body whose members may perform audits and reviews of historical financial information, or other assurance or related services engagements, or of an organisation that provides relevant quality control services. Since, in India only the Institute of Chartered Accountants of India is the professional body whose members can carry out an audit or a review of historical financial information or other assurance engagement, a specific reference to this fact appearing in the context of “partner of another firm or an employee” has been deleted from the definition of “suitably qualified external person”.

3. Paragraph 6(p) of ISQC 1 lays down that “an organisation that provides relevant quality control services” can also act as a suitably qualified person. The SQC does not include any such requirement since it is felt that a review of a firm of accountants should be done by a similar firm of accountants only.

4. Paragraph 27 of the ISQC 1 requires that in all engagements of audit of listed companies, the engagement partner of the firm should be rotated within a period of seven years in order to avoid the familiarity threat. The SQC 1 does not mandate such a provision in the audit engagements of the listed entities that are audited by the sole practitioners/proprietors as it is not possible to apply the provision in such cases. However, the SQC 1 provides for peer review of those firms in order to mitigate familiarity threat.

5. The ISQC 1 also deals with the public sector perspective. However, since the Standards, Statements, General Clarifications and Guidance Notes issued by the ICAI are equally applicable in case of all engagements, irrespective of the form, nature and size of the entity, this Standard does not specifically mention that aspect.