QUALITY MANAGEMENT FOR
AUDIT AND ASSURANCE
FIRMS
SYSTEM OF QUALITY CONTROL
• It refers to quality control policies and procedures
adopted by CPA firms that are designed to provide
reasonable assurance that the firm and its personnel
comply with professional standards and regulatory and
legal requirements and that reports issued by the firm
or engagement partners are appropriate in the
circumstances.
IN AN AUDIT ENGAGEMENT….
• Policies and procedures to provide reasonable
assurance that all audits are conducted in accordance
with PSAs and that audit reports issued are appropriate
in the circumstances
QC POLICIES vs. QC PROCEDURES
• Quality control policies – are the objectives and goals to be
achieved
• Quality control procedures – These are steps/procedures to be
taken to:
accomplish the policies adopted, or
implement and monitor compliance with those policies
MANDATORY REQUIREMENT
• Under Philippine Standard on Quality Control 1 (PSQC 1)
CPA firms are required to establish and implement a
system of quality control.
NATURE AND EXTENT OF A SYSTEM
OF QUALITY CONTROL
• Size of the CPA firm
• Nature of its practice
• Operating characteristics
• Its organization
• Geographical dispersion
• Cost-benefit consideration
• Whether it is part of a network
ELEMENTS OF SYSTEM OF QUALITY
CONTROL
Leadership responsibilities for quality within the
firm
• The CPA firm should establish policies and procedures
that:
Promote an internal culture based on recognition that
quality is essential in the performance of the
engagements
Require CPA firm’s leader (CEO / managing board of
partners or its equivalent), to assume ultimate
responsibility for the firm’s system of quality control.
ELEMENTS OF SYSTEM OF QUALITY
CONTROL
Ethical requirements, including independence
• The CPA firm should establish policies and procedures to
provide reasonable assurance that the firm and its
personnel comply with relevant ethical requirements
(including independence)
ELEMENTS OF SYSTEM OF QUALITY
CONTROL
Acceptance and continuance of client relationships
and specific engagements
• The CPA firm should establish policies and procedures to
provide reasonable assurance that the CPA firm will only
undertake or continue relationships and engagements
where it:
Has considered the client’s integrity
Is competent to perform the engagement and has the
capabilities, time and resources to do so; and
Can comply with ethical requirements
ELEMENTS OF SYSTEM OF QUALITY
CONTROL
Human Resources
• The CPA firm should establish policies and procedures to
provide reasonable assurance that it has sufficient
personnel with the capabilities, competence, and
commitment to ethical principles necessary to perform
the engagement.
ELEMENTS OF SYSTEM OF QUALITY
CONTROL
Engagement Performance
• The CPA firm should establish policies and procedures to
provide reasonable assurance that engagements are
performed in accordance with professional standards
and regulatory and legal requirements, and that the
firm or engagement partner issue reports that are
appropriate in the circumstances.
ELEMENTS OF SYSTEM OF QUALITY
CONTROL
Monitoring
• The CPA firm should establish policies and procedures to
provide reasonable assurance that quality control are
relevant, adequate and operating effectively and
complied with in practice and should include an ongoing
consideration and evaluation of the firm’s system of
quality control, including a periodic inspection of a
selection of completed engagements.
ELEMENTS OF SYSTEM OF QUALITY
CONTROL
Monitoring
• The purpose of monitoring compliance with quality control
policies and procedures is to provide an evaluation of:
Adherence to professional standards and regulatory and legal
requirements;
Whether the quality control system has been appropriately
designed and effectively implemented; and
Whether the firm’s quality control policies and procedures
have been appropriately applied, so that reports that are
issued by the firm or engagement partners are appropriate in
the circumstances.
PSQM 1
Quality Management for Firms that Perform Audits or Reviews of
Financial Statements, or Other Assurance or Related Services
Engagements
• This standard deals with a firm’s responsibilities to DESIGN, IMPLEMENT and
OPERATE a system of quality management for audits or reviews of financial
statements, or other assurance or related services.
• The OBJECTIVE of the firm is to design, implement and operate a system of
quality management that provides the firm with reasonable assurance that:
The firm and its personnel fulfill their responsibilities in accordance with
professional standards and applicable legal and regulatory requirements, and
conduct engagements in accordance with such standards and requirements;
and
Engagement reports issued by the firm or engagement partners are appropriate
in the circumstances.
