KC Lim & Associates Overview Of Quality Control Manual

OVERVIEW OF QUALITY CONTROL MANUAL – DETAILS

The Firm recognises that quality is essential in performing engagements. Particular emphasis is placed on the need to ensure that:

•          the quality of performance in all assignments engaged by the client;

•          performance evaluation, compensation and promotion demonstrate the Firm’s commitment to quality; and

•          sufficient resources are devoted to the development, documentation and support of the Firm’s quality control policies and procedures.

The manual is intended to provide guidance on the procedures to be followed when undertaking various type of assignments.

A. Leadership Responsibilities for Quality Within KC LIM & ASSOCIATES

Leadership Positions

Throughout this quality control manual, reference will be made to various leadership functions within the SP. The SP will serve several roles. However, the role of HR may be served by appropriately qualified staff and the QCR will be a suitably qualified external person.

SP (Sole Proprietor)

–          Owner and manager of the SP

QCR (Quality Control Reviewer)

–          Any professional performing the function of engagement quality control review

HR2 (Human Resources)

–          Personnel responsible for all human resource functions including recordkeeping with respect to professional duties such as membership fees and continuing professional development in which the role is assumed by the SP at the moment and delegated to the Manager(s).

Tone at the Top

The SP decides on all key matters regarding the professional practice.

The SP accepts responsibility for leading and promoting a quality assurance culture within the firm and for providing and maintaining this manual and all other necessary practical aids and guidance to support engagement quality.

The SP determines the operating and reporting structure. In addition, the SP may designate qualified staff, on an annual or other periodic basis, the person(s) responsible for recordkeeping or other administrative elements of the quality control system; however, ultimate responsibility for these functions will rest with the SP.

Any individuals who take on specific responsibilities and duties will be assessed by the SP as possessing sufficient and appropriate experience and the ability to carry out their responsibilities.

B. Relevant Ethical Requirements

The SP recognises the value of ethical leadership and accepts responsibility to provide it.

The SP has an expectation that all staff maintain current knowledge of the provisions contained within the Code of Ethics approved and adopted by the Malaysian Institute of Accountants (“MIA”).  This will require all staff to assume personal responsibility for the periodic review of these Ethics Code contents.

Independence

The SP and all staff must be independent both of mind and in appearance of their assurance clients and engagements.

Independence shall be maintained throughout the engagement period for all assurance engagements, as set forth in and by:

• The International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code), specifically Section 290 and Section 291;{check MIA equivalents}
• ISQC 1; and
• International Standard on Auditing (ISA) 220, Quality Control for an Audit of Financial Statements.

If threats to independence cannot be eliminated or reduced to an acceptable level by applying appropriate safeguards, the SP shall eliminate the activity, interest, or relationship that is creating the threat, or refuse to accept or continue the engagement (where withdrawal is not possible).

The SP is responsible for and must ensure an appropriate resolution to independence threats.

The SP and staff are required to review their specific circumstances for any independence threats. The SP is to be informed if such threats are identified by staff.

The SP must document the details of identified threats, including relationships or circumstances involving a client, and the safeguards that were applied.

All staff are required to provide the SP annually with written confirmation that they understand and have complied with Section 290 and Section 291 of the IESBA Code and the SP’s independence policies.

Staff assigned to an assurance engagement shall confirm to the SP that they are independent of the client and engagement, or notify the SP of any threats to independence so that appropriate safeguards can be applied.

Staff must notify the SP if, to their knowledge, they or any other staff member have, during the disclosure period, provided any service that would be prohibited under Section 290 and Section 291 of the IESBA Code or other regulatory authority, which could result in the SP being unable to complete an assurance engagement.

When asked by the SP, staff shall take whatever reasonable actions are necessary and possible to eliminate or reduce any independence threat to an acceptable level. These actions may include:

• Ceasing to be a member of the assurance team;
• Ceasing or altering specific types of work or services performed in an engagement;
• Divesting of a financial or ownership interest;
• Ceasing or changing the nature of personal or business relationships with clients;
• Submitting work for additional review to an external professional accountant or other staff member; and

Taking any other reasonable actions that are appropriate in the circumstances.

Long Association of Senior Personnel (Including Partner Rotation) on Audit Engagements for Public Interest Entities

The SP and staff must follow Section 290 and Section 291 of the IESBA Code regarding mandatory rotation of the engagement leader, and engagement quality control reviewer on all audit engagements for public interest entities.

In accordance with paragraph 290.151, when the audit client is a public interest entity, and the SP or QCR has been involved with the client for a period of [state number of years in accordance with SP policy, no more than seven years], they shall not participate in the engagement until [a further period of time, not less than two years], has elapsed.

