The following is the text of the Guidance Note on "Control of the Quality of Audit Work" issued by the Auditing Practices Committee of the Council of the Institute of Chartered Accountants of India. This Guidance Note should be read in conjunction with the "Preface to the Statements on Standard Auditing Practices" issued by the Institute. It may be mentioned that it is the intention of the Institute to issue this publication as a Statement on Standard Auditing Practices (SAP) in due course of time.
1. Statement on Standard Auditing Practices (SAP) 1. "Basic Principles Governing an Audit" states (paragraphs 9 and 10) :
"When the auditor delegates work to assistants or uses work performed by other auditors and experts, he will continue to be responsible for forming and expressing his opinion on the‑financial information....
The auditor should carefully direct, supervise and review work delegated to assistants. The auditor should obtain reasonable assurance that work performed by other auditors or experts is adequate for his purpose."
2. This Guidance Note discusses:
§ policies and procedures to be adopted by an audit firm to provide reasonable assurance regarding the quality of audit work generally; and
§ procedures to Le adopted by an auditor to comply with this basic principle as it relates to the work delegated to assistants on an individual audit.
The control procedures to be followed in respect of an individual audit should be designed in the context of the general quality controls adopted by an audit firm. The latter augment and facilitate the former, but do not replace them
3. It may be emphasized that the nature and extent of a firm's quality control procedures depend on a number of factors such as the size and nature of its practice, its geographic dispersion, its organization and appropriate cost-benefit considerations. Accordingly, the procedures adopted by individual firms will vary, as will the extent of their documentation. Besides, all procedures will not carry the same importance for all circumstances. Particularly, in the case of smaller firms, some of these procedures may not be appropriate while others may exist informally.
4. In this Guidance Note, financial information encompasses financial statements and the following terms have the meaning attributed below:‑
audit firm : audit firm or a sole practitioner employing assistants;
personnel : all partners and professional staff of an audit firm;
the auditor : the auditor with final responsibility for the audit;
assistants : personnel involved in an individual audit other than the auditor.
General Quality Controls
5. Quality Controls are the policies and procedures adopted by a firm to provide reasonable assurance that all audits done by the firm are being carried out in accordance with the Basic Principles Governing an Audit, as set out in Statement on Standard Auditing Practices (SAP) 1.
6. An audit firm should adopt quality control policies that incorporate the following objectives and should implement appropriate procedures that provide reasonable assurance of achieving those objectives:
A. Personal Qualities
Personnel in the firm should adhere to the principles of Integrity, Objectivity, Independence and Confidentiality. Firms should therefore frame appropriate procedures to ensure compliance with this policy. For instance an important procedure would be to communicate the firm's policies relating to independence to personnel at all levels within the firm.
B. Skills and Competence
The firm should be staffed by personnel who have attained and maintain the skills and competence required to enable them to fulfil their responsibilities. Implementation of this polity would involve following proper recruitment procedures designed to obtain appropriately qualified personnel and procedures to maintain a high degree of skills through periodic staff training, continuing professional educational programmes and dissemination of information relating to current developments in professional technical standards.
Audit work should be assigned to personnel who have the degree of technical training and proficiency required in the circumstances.
If, however, special skills required for the conduct of an audit e.g. a good EDP background to evaluate controls over computer programs are not available within the firm, then reliance will have to be placed on work delegated to outside experts.
D. Direction and Supervision
There should be adequate direction and supervision of work at all levels to provide the firm with reasonable assurance that the work performed meets appropriate standards of quality. Whenever necessary, consultation should be made with those who have appropriate expertise.
Procedures designed to comply with this policy would encompass aspects such as having a proper audit programme, guidelines relating to the form and content of working papers, employment of standardised forms, checklists and questionnaires to the extent appropriate.
A firm should monitor the effectiveness of its quality control policies and procedures. For this purpose, inspection procedures should include review of selected engagements for compliance with professional standards and with the firm's quality control policies and procedures. Thus, while the final review of an audit is carried out by the auditor, it may be desirable to augment this review particularly in the case of large complex audits by requesting another partner, not involved in the audit, to perform certain additional review procedures. Depending on constraints of time, such additional review could be performed either before or shortly after issuance of the auditors report.