COMPONENTS OF SYSTEM OF
QUALITY MANAGEMENT
• The firm’s risk assessment process;
• Governance and leadership;
• Relevant ethical requirements;
• Acceptance and continuance of client relationships and specific
engagements;
• Engagement performance;
• Resources;
• Information and communication; and
• The monitoring and remediation process.
The firm’s risk assessment
process
• The firm shall design and implement a risk assessment
process to establish quality objectives, identify and
assess quality risks and design and implement
responses to address the quality risks.
Governance and leadership
• The firm shall establish the following quality objectives that address the
firm’s governance and leadership, which establishes the environment that
supports the system of quality management:
• The firm demonstrates a commitment to quality through a culture that
exists throughout the firm, which recognizes and reinforces:
The firm’s role in serving the public interest by consistently performing
quality engagements;
The importance of professional ethics, values and attitudes;
The responsibility of all personnel for quality relating to the performance
of engagements or activities within the system of quality management,
and their expected behavior; and
The importance of quality in the firm’s strategic decisions and actions,
including the firm’s financial and operational priorities.
Governance and leadership
• Leadership is responsible and accountable for quality.
• Leadership demonstrates a commitment to quality through their actions and behaviors.
• The organizational structure and assignment of roles, responsibilities and authority is
appropriate to enable the design, implementation and operation of the firm’s system of
quality management.
• Resource needs, including financial resources, are planned for and resources are
obtained, allocated or assigned in a manner that is consistent with the firm’s
commitment to quality.
Relevant ethical requirements
• The firm shall establish the following quality objectives that address the
fulfillment of responsibilities in accordance with relevant ethical requirements,
including those related to independence:
a. The firm and its personnel:
Understand the relevant ethical requirements to which the firm and the firm’s
engagements are subject; and
Fulfill their responsibilities in relation to the relevant ethical requirements to
which the firm and the firm’s engagements are subject.
b. Others, including the network, network firms, individuals in the network or
network firms, or service providers, who are subject to the relevant ethical
requirements to which the firm and the firm’s engagements are subject:
Understand the relevant ethical requirements that apply to them; and
Fulfill their responsibilities in relation to the relevant ethical requirements that
apply to them.
Acceptance and continuance of
client
• The firm shall establish the following quality objectives that address the
acceptance and continuance of client relationships and specific
engagements:
a. Judgments by the firm about whether to accept or continue a client
relationship or specific engagement are appropriate based on:
Information obtained about the nature and circumstances of the
engagement and the integrity and ethical values of the client (including
management, and when appropriate, those charged with governance) that
is sufficient to support such judgments; and
The firm’s ability to perform the engagement in accordance with
professional standards and applicable legal and regulatory requirements.
b. The financial and operational priorities of the firm do not lead to
inappropriate judgments about whether to accept or continue a client
relationship or specific engagement.
Engagement performance
• The firm shall establish the following quality objectives that address the
performance of quality engagements:
Engagement teams understand and fulfill their responsibilities in
connection with the engagements.
The nature, timing and extent of direction and supervision of engagement
teams and review of the work performed is appropriate.
Engagement teams exercise appropriate professional judgment and,
when applicable to the type of engagement, professional skepticism.
Consultation on difficult or contentious matters is undertaken.
Differences of opinion are brought to the attention of the firm and
resolved.
Engagement documentation is assembled on a timely basis after the date
of the engagement report and is appropriately maintained and retained.
Resources
• The firm shall establish the following quality objectives that address appropriately
obtaining, developing, using, maintaining, allocating and assigning resources in a
timely manner to enable the design, implementation and operation of the system
of quality management.
• Human Resources
Personnel are hired, developed and retained and have the competence and
capabilities to:
Consistently perform quality engagements, including having knowledge or
experience relevant to the engagements the firm performs; or
Perform activities or carry out responsibilities in relation to the operation of the
firm’s system of quality management.
Personnel demonstrate a commitment to quality through their actions and
behaviors, develop and maintain the appropriate competence to perform their
roles.
Resources (cont.)
• Human Resources
Individuals are obtained from external sources (i.e., the network,
another network firm or a service provider) when the firm does
not have sufficient or appropriate personnel to enable the
operation of firm’s system of quality management or performance
of engagements.
Engagement team members are assigned to each engagement,
including an engagement partner, who have appropriate
competence and capabilities.