Some degree of flexibility may be permitted in rare cases due to foreseen circumstances outside of the firm’s control and where the individual’s continuity on the audit engagement is especially important to audit quality. In these cases, equivalent safeguards will be applied to reduce any threats to an acceptable level. Such safeguards, at a minimum, will include an additional review of the work performed by a professional colleague who has not been associated with the audit team. The circumstances under which rotation would not be recommended or required should be compelling. When a significant independence threat involving the SP or QCR is recurring, rotation would be a primary safeguard necessary to reduce the threat to an acceptable level. Assessing independence of the engagement team is an important part of client acceptance and continuance procedures. When the assessment concludes that rotation of certain individuals is necessary, the matter must be referred to the SP.

After reviewing the circumstances (including the client’s expected reaction), the SP will provide a decision as soon as possible on whether rotation is necessary.

If rotation is deemed necessary, the SP will arrange for another (external) qualified practitioner to assume engagement team leadership and specify the length of the period for which the individual shall not participate in the audit of the entity and any other relevant requirements.

If rotation is deemed unnecessary, the SP will identify alternative safeguards to reduce the risk to an acceptable level.

Conflict of Interest

The SP and staff must follow Section 220 of the IESBA Code regarding any interests, influences, or relationships that may create a conflict of interest. The SP and staff must be free of any interests, influences, or relationships in respect of the client’s affairs which impair professional judgment or objectivity.

The SP is responsible for the development, implementation, compliance, enforcement, and monitoring of practice methods and procedures designed to assist the SP and staff in understanding, identifying, documenting, and addressing conflicts of interest, and determining their appropriate resolution.

The SP will ensure that appropriate procedures are followed when conflicts and potential conflicts of interest have been identified. It is presumed, unless proven otherwise, that whenever a conflict or potential conflict is identified, the SP or staff shall not act or provide advice or comment until they have thoroughly reviewed the facts and circumstances of the situation, and are confident that the required safeguards and communications are in place and it is appropriate to act.

The decision to act or provide advice in these circumstances is extremely rare and it is suggested that the details be fully documented.

The staff should review their specific circumstances and advise the SP of any conflicts of interest or potential conflicts involving them or their immediate family. The SP and staff should also determine and disclose any conflicts of interest between themselves and the firm’s clients, particularly if they provide services directly to these clients. They should exercise due care, follow firm policy, and discuss the particular circumstances in order to determine how to address the situation and ascertain whether a particular service should be avoided.

After consultation with other staff, the SP shall have the final authority on the resolution of any conflict of interest situation, which could include:

• Refusing or discontinuing the service, engagement, or action;
• Determining and requiring specified actions and procedures to appropriately address the conflict, protect sensitive and client-specific information, and ensure appropriate consents are obtained and disclosures made when it is determined to be acceptable to act;
• Appropriately documenting the process, safeguards applied, and decisions or recommendations made;
• Administering partner and staff discipline procedures and sanctions for non-compliance; and
• Initiating and participating in pre-emptive planning measures to assist in avoiding conflicts of interest situations that may arise.

The client will be notified of the SP’s business interest or activities that may represent a conflict of interest, all known relevant parties in situations in which the firm is acting for two or more parties in respect of a matter where their respective interests are in conflict, and will notify the client that the SP does not act exclusively for any one client in the provision of proposed services. In all cases, the client’s consent to act should be obtained.

When the SP decides to continue to accept the engagement, the SP and staff shall document within the engagement file identified conflicts, typically in the acceptance and continuance or planning sections. This might include any correspondence or discussions concerning the nature of the conflict, as well as any consultations with others, conclusions reached, safeguards applied, and procedures followed to address the conflict situation.

If internal confidentiality is required, it may be necessary to prevent other staff from having access to the information with the use of firewalls; physical, personnel, file, and information security; specific non-disclosure agreements; or segregation and lock-down of files or access to data. When these measures are taken, all staff involved shall respect and abide by them without exception. Generally, however, situations requiring such measures will be avoided.

If staff are unsure of their responsibilities regarding the assessment of a conflict or potential conflict, it is suggested that a discussion be held with other non-involved personnel to request help with the assessment.

If staff become aware of others acting (knowingly or inadvertently) in situations contrary to firm policies or specific determinations regarding engagements (other than a trivial or inconsequential instance), it is recommended that the matter be immediately referred to the SP.

Confidentiality

The SP and staff shall protect and keep confidential any client information that is required to be kept confidential and protected according to governing laws, regulatory authorities, Section 140 of the IESBA Code, firm policy, and specific client instructions or agreements.