7. A firm's general quality control policies and procedures should be communicated to its personnel in a manner that provides reasonable assurance that the policies and procedures are understood. The form of communication would vary depending on the size of the firm and the criticality of various policies and procedures and need not necessarily be documented in all instances.
8. Special procedures should be developed to ensure that all personnel are kept fully aware of the pronouncements of the Institute of Chartered Accountants of India, changes in the law and appropriate notifications and clarifications issued by statutory authorities.
9. The firm should carry out an evaluation of a prospective client prior to acceptance and should review, on an ongoing basis, the association with existing clients. In making a decision to accept or continue with a client a firm should consider its own independence, its ability to service a client properly, and the integrity of the client's management.
10. In evaluating the firm's ability to service the clients properly, consideration should be given to the needs for technical skills, knowledge of the industry and availability of suitable personnel.
11. In evaluating the integrity of the client's management, consideration should be given to the possibility of reviewing financial information available regarding the prospective client, such as annual reports. Communication with the previous auditor may also provide significant information regarding disagreernents, if any, with management as to accounting policies, auditing procedures or other similarly significant matters as also the predecessor's understanding as to the, reason for the change in auditors.
Control on Individual Audits
12. Any delegation of work to assistants should be in a manner that provides reasonable assurance that such work will be performed by persons having independence and the degree of skills and competence required in the circumstances. Some of the factors which need to be considered in this context are:
(i) Audit size and complexity
(ii) Personnel availability
(iii) Special expertise required
(iv) Timing of the work to be performed.
13. The auditor and assistants with supervisory responsibilities should consider the skills and competence of assistants in performing the work that is delegated to them and in deciding on the extent of direction, supervision and review appropriate in each situation.
14. Appropriate directions should be given to assistants to whom work is delegated. Direction involves informing assistants of their responsibilities and the objectives of the procedures they are to perform. It also involves informing them of matters, such as the nature of the entity's business and possible accounting or auditing problems, that may affect the nature, timing and extent of audit procedures with which they are involved.
15. Supervision is Closely related to both direction and review and may involve elements of both.
16. Personnel carrying out supervisory responsibilities should perform the following functions during the performance of an audit.
a) Monitor the progress of the work to determine that:
§ assistants appear to have the necessary skills and competence to carry out their assigned tasks;
§ assistants appear to understand the audit directions; and
§ the work is being carried out in accordance with the audit programme and other planning documents.
b) Become informed of significant accounting and auditing questions
raised during the audit, assess their significance and modify the audit
programme where appropriate.
c) Resolve any differences of professional judgement between personnel.
17. The use of standardized forms, checklists and questionnaires assists in the performance of audit and supervision ok audit work.
18. The work performed by each assistant should be reviewed by personnel of equal or higher competence to determine whether:
a) the work has been performed in accordance with professional and firm standards and specific policies and procedures adopted by the audit firm;
b) the work performed and the results obtained have been adequately
c) all significant audit matters have been resolved; and
d) the objectives of the audit procedures have been achieved and the
conclusions expressed are consistent with the results of the work performed and support the auditor's opinion on the financial information.
19. The following major review stages can often be identified in an audit:
a) Review of the initial audit plan and the audit programme.
b) Review of the study and evaluation of internal control, including compliance procedures, and of the modifications, if any, made to the audit programme as a result thereof.
c) Review of the documentation of the audit evidence obtained and the conclusions drawn therefrom.
d) Review of the financial information and proposed auditors report.
Note: Attention of the members is invited to the "Clarification Regarding Authority Attached to the Documents Issued by the Institute" published in the December 1985 issue of the Journal. Accordingly, Guidance Notes are recommendatory in nature. A member should ordinarily follow recommendations in a Guidance Now relating to an auditing matter except where he is satisfied that, in the circumstances of the case, it may not be necessary to do so.