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Which organization and by which guidelines requires that firms adopt a system of quality control?
The AICPA Code of Professional Conduct
What are the 6 elements of quality control
- H-E-L-P M-E
- Human resources
- Engagement/client acceptance and continuance
- Leadership responsibilities
- Performance of the engagement
- Ethical requirements
What is included in the Human Resources aspect of quality control?
- Recruitment and hiring, including ID of staffing requirements
- Determining capabilities and competencies, including requiring a background check
- Assigning personnel to engagements
- Professional development, including mandatory training or OJT
- Performance evaluation, compensation, & advancement
- Putting into place personnel policies & procedures
What criteria should be considered before a firm accepts a client?
- What is the client's reputation, especially owners and key management
- Whether the firm has the professional competence for the engagement
- Can the firm meet the deadlines
- Is the firm independent, or does it have any conflicts of interest
What types of activities within a firm indicate a commitment to quality?
- A "tone at the top" attitude
- Compensation and advancement based on quality
- Making available appropriate on-line or written materials for specific industries to ensure a high level of performance
- Requirements regarding
- ** confidentiality
- ** safe custody & retention of engagement documentation
- Allowing consultation with experts regarding difficult, complex, or contentious issues
- Providing a means to resolve differences of opinion
- Appointing a technically competent quality control reviewer
For any engagement there is an engagement partner and a quality control reviewer. Which is ultimately responsible for the engagement?
The engagement partner
What is the role of the Engagement Partner?
- Responsible for the audit engagement, its performance, and for the auditor's report
- Takes responsibility for the overall quality of the engagement.
- May delegate the performance of certain procedures to, and use the work of, other members of the engagement team.
- May rely upon the firm's system of quality control.
- Ensures the Independence of each team member
- Ensures the team members, and any external specialists, are competent for their roles
- Obtains sufficient appropriate audit evidence to form an opinion
- Seeks consultation on difficult or contentious matters and that the consultant as well as the team understand and appropriately use the information
- Ensures a quality control reviewer has been approved
What level is the Quality Reviewer and what is his role?
A partner, other person or team in the firm, none of whom is part of the engagement team, with sufficient and appropriate experience and authority to objectively evaluate the significant judgments that the engagement team made and the conclusions it reached in formulating the auditor's opinion.
What are the purposes of the firm's quality control system?
- (1) Determine whether the firm has complied with professional, legal, and regulatory requirements
- (2) Determine if the QC system has been (1) designed appropriately, (2) implemented and (3) is operating effectively
- (3) Ensure the auditor's opinion is appropriate in the circumstances
True / False: A firm may rely on a peer review, which may substitute for some of the firm's inspection procedures.
The use of a 2nd partner preissuance review is mandated for audits of issuers by which legislation?
Who performs a peer review? And which firms typically use peer review?
- Another CPA firm, not affiliated with the firm under review.
- Typically used by small firms
What is the purpose of a peer review?
To ensure the firm under review is in compliance with its quality control system
How frequently must a peer review be performed to maintain membership in the AICPA?
No fewer than every 3 years.
FirmA performs a peer review of FirmB, and notes a few deficiencies. FirmB neglects to take corrective action. What can happen to FirmB?
Firm-B is subject to sanctions
Why is following ethical requirements important within the accting profession?
To maintain public confidence in the profession.
Define Independence. Why and how often must a firm's employees' verify their independence in writing?
- Impartiality and freedom from any obligation to or interest in the client, including
- Independence is required in both fact and appearance
- Employees must verify at lease annually
What types of issues impede independence.
- Whether previously employed by the client
- Having relatives holding key positions with client
- Having a financial obligation (investment, loan) with the client
True / False: Generally accepted auditing standards (GAAS) and quality control standards are synonymous.
- GAAS relate to the conduct of each individual audit engagement
- QC Standards relate to the conduct of all professional activities within the firm's practice as a whole.
- The firm can fail at QC Standards yet still adhere to GAAS requirements.
What tasks should the Quality Control Reviewer take to ensure the audit has been performed appropriately?
- Read the FS and the proposed auditor's report;
- Ensure the (NET) nature, timing, and extent of the work performed is appropriate and without need for revision
- Evaluate the engagement team's identification of, assessment of, and response to, significant risks and materiality identified, including the risk of fraud.
- Review selected audit documentation relating to the significant judgments and ascertain if it supports the related conclusions
- Review the significance and disposition of corrected and uncorrected misstatements identified during the audit. (SOAP = Summary of Adjustments Passed)
- Review matters to be communicated to the client or other parties, such as regulatory bodies
- Evaluate the conclusions reached in formulating the auditor's report and consideration of whether the proposed auditor's report is appropriate
- Review management's report on internal control
- Read other information to be filed with the SEC and determine whether appropriate actions have been taken regarding misstatements
- Evaluate the firm's independence with regard to the audit engagement
- Determine if appropriate consultation has taken place on matters involving differences of opinion or other difficult or contentious matters and the related conclusions arising from those consultations; and ensure there are no unresolved matters
- Discuss significant findings or issues with the Engagement Partner
True / False: The Quality Control Review must be completed prior to the release of the audit report for nonissuers?
- It should be completed prior to the release, but if completed afterward and instances of additional evidence or procedures are identified, then the date of the auditor's report should be changed to the date when the additional evidence was obtained.
What are the requirements of the PCAOB regarding quality control standards for issuers?
- The QC reviewer must concur with (approve) the audit report prior to issuance for all audits of issuers, AND
- Each engagement must review the interim FS of an issuer.
Which firms are inspected by the PCAOB and how often?
Firms that audit 100+ issuers in a year, the PCAOB will inspect a sample of your firm's records each year.
What are the 3 deficiencies that could prevent the QC Reviewer from concurring with (approving) the audit report?
- The engagement team failed to obtain sufficient appropriate evidence
- The engagement team reached an inappropriate overall conclusion
- The firm is not independent of the client
True / False: The work performed by the auditor is designed to support the assertions made in the FS.
- The work performed is designed to support the auditor's opinion regarding the FS, not the FS themselves
Fun Fact: A COSO study identified that 60% of all fraud occurs with which account?
What is SOAP?
- Summary of Adjustments Passed
- ** Here are all the adjustments we identified, that are individually immaterial, but in the aggregate are material.