ASA 220 - Quality Control for Audits of Historical Financial Information - April 2006
Quality Control for Audits of HistoricalQuality Control for Audits of Historical Financial Information
Start here
Get a plain-English read of Quality Control for Audits of Historical
Turn the raw legal text into a practical explanation grounded in ASA 220 - Quality Control for Audits of Historical Financial Information - April 2006.
Quality Control for Audits of Historical Financial Information
Application
1 This Auditing Standard applies to:
(a) an audit of a financial report for a financial year, or an audit of a financial report for a half-year, in accordance with Part 2M.3 of the Corporations Act 2001; and
(b) an audit of a financial report for any other purpose.
2 This Auditing Standard also applies, as appropriate, to an audit of other financial information.
Operative Date
3 This Auditing Standard is operative for financial reporting periods commencing on or after 1 July 2006.
Introduction
4 The purpose of this Auditing Standard is to establish mandatory requirements and to provide explanatory guidance on specific responsibilities of firm personnel regarding quality control procedures for audits of historical financial information, including an audit of a financial report.
5 The engagement team shall implement quality control procedures that are applicable to the individual audit engagement.
6 Under the quality control requirements for firms[1] issued by a professional accounting body, a firm has an obligation to establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with Auditing Standards and that the auditor’s reports issued by the firm or engagement partners are appropriate in the circumstances.
7 In accordance with paragraph 5 of this Auditing Standard, engagement teams are required to implement quality control procedures that are applicable to the audit engagement. Ordinarily, engagement teams:
(a) provide the firm with relevant information to enable the functioning of that part of the firm’s system of quality control relating to independence; and
(b) are entitled to rely on the firm’s systems (for example in relation to capabilities and competence of personnel through their recruitment and formal training; independence through the accumulation and communication of relevant independence information; maintenance of client relationships through acceptance and continuance systems; and adherence to regulatory and legal requirements through the monitoring process), unless information provided by the firm or other parties suggests otherwise.
Definitions
8 In this Auditing Standard, the following terms have the meanings attributed below:
(a) “Engagement partner” means the partner or other person in the firm who is responsible for the audit engagement and its performance, and for the auditor’s report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body.
Division Quality Control for Audits of Historical - ASA 220 - Quality Control for Audits of Historical Financial Information - April 2006 - Quality Control for Audits of Historical Financial Information | Zoe
(b) “Engagement quality control review” means a process designed to provide an objective evaluation, before the auditor’s report is issued, of the significant judgements the engagement team made and the conclusions they reached in formulating the auditor’s report.
(c) “Engagement quality control reviewer” means a partner, other person in the firm, suitably qualified external person, or a team made up of such individuals, with sufficient and appropriate experience and authority to objectively evaluate, before the auditor’s report is issued, the significant judgements the engagement team made and the conclusions they reached in formulating the auditor’s report.
(d) “Engagement team” means all personnel performing an audit engagement, including any experts contracted by the firm in connection with that audit engagement.
(e) “Firm” means a sole practitioner, partnership, corporation or other entity of professional accountants.
(f) “Inspection” means in relation to completed audit engagements, procedures designed to provide evidence of compliance by engagement teams with the firm’s quality control policies and procedures.
(g) “Listed entity” means an entity whose shares, stock or debt are quoted or listed on a recognised stock exchange, or are marketed under the regulations of a recognised stock exchange or other equivalent body.
(h) “Monitoring” means a process comprising an ongoing consideration and evaluation of the firm’s system of quality control, including a periodic inspection of a selection of completed engagements, designed to enable the firm to obtain reasonable assurance that its system of quality control is operating effectively.
(i) “Network firm” means an entity under common control, ownership or management with the firm 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 or internationally.
(j) “Partner” means any individual with authority to bind the firm with respect to the performance of a professional auditing engagement.
(k) “Personnel” means partners and staff.
(l) “Professional accounting body” includes:
The Institute of Chartered Accountants in Australia;
CPA Australia; and
National Institute of Accountants.
(m) “Reasonable assurance” means a high, but not absolute, level of assurance.
(n) “Staff” means professionals, other than partners, including any experts the firm employs.
