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Guidance Note on Control of the
Quality of Audit Work
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. Introduction 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. C. Assignment 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. E. Inspection 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 Delegation 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. Direction 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. Supervision 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. Review 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 documented; 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.
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