Summary of Auditing Standards - SA 220

 

SA 220 Quality Control for an Audit of Financial Statements

A. Introduction:

1. Responsibility of Engagement Partner: The engagement partner holds the responsibility for the quality control procedures for each audit engagement, following SA-220, which operates within the framework of the firm’s system of quality control as outlined in SQC 1.
2. Implementation of Quality Control Procedures: The engagement team must apply quality control procedures specific to each audit engagement. The firm must also receive relevant information from the team to ensure the independence aspect of the quality control system is maintained.
3. Reliance on the Firm’s System: The engagement team can rely on the firm’s overall system of quality control unless there is evidence suggesting otherwise, such as contradictory information from the firm or other sources.

B. Objective of Auditor as per SA 220:

The auditor’s goal is to implement procedures that ensure:

1. Compliance: The audit complies with professional, legal, and regulatory standards.
2. Appropriateness of Auditor’s Report: The auditor’s report issued must be appropriate given the circumstances of the audit.

C. Elements Covered Under SA-220:

SA-220 focuses on the engagement partner’s responsibilities concerning the following key areas:

1. Leadership Responsibilities for Audit Quality: Ensuring that quality is emphasized at all levels.
2. Ethical Requirements: Addressing ethical compliance throughout the audit.
3. Acceptance and Continuance of Client Relationships and Audit Engagements: Ensuring the firm’s standards are maintained before accepting or continuing engagements.
4. Assignment of Engagement Teams: Ensuring team competence for the audit.
5. Engagement Performance: Oversight of audit performance according to standards.
6. Monitoring: Ensuring the quality control system is operating effectively.

D. Leadership Responsibilities for Quality on Audits:

1. Engagement Partner’s Role: The engagement partner is responsible for the overall audit quality, which includes:
• Ensuring compliance with professional standards and legal requirements.
• Adhering to the firm’s quality control policies.
• Ensuring the issuance of appropriate auditor reports.
• Promoting an environment where engagement team members can raise concerns without fear of retaliation.
2. Audit Quality Emphasis: The engagement partner must emphasize the importance of quality, ensuring that the audit team consistently performs to the highest standard.

E. Relevant Ethical Requirements:

1. Independence Threats: The engagement partner must identify any threats to the independence of the audit team. If these threats cannot be mitigated or reduced to an acceptable level, corrective actions must be taken, such as withdrawing from the engagement.
2. Reporting to Firm: The engagement partner must report any independence issues to the relevant persons within the firm for appropriate action, which may involve eliminating the threat or withdrawing from the engagement.

F. Acceptance and Continuance of Client Relationships and Audit Engagements:

1. Engagement Partner’s Responsibility: The engagement partner must gather necessary information before accepting or continuing an engagement. This includes:
• Assessing the integrity of the client’s principal owners.
• Evaluating the engagement team’s competence, capabilities, and availability.
• Ensuring compliance with ethical standards.
• Considering any significant matters from past audits that may affect the current engagement.

G. Assignment of Engagement Teams:

1. Team Competence: The engagement partner is responsible for ensuring that the audit team, as well as any external experts involved, have the necessary competence and capabilities to carry out the audit in compliance with professional, regulatory, and legal standards.

H. Engagement Performance:

1. Audit Direction and Supervision: The engagement partner is responsible for overseeing the direction, supervision, and performance of the audit to ensure compliance with professional standards and legal requirements.
2. Audit Documentation Review: The engagement partner must review the audit documentation before issuing the auditor’s report to ensure that adequate and appropriate audit evidence has been obtained.
3. Consultation on Difficult Matters: The engagement partner is responsible for ensuring the team consults on difficult or contentious issues, both within the team and with other experts or personnel as necessary, to resolve issues appropriately.

I. Engagement Quality Control Review:

For audits of listed entities and other engagements deemed necessary by the firm:

1. Quality Control Reviewer Appointment: The engagement partner must ensure an engagement quality control reviewer is appointed.
2. Review Process: The engagement partner must discuss significant audit matters with the quality control reviewer, including those identified during the review process.
3. Timing of Auditor’s Report: The auditor’s report should not be dated until the engagement quality control review has been completed.
4. Reviewer’s Evaluation: The engagement quality control reviewer must:
• Discuss key issues with the engagement partner.
• Review the financial statements and proposed auditor’s report.
• Review selected audit documentation to assess the judgments made and conclusions reached by the team.
• Evaluate whether the auditor’s report is appropriate and whether the engagement meets the firm’s independence requirements.
• Ensure that any difficult or contentious matters have been appropriately consulted on.

J. Monitoring:

1. Monitoring Process: An effective quality control system includes monitoring to provide reasonable assurance that the firm’s quality control policies are being followed and are effective. The engagement partner must consider the results of the firm’s monitoring process, including deficiencies that could affect the audit engagement.

K. Documentation:

1. Documentation by Engagement Partner: The engagement partner must document:
• Any ethical issues identified and how they were resolved.
• Conclusions regarding the independence of the audit engagement.
• Acceptance and continuance decisions for client relationships and engagements.
• Consultations made during the audit process.
2. Documentation by EQC Reviewer: The engagement quality control reviewer must document:
• That the firm’s review procedures have been followed.
• The review has been completed before issuing the auditor’s report.
• The reviewer is unaware of any unresolved matters that would suggest inappropriate conclusions or judgments.

Mechanisms for Review of Quality Control

Peer Review Board:

1. Objective: The Peer Review Board ensures that members of the Institute of Chartered Accountants of India (ICAI) comply with technical, professional, and ethical standards in their assurance work.
2. Peer Review Process: Peer review involves an examination of the systems and procedures a practice unit uses to ensure quality in assurance services, which includes auditing practices. It aims to improve the reliability of audit reports.
3. Peer Review Certificate: A peer review certificate is issued if the practice unit's work meets the required standards; otherwise, a qualified report is issued, detailing necessary follow-up actions.

Quality Review Board (QRB):

1. Functions: The QRB reviews the quality of services provided by ICAI members, especially in audits, and makes recommendations to improve quality.
2. Statutory Audit Review: Statutory audits are selected for review based on risk. The review is conducted by technical reviewers appointed by the QRB.
3. National Financial Reporting Authority (NFRA): NFRA monitors and enforces compliance with accounting and auditing standards for listed companies and other specified entities. It oversees audit quality for these entities, while QRB focuses on others not covered by NFRA.

SQC 1 vs. SA 220 - Key Differences in Nature, Scope, and Applicability

S.N.	SQC 1	SA 220
1	Applies to the entire firm, with the responsibility resting on the CEO or managing partners.	Applies to a specific audit engagement, with the engagement partner assuming responsibility.
2	Applicable to audits, reviews of historical financial information, and other assurance and related services engagements.	Applicable only to audit engagements.
3	Focuses on setting up a quality control system with policies and procedures for the whole firm.	Focuses on the responsibilities of engagement teams to implement quality control procedures for specific audit engagements.
4	Aims to establish a system of quality control to provide reasonable assurance that the firm and its personnel comply with professional standards, ensuring appropriate reports.	Based on the assumption that the firm complies with SQC 1. It focuses on implementing quality control procedures for audit engagements within the firm’s overall quality control system.