(o) “Suitably qualified external person” means an individual outside the firm with the capabilities and competence to act as an engagement partner, for example a partner of another firm, or an employee (with appropriate experience) of either a professional accounting body whose members may perform audits of historical financial information or of an organisation that provides relevant quality control services.
Leadership Responsibilities for Quality on Audits
9 The engagement partner shall take responsibility for the overall quality on each audit engagement to which that partner is assigned.
10 Ordinarily, the engagement partner sets an example regarding audit quality to the other members of the engagement team through all stages of the audit engagement. Ordinarily, this example is provided through the actions of the engagement partner and through appropriate messages to the engagement team. Such actions and messages emphasise:
(a) the importance of:
(i) performing work that complies with Auditing Standards and regulatory and legal requirements;
(ii) complying with the firm’s quality control policies and procedures as applicable; and
(iii) issuing auditor’s reports that are appropriate in the circumstances; and
(b) the fact that quality is essential in performing audit engagements.
Ethical Requirements
11 The engagement partner shall consider whether members of the engagement team have complied with relevant ethical requirements relating to audit engagements.
12 Ethical requirements relating to audit engagements ordinarily include the requirements of the applicable code of professional conduct of a professional accounting body[2] that establishes the fundamental principles of professional ethics, which include:
(a) integrity;
(b) objectivity;
(c) professional competence and due care;
(d) confidentiality; and
(e) professional behaviour.
13 Ordinarily, the engagement partner remains alert for evidence of non-compliance with relevant ethical requirements relating to audit engagements. Enquiry and observation regarding ethical matters amongst the engagement partner and other members of the engagement team occur, as necessary, throughout the audit engagement. If matters come to the engagement partner’s attention through the firm’s systems or otherwise that indicate that members of the engagement team have not complied with ethical requirements, ordinarily the partner, in consultation with others in the firm, determines the appropriate action.
14 Ordinarily, the engagement partner and, where appropriate, other members of the engagement team, document issues identified and how they were resolved.
Independence
15 The engagement partner shall form a conclusion on compliance with independence requirements that apply to the audit engagement. In doing so, the engagement partner shall:
(a) obtain relevant information from the firm and, where applicable, network firms, to identify and evaluate circumstances and relationships that create threats to independence;
(b) evaluate information on identified breaches, if any, of the firm’s independence policies and procedures to determine whether they create a threat to independence for the audit engagement;
(c) take appropriate action to eliminate such threats or reduce them to an acceptable level by applying safeguards. The engagement partner shall promptly report to the firm any failure to resolve the matter for appropriate action; and
(d) document conclusions on independence and any relevant discussions with the firm that support these conclusions.
16 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, the engagement partner ordinarily consults 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. Under paragraph 15 (d) of this Auditing Standard, such discussions and conclusions need to be documented.
Acceptance and Continuance of Client Relationships and Specific Audit Engagements
17 The engagement partner shall be satisfied that appropriate procedures regarding the acceptance and continuance of client relationships and specific audit engagements have been followed, and that conclusions reached in this regard are appropriate and have been documented.
18 The engagement partner may or may not initiate the decision-making process for acceptance or continuance regarding the audit engagement. Regardless of whether the engagement partner initiated that process, under paragraph 17 of this Auditing Standard, the partner needs to determine whether the most recent decision remains appropriate.
19 Acceptance and continuance of client relationships and specific audit engagements include considering:
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 time and resources.
Whether the firm and the engagement team can comply with ethical requirements.
20 Where issues arise out of any of these considerations, under paragraph 34 of this Auditing Standard, the engagement team needs to conduct appropriate consultations and document how issues were resolved. Also refer to explanatory guidance set out in paragraphs 35 to 37 of this Auditing Standard.
21 Deciding whether to continue a client relationship ordinarily includes consideration of significant matters that have arisen during the current or previous audit 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.
22 Where the engagement partner obtains information that would have caused the firm to decline the audit engagement if that information had been available earlier, the engagement partner shall communicate that information promptly to the firm, so that the firm and the engagement partner can take the necessary action.