Individuals are assigned to perform activities within the system of
quality management who have appropriate competence and
capabilities, including sufficient time, to perform such activities.
Positions and Tasks in Public Accounting
Firm
• Audit Partner
1. Plan and review all phases of audit
2. Sign audit report
3. Approve billing to client
4. Obtain/establish contracts with clients
5. Determine office operating policies
Positions and Tasks in Public Accounting
Firm
• Audit Manager
1. Liaison officer between partners and
staffs
2. Discuss problems that may arise with
clients
3. Exercise direct supervision on seniors in
charge
4. Review working papers and drafts of
audit report
5. Discuss reports and results of audit with
clients
6. Take direct charge of training programs
Positions and Tasks in Public Accounting
Firm
• In-charge (Senior) Auditor
1. Prepare audit program – reviewed by
Partner and Manager
2. Assign audit work to staff and directly
supervise them
3. Perform audit procedures requiring skills
and expertise:
a. Review of articles of incorporation, by-laws, and other
nonfinancial records
b. Verification of assets and liabilities and the basis of
valuation
c. Comparison of current and previous operating results
d. Examination of adequacy of allowances for
depreciation, bad debts, provision for income taxes,
etc.
Positions and Tasks in Public Accounting
Firm
• In-charge (Senior) Auditor
4. Take up with client or with
partner/manager, problems or
questions that arise in the course of
audit
5. Assemble working papers and prepare
a draft of the report and financial
statements for review and approval by
the manager and partner
Positions and Tasks in Public Accounting
Firm
• Staff Auditor
1. Prepare schedules and reports of
findings
2. Work on tax returns
3. Check accuracy of footings and
extensions on books of accounts and
other records
4. Check postings of entries from the
journals to the ledger
5. Examine vouchers supporting minor
disbursements
6. Generally, to serve as an assistant
Resources (cont.)
• Technological Sources
Appropriate technological resources are obtained or
developed, implemented, maintained, and used, to
enable the operation of the firm’s system of quality
management and the performance of the engagements.
Resources (cont.)
• Intellectual Sources
Appropriate intellectual resources are obtained or
developed, implemented, maintained, and used, to
enable the operation of the firm’s system of quality
management and the consistent performance of quality
engagements.
Resources (cont.)
• Service Providers
Human, technological or intellectual resources from
service providers are appropriate for use in the firm’s
system of quality management and in the performance
of engagements.
Information and communication
• The firm shall establish the following quality objectives that address
obtaining, generating or using information regarding the system of
quality management, and communicating information within the firm
and to external parties on a timely basis to enable the design,
implementation and operation of the system of quality management:
• The information system identifies, captures, processes and maintains
relevant and reliable information that supports the system of quality
management.
• The culture of the firm recognizes and reinforces the responsibility of
personnel to exchange information within the firm and with one another.
• Relevant and reliable information is exchanged throughout the firm and
with engagement teams.
• Relevant and reliable information is communicated to external parties.
Monitoring and Remediation
Process
The firm shall establish a monitoring and remediation
process to:
Provide relevant, reliable and timely information about
the design, implementation and operation of the system
of quality management.
Take appropriate actions to respond to identified
deficiencies such that deficiencies are remediated on a
timely basis.
Monitoring and Remediation
Process
Designing and Performing Monitoring Activities
• The firm shall design and perform monitoring activities
to provide a basis for the identification of deficiencies.
• The firm shall include the inspection of completed
engagements in its monitoring activities and shall
determine which engagements and engagement
partners to select.
Monitoring and Remediation
Process
Evaluating Findings and Identifying Deficiencies
The firm shall evaluate the findings to determine
whether deficiencies exist, including in the monitoring
and remediation process.
The firm shall evaluate the severity and pervasiveness
of identified deficiencies.
The firm shall design and implement remedial actions
to address identified deficiencies.
EVALUATING THE SYSTEM OF QUALITY MANAGEMENT
• The individual(s) assigned ultimate responsibility and
accountability for the system of quality management
shall evaluate, on behalf of the firm, the system of
quality management. The evaluation shall be
undertaken as of a point in time, and performed at
least annually.
• The firm shall undertake periodic performance
evaluations of the individual(s) assigned ultimate
responsibility and accountability for the system of
quality management, and the individual(s) assigned
operational responsibility for the system of quality
management.