Client information and any personal information obtained during an engagement shall be used or disclosed only for the purpose for which it was collected.

Personal and client information will only be retained as defined by the SP’s access and retention policy. Documents will be kept on file for as long as is necessary to fulfill professional, regulatory or legal requirements.

The SP policy requires personal and client information to be as accurate, complete, and up-to-date as possible.

The SP policy permits an individual or client (with appropriate authorization), upon request, to be informed of the existence, use, and disclosure of personal information or specified equivalent business information and provides (as appropriate) access to this information. This information does not necessarily include working papers, which are the SP’s property.

The SP will communicate the policies and provide access to information on guidance, rules, and interpretations through this quality control manual, other firm documentation (such as training materials), and electronically, to educate all staff on privacy and client confidentiality requirements and issues.

The SP policy requires the maintenance of industry-standard technology, including firewalls, hardware, and software, as well as data transmission and storage procedures designed to retain, catalogue, and recover electronic information and protect this information from unauthorized access or inappropriate use (both internally and externally) (if applicable).

The SP policy requires the maintenance of internal and external hard-copy file handling and storage procedures and facilities to protect, retain, catalogue, and recover file information and to protect this information from unauthorized access or inappropriate use (both internally and externally).

C. Acceptance and Continuance of Client Relationships and Specific Engagements

Acceptance and Continuance

The SP accepts new engagements or continues existing engagements and client relationships only after a review process has been conducted by the SP or a qualified staff member.

For each ongoing engagement, a documented client continuance review is required to determine whether it is appropriate to continue providing the client with services, based on the prior engagement and planning for the continuing engagement. This review will also include consideration of any rotation requirements.

The SP must approve and sign off on the decision to accept or continue an engagement in accordance with the SP policies and procedures.

If, after completing the acceptance and planning phase of the engagement, significant risks associated with the client or engagement have been identified, the SP will consider consultation with an external qualified professional and will document how the issues were resolved.

If, after accepting or continuing an engagement, the SP receives information, which, if known earlier, would have resulted in a refusal of the engagement, the SP must consider whether to continue the engagement and will normally seek legal advice regarding its position and options to ensure that it meets any professional, regulatory, and legal requirements.

When considering whether or not to accept or continue a particular engagement the SP shall consider:

• Whether the SP and staff are, or can reasonably become, sufficiently competent to undertake the engagement (this would include knowledge of the industry and subject matters and experience with the regulatory or reporting requirements);
• Access to any experts that may be required;
• Identification and availability of the individual assigned to perform the engagement quality control review (if required);
• Any proposed use of another auditor’s or accountant’s work (including any collaboration which may be necessary with other offices of the firm or network firms);
• The ability to meet the engagement’s reporting deadline;
• Whether there are any actual or potential conflicts of interest;
• Whether any identified independence threats have or can have safeguards applied and maintained to reduce them to an acceptable level;
• The quality of the (potential) client’s management, as well as those charged with governance and those who control or exert significant influence over the entity, including their integrity, competence, and business reputation (including consideration of any lawsuits or negative publicity surrounding the organization), together with present and past firm experience;
• The attitude of these individuals and groups towards the internal control environment and their views on aggressive or inappropriate interpretations of accounting standards (including consideration of any modified reports that have previously been issued and the nature of the qualifications);
• The nature of the entity’s operations, including its business practices and the fiscal health of the organization;
• Whether the SP is under pressure from the client to keep the billable hours (fees charged) at an unreasonably low level;
• Whether the SP expects any scope limitations;
• Whether there are any signs of criminal involvement; and
• Consideration of the reliability of the work done by the preceding firm and how this predecessor has responded to communications (this would include knowledge of the reasons the client left the previous firm).

New Client Proposals

Prospective client proposals may be prepared by competent staff and reviewed by the SP. However, an evaluation of a prospective client and authorized approval shall precede issuance of any client proposal.

For each new engagement client, a review process must be undertaken and documented before the SP will accept the engagement. This process will include an assessment of the risks associated with the client.

The SP will make inquiry of personnel or third parties (including the predecessor firm) in making a determination of whether to consider a new client proposal. The SP may also engage in background searches, such as making use of any online information that may be readily available.

Once a determination has been made to accept a new client, the SP shall meet the relevant ethical requirements (such as communicating with the former firm if required by the member body code of ethics) and will prepare an engagement letter for signature by the new client.