Assignment of Engagement Teams
23 The engagement partner shall be satisfied that the engagement team collectively has the appropriate capabilities, competence and time to perform the audit engagement in accordance with Auditing Standards and regulatory and legal requirements, and to enable an auditor’s report that is appropriate in the circumstances to be issued.
24 The appropriate capabilities and competence expected of the engagement team as a whole include the following:
An understanding of, and practical experience with, audit engagements of a similar nature and complexity through appropriate training and participation.
An understanding of Auditing Standards and regulatory and legal requirements.
Appropriate technical knowledge, including knowledge of relevant information technology.
Knowledge of relevant industries in which the client operates.
Ability to apply professional judgement.
An understanding of the firm’s quality control policies and procedures.
Engagement Performance
25 The engagement partner shall take responsibility for the direction, supervision and performance of the audit engagement in compliance with Auditing Standards and regulatory and legal requirements, and for the auditor’s report that is issued to be appropriate in the circumstances.
26 Ordinarily, the engagement partner directs the audit engagement by informing the members of the engagement team of:
(a) their responsibilities;
(b) the nature of the entity’s business;
(c) risk-related issues;
(d) problems that may arise; and
(e) the detailed approach to the performance of the engagement.
Ordinarily, the engagement team’s responsibilities include maintaining an objective state of mind and an appropriate level of professional scepticism, and performing the work delegated to them in accordance with the ethical principle of due care. Members of the engagement team are ordinarily encouraged to raise questions with more experienced team members and communicate as appropriate within the engagement team.
27 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.
28 Supervision includes the following:
Tracking the progress of the audit 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 audit engagement.
Addressing significant issues 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.
29 Review responsibilities are determined on the basis that more experienced team members, including the engagement partner, review work performed by less experienced team members. Ordinarily, reviewers consider whether:
(a) the work has been performed in accordance with Auditing Standards and regulatory and legal requirements;
(b) significant matters have been raised for further consideration;
(c) appropriate consultations have taken place and the resulting conclusions have been documented and implemented;
(d) there is a need to revise the nature, timing and extent of work performed;
(e) the work performed supports the conclusions reached and is appropriately documented;
(f) the evidence obtained is sufficient and appropriate to support the auditor’s report; and
(g) the objectives of the engagement procedures have been achieved.
30 Before the auditor’s report is issued, the engagement partner, through review of the audit documentation and discussion with the engagement team, shall be satisfied that sufficient appropriate audit evidence has been obtained to support the conclusions reached and for the auditor’s report to be issued.
31 Ordinarily, the engagement partner conducts timely reviews at appropriate stages during the engagement. This allows significant matters to be resolved on a timely basis to the engagement partner’s satisfaction before the auditor’s report is issued. Ordinarily, the reviews cover critical areas of judgement, especially those relating to difficult or contentious matters identified during the course of the engagement, significant risks, and other areas the engagement partner considers important. The engagement partner need not review all audit documentation. However, under ASA 230 Audit Documentation, the partner needs to document the extent and timing of the reviews. Under paragraph 30 of this Auditing Standard, issues arising from the reviews need to be resolved to the satisfaction of the engagement partner.
32 Ordinarily, a new engagement partner taking over an audit during the engagement reviews the work performed to the date of the change. Ordinarily, the review procedures are sufficient to satisfy the new engagement partner that the work performed to the date of the review has been planned and performed in accordance with Auditing Standards and regulatory and legal requirements.
33 Where more than one partner is involved in the conduct of an audit engagement, it is important that the responsibilities of the respective partners are clearly defined and understood by the engagement team.
Consultation
34 The engagement partner shall:
(a) be responsible for the engagement team undertaking appropriate consultation on difficult or contentious matters;
(b) be satisfied that members of the engagement team have undertaken appropriate consultation during the course of the engagement, both within the engagement team and between the engagement team and others at the appropriate level within or outside the firm;
(c) be satisfied that the nature and scope of, and conclusions resulting from, such consultations are documented and agreed with the party consulted; and
(d) determine that conclusions resulting from consultations have been implemented.