DOCUMENTATION
• The firm shall prepare documentation of its system of quality
management that is sufficient to
1. Support a consistent understanding of the system of quality
management by personnel.
2. Support the consistent implementation and operation of the
responses.
3. Provide evidence of the design, implementation and operation of the
responses.
• The firm shall establish a period of time for the retention of
documentation for the system of quality management that is sufficient
to enable the firm to monitor the design, implementation and operation
of the firm’s system of quality management, or for a longer period if
required by law or regulation.
PSQM 2
Engagement Quality Reviews
• An objective evaluation of the significant judgments
made by the engagement team and the conclusions
reached thereon, performed by the engagement quality
reviewer and completed on or before the date of the
engagement report.
PSQM 1 requires and
engagement quality review for:
• Audits of financial statements of listed entities;
• Audits or other engagements for which an engagement quality
review is required by law or regulation;
• Audits or other engagements for which the firm determines that
an engagement quality review is an appropriate response to
address one or more quality risk(s).
PSQM 2 deals with:
• The appointment and eligibility of the engagement quality
reviewer; and
• The engagement quality reviewer’s responsibilities relating to the
performance and documentation of an engagement quality
review.
PSQM 2
• The performance of an engagement quality review is
undertaken at the engagement level by the
engagement quality reviewer on behalf of the firm.
PSQM 2
• The firm shall establish policies or procedures that set forth
the criteria for eligibility to be appointed as an engagement
quality reviewer. Those policies or procedures shall require
that the engagement quality reviewer not be a member of the
engagement team, and:
Has the competence and capabilities, including sufficient
time, and the appropriate authority to perform he
engagement quality review;
Complies with relevant ethical requirements;
Complies with provisions of law and regulation, if any, that are
relevant to the eligibility of the engagement quality reviewer.
PSQM 2
In performing the engagement quality review, the
engagement quality reviewer shall:
• Read, and obtain an understanding of, information
communicated by:
The engagement team regarding the nature and
circumstances of the engagement and the entity; and
The firm related to the firm’s monitoring and
remediation process, in particular identified deficiencies
that may relate to, or affect, the areas involving
significant judgments made by the engagement team.
PSQM 2
• Discuss with the engagement partner and, if applicable,
other members of the engagement team, significant
matters and significant judgments made in planning,
performing and reporting on the engagement.
• Based on the information obtained in (a) and (b), review
selected engagement documentation relating to the
significant judgments made by the engagement team.
• For audits of financial statements, evaluate the basis for
the engagement partner’s determination that relevant
ethical requirements relating to independence have been
fulfilled.
PSQM 2
• Evaluate whether appropriate consultation has taken place
on difficult or contentious matters or matters involving
differences of opinion and the conclusions arising from those
consultations.
• For audits of financial statements, evaluate the basis for the
engagement partner’s determination that the engagement
partner’s involvement has been sufficient and appropriate
throughout the audit engagement such that the engagement
partner has the basis for determining that the significant
judgments made and the conclusions reached are
appropriate given the nature and circumstances of the
engagement.
PSQM 2
Review:
For audits of financial statements, the financial
statements and the auditor’s report thereon, including,
if applicable, the description of the key audit matters.
For review engagements, the financial statements or
financial information and the engagement report
thereon.
For other assurance and related services engagements,
the engagement report, and when applicable, the
subject matter information.
PSQM 2
• The engagement quality reviewer shall notify the
engagement partner if the engagement quality reviewer
has concerns that the significant judgments made by
the engagement team, or the conclusions reached
thereon, are not appropriate.
Completion of the Engagement
Quality Review
• The engagement quality reviewer shall determine
whether the requirements of PSQM 2 with respect to the
performance of the engagement quality review have
been fulfilled, and whether the engagement quality
review is complete. If so, the engagement quality
reviewer shall notify the engagement partner that the
engagement quality review is complete.
DOCUMENTATIONS
• The firm shall establish policies and procedures that require the
engagement quality reviewer to take responsibility for documentation of
the engagement quality review.
• The engagement quality reviewer shall determine that the documentation
of the engagement quality review includes:
The names of the engagement quality reviewer and individuals who
assisted with the engagement quality reviewer;
An identification of the engagement documentation reviewed.
The basis for the engagement quality reviewer’s determination whether
the requirements of PSQM 2 with respect to the performance of the
engagement quality review have been fulfilled, and whether the
engagement quality review is complete.
The date of completion of the engagement quality review.
