ACCA P7 Chapter 4 Practice Management

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Chapter 4

Quality control

Quality control policies and procedures are defined as those ‘designed to provide reasonable assurance as to the appropriateness of the auditors’ report and of adherence to Auditing Standards, ethical and other requirements’.

The firm

Firms should establish and communicate to audit engagement partners and audit staff quality control policies and procedures. This will involve the establishment of an appropriate structure within the firm, including the appointment of a senior audit partner to take responsibility for these matters.

The key roles within the firm:

Acceptance and retention of engagements

Before accepting a new audit engagement firms should ensure that they:

Are competent to undertake the work.

Consider carefully whether there are threats to their independence and objectivity and, if so, whether adequate safeguards can be established.

Assess the integrity of the owners, directors and management of the entity, and

Comply with the ethical requirements of the professional accountancy bodies in relation to changes in appointment.

Firms should also ensure that they reconsider these matters when deciding whether they are willing to continue in office as auditors.

Resources

Firms should have sufficient engagement partners and audit staff with the competencies necessary to meet their needs.

Competencies

Competencies are developed through:

Professional education and development (including technical and management training, in-house courses and external training).

Work experience and coaching by other members of the audit team.

Assignment of personnel to engagements

An audit engagement partner should be appointed to each audit engagement undertaken by a firm, to take responsibility for the engagement on behalf of the firm.

Firms should assign audit staff with the competencies necessary to perform the audit work expected of them.

Competencies to be considered include:

Understanding and practical experience of auditing.

Understanding applicable accounting, auditing, ethical and other technical standards.

Knowledge of specific industries.

Professional judgement.

Understanding the firm’s quality control policies and procedures.

Consultation

Firms should establish procedures to facilitate consultation and to ensure that sufficient resources are available to enable appropriate consultation to take place in relation to difficult or contentious matters.

The results of consultation that are relevant to audit conclusions should be documented.

Consultation on technical matters may amount to a simple request for advice from a technical department or from an expert within the firm.

The procedures are designed to ensure that individuals of appropriate seniority and experience are consulted on all difficult or contentious issues and that the results of consultations relevant to audit conclusions are properly documented.

Direction, supervision and review

Audit engagement partners should ensure that audit work is directed, supervised and reviewed in a manner which provides reasonable assurance that the work has been performed competently.

Audit planning is an important means of providing direction to audit staff.

Supervision includes:

Both direction and review.

Monitoring the progress of the audit to consider whether:

assistants have the necessary skills, plus competence to carry out the assigned tasks

assistants understand the audit directions; and

the work is being carried out in accordance with the overall audit plan and the audit program.

Addressing significant accounting and auditing questions raised during the audit, assessing their significance and modifying the overall audit plan and audit programme as appropriate; and

resolving any differences of professional judgement between personnel and considering the level of consultation that is appropriate.

Work performed by staff is reviewed by more senior staff or the audit engagement partner.

Independent review

Firms should ensure that an independent review is undertaken for all audit engagements where the audited entity is a listed entity. In addition, firms should establish policies setting out the circumstances in which an independent review should be performed for other audit engagements, whether on the grounds of the public interest or audit risk.

The independent review should take place before the issue of the auditors’ report in order to provide an objective, independent assessment of the quality of the audit.

Monitoring

Firms should appoint a senior audit partner to take responsibility for monitoring the quality of audits carried out by the firm.

The objective of monitoring reviews is to provide an independent assessment of:

The appropriateness of the auditors’ report and the conduct of the audit in accordance with Auditing Standards, ethical and other regulatory requirements.

Whether the firm’s quality control policies and procedures have been applied in practice and appropriate consultation has taken place in relation to difficult or contentious issues.

Advertising, publicity and obtaining professional work

The Rules of Professional Conduct give guidance in relation to the above.

Audit firms are allowed to advertise. The following considerations should be borne in mind when preparing advertisements or promotional material.

They should not bring discredit to the audit firm, the member or the profession in general.

They should not discredit the service offered by other firms.

Care should be taken to ensure that any reference to fees does not mislead the reader as to the precise range of services and time commitment that the reference is intended to cover.

In the UK, the material should comply with the requirements of the British Code of Advertising Practice and the IBA Code of Advertising Standards and Practice, as to legality, decency, clarity, honesty and truthfulness.

Fees

The Rules of Professional Conduct state that fees should be fair and reasonable.

They recommend that the basis of charging fees should be mentioned in the engagement letter.

Fees should not be charged on a contingency, percentage or similar basis except where that course of action is generally accepted practice for certain specialised work.

Fee disputes may arise when the client believes that the fee charged is excessive. If a firm is about to issue a fee note which is higher than previous fees, it is good practice to explain the reasons for the variation to the client concerned.

Lowballing

This refers to the practice of setting the initial audit fee low in order to win the client’s business.

Explain the ethical implications of the following two practices in relation to fees.

(a) Fixed fees

(b) Lowballing

Tendering introduction

when an audit firm is approached by a prospective client, it must first decide whether the accounting framework in use is acceptable

in addition, the firm is faced with two initial questions:

does the firm want the work?

does the firm think they will get a reasonable fee for a quality job?

the risk attaching to the client must be considered. The audit firm would wish to consider the following:

How has the approach arisen?

Why has the firm been asked? Is it due to their reputation, a recommendation from a mutual contact or is the entity unhappy with the current fees?

What it is being asked to do?

What is the risk in getting involved?

Can the firm afford to spend time on the proposal?

What work would you perform in order to assess the risk attaching to a prospective client?

Can the firm do the work for a reasonable fee?

The firm will need to consider the amount of work required, resources available and the location of the client.

A preliminary estimate of the fee should establish if the return is likely to be acceptable.

Content of the proposal document

The basic format of the proposal will depend on the circumstances and the prospective client’s requirements. The main objective is to convince the client to appoint the audit firm. The firm will therefore want to demonstrate that it has understood the unique features and requirements of the business and considered how best it can meet those.

The following matters will usually need to be covered:

The fee and details of how it has been calculated;

An assessment of the requirements of the prospective client;

An outline of how the firm proposes to address those requirements for the fee;

The assumptions made, for example regarding deadlines or availability of information;

The proposed approach to the engagement;

An outline of the firm and the staff involved.

Terms of audit engagements

The auditors and the client should agree on the terms of the engagement. This should be recorded in writing.

Once the terms of the engagement have been agreed, they will remain in force from one year to the next unless they are replaced. Auditors should regularly review the terms of the engagement to ensure they are appropriate.

The engagement letter documents and confirms the auditors’ acceptance of the appointment, and includes a summary of the responsibilities of the directors and the auditors, the scope of the engagement and the form of any reports.

Descriptions of practising firms

A firm may describe itself as a firm of “Chartered Certified Accountants” or “Certified Accountants” only where:

at least half of the partners are ACCA members; and

these partners control at least 51% of the voting rights under the firm’s partnership agreements.

Firms holding an auditing practising certificate issued by the ACCA may describe themselves as “Registered Auditors”.

A practice name should be consistent with the dignity of the profession in the sense that it should not project an image inconsistent with that of a professional bound by high ethical and technical standards.