35 Effective consultation with other professionals requires that those consulted be given all the relevant facts that will enable them to provide informed advice on technical, ethical or other matters. Where appropriate, the engagement team consults individuals with appropriate knowledge, seniority and experience within the firm or, where applicable, outside the firm. Under paragraph 34 of this Auditing Standard, conclusions resulting from consultations need to be appropriately documented and implemented.
36 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.
37 Under paragraph 34 of this Auditing Standard, the documentation of consultations with other professionals that involve difficult or contentious matters need to be agreed by both the individual seeking consultation and the individual consulted. Ordinarily, the documentation is sufficiently complete and detailed to enable an understanding of:
(a) the issue on which consultation was sought; and
(b) the results of the consultation, including any decisions taken, the basis for those decisions and how they were implemented.
Differences of Opinion
38 Where differences of opinion arise within the engagement team, with those consulted and, where applicable, between the engagement partner and the engagement quality control reviewer, the engagement team shall follow the firm’s policies and procedures for dealing with and resolving differences of opinion.
39 As necessary, the engagement partner informs members of the engagement team that they may bring matters involving differences of opinion to the attention of the engagement partner or others within the firm as appropriate without fear of reprisals.
Engagement Quality Control Review
40 For audits of financial reports of listed entities, the engagement partner shall:
(a) determine that an engagement quality control reviewer has been appointed;
(b) discuss significant matters arising during the audit engagement, including those identified during the engagement quality control review, with the engagement quality control reviewer; and
(c) not issue the auditor’s report until the completion of the engagement quality control review.
For other audit engagements where an engagement quality control review is performed, the engagement partner shall follow the requirements set out in subparagraphs (a) to (c).
41 Where, at the start of the engagement, an engagement quality control review is not considered necessary, ordinarily the engagement partner is alert for changes in circumstances that would need such a review.
42 An engagement quality control review shall include an objective evaluation of:
(a) the significant judgements made by the engagement team; and
(b) the conclusions reached in formulating the auditor’s report.
43 Ordinarily, an engagement quality control review involves:
Discussion with the engagement partner.
A review of the financial information and the auditor’s report.
Consideration of whether the auditor’s report is appropriate.
A review of selected audit documentation relating to the significant judgements the engagement team made and the conclusions reached.
The extent of the review depends on the complexity of the audit engagement and the risk that the auditor’s report might not be appropriate in the circumstances. The review does not reduce the responsibilities of the engagement partner.
44 An engagement quality control review for audits of a financial report ordinarily includes considering the following:
The engagement team’s evaluation of the firm’s independence in relation to the specific audit engagement.
Significant risks identified during the engagement (in accordance with ASA 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement), and the responses to those risks (in accordance with ASA 330 The Auditor’s Procedures in Response to Assessed Risks), including the engagement team’s assessment of, and response to, the risk of fraud.
Judgements 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 audit.
The matters to be communicated to management and those charged with governance and, where applicable, other parties such as regulatory bodies.
Whether audit documentation selected for review reflects the work performed in relation to the significant judgements and supports the conclusions reached.
The appropriateness of the auditor’s report to be issued.
Engagement quality control reviews for audits of historical financial information other than an audit of a financial report may, depending on the circumstances, include some or all of these considerations.
Monitoring
45 The quality control requirements for firms issued by a professional accounting body, require the firm to 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. The engagement partner ordinarily considers the results of the monitoring process as evidenced in the latest information circulated by the firm and, if applicable, other network firms. The engagement partner ordinarily considers whether:
(a) deficiencies noted in that information may affect the audit engagement; and
(b) the measures the firm took to rectify the situation are sufficient in the context of the audit.
46 A deficiency in the firm’s system of quality control does not indicate that a particular audit engagement was not performed in accordance with Auditing Standards and regulatory and legal requirements, or that the auditor’s report was not appropriate.
Conformity with International Standards on Auditing
47 Except as noted below, this Auditing Standard conforms with International Standard on Auditing ISA 220 Quality Control for Audits of Historical Financial Information, issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants. The main difference between this Auditing Standard and ISA 220 is:
ISA 220 includes a Public Sector Perspective section. This Auditing Standard does not include a separate section on the public sector as it is sector neutral.
Compliance with this Auditing Standard enables compliance with ISA 220.