Resignation of a Client Relationship

The SP has a defined process to be followed when it has been determined that withdrawal from an engagement is necessary. This process includes consideration of the professional, regulatory, and legal requirements and any mandatory reporting which must be undertaken as a result.

The SP will undertake to meet with the client’s management and those charged with governance to discuss the facts and circumstances leading to the withdrawal.

The SP will document the significant matters which led to the withdrawal, including the results of any consultation, the conclusions reached, and the basis for these conclusions.

D. Human Resources

The SP recognizes the value and authority of the HR in all human resource matters. The HR has responsibility for:

• Maintenance of human resource policies;
• Identifying required policy changes resulting from labor laws and regulations and to remain competitive in the marketplace;
• Providing guidance and consultation on human resource related matters;
• Maintenance of performance evaluation appraisal systems;
• As requested, recommending specific actions or procedures appropriate to the circumstance (that is, discipline, recruitment);
• Scheduling of in-house professional development;
• Maintenance of personnel files (including annual declarations of independence, acknowledgement of confidentiality, and continuing professional development reports); and
• Development and delivery of orientation training.

Recruitment and Retention

The SP and HR must assess professional service requirements in order to ensure they have the capacity and competence necessary to meet clients’ needs. This will ordinarily include a detailed expectation of engagement requirements over the course of each calendar period in order to identify peak periods and potential resource shortages.

The HR uses current application, interviewing, and documentation processes with respect to hiring.

The HR will consider the following items when the SP is seeking candidates for employment:

• Verifying academic and professional credentials and checking references;
• Clarifying gaps in time on candidates’ resumes;
• Considering credit and criminal-record checks;
• Clarifying with candidates the firm’s requirement to state in writing, annually and for each assurance engagement, whether they are independent and free of conflict of interest; and
• Informing candidates of the requirement to sign a declaration regarding understanding of and compliance with the firm’s confidentiality policy.

Insert additional SP policy or procedures for recruitment as desired here. For guidance, refer to Section 4.2 of the Guide.

The HR provides all new personnel orientation information as soon as is practical after commencing employment with the SP. The orientation materials include a complete copy of the SP’s policies and procedures. A probationary period of [specify length of period] applies to all new personnel.

The SP endeavors to identify opportunities for the personnel’s career development in order to retain competent staff and to provide for the SP’s sustainability and continued growth.

 

The SP periodically reviews the effectiveness of the recruitment program together with an assessment of the SP’s current resource needs to identify whether revisions to the program are required.

 

Continuing Professional Development

The SP must meet the minimum continuing professional development requirements as defined in [state local jurisdiction or member body requirements] (in accordance with IFAC’s International Education Standard (IES) 7, Continuing Professional Development: A Program of Lifelong Learning and Continuing Development of Professional Competence, which prescribes that IFAC member bodies implement a continuing professional development (CPD) requirement as an integral component of a professional accountant’s continued membership, and IES 8, Competence Requirements for Audit Professionals, which prescribes competence requirements for audit professionals, and which IFAC member bodies need to establish via policies and procedures that members satisfy. Additional continuing professional requirements may be expected by member bodies or regulators in various jurisdictions).

Assignment of Engagement Teams

Through its policies and procedures, the SP ensures the assignment of appropriate staff (individually and collectively) to each engagement. The responsibilities of the SP are clearly defined in this manual and in the engagement templates provided by the SP. The SP is also responsible for ensuring that the individuals assigned, and the engagement team as a whole, have the necessary competencies to complete the engagement according to professional standards and the firm’s quality control system.

The SP will also plan for coaching opportunities between junior and senior personnel to guide the development of less experienced staff.

When determining the appropriate personnel to assign to an engagement, particular attention will be given to continuity with the client, balanced with rotation requirements, in order to ensure adequate complement and opportunity to the engagement team.

Enforcement of Quality Control Policies (Discipline)

The SP’s quality control system requires more than effective monitoring. An enforcement process is essential, and includes consequences and corrective procedures for non-compliance, disregard, lack of due care and attention, abuse, and circumvention.

The SP has overall responsibility for the disciplinary process. Corrective action is determined and administered through a consultative process, not in an autocratic fashion. The corrective action taken will depend on the circumstances.

Serious, wilful, and repeated infractions or disregard for SP policies and professional rules cannot be tolerated. Appropriate steps must be taken to correct the staff member’s behavior or terminate the person’s relationship with the SP.

Corrective action taken by the SP will depend on the circumstances. Such actions might include, but are not limited to:

• Interviewing the person(s) involved to establish the facts and discuss causes and solutions;
• Conducting follow-up interviews to ensure compliance has improved or to caution the staff involved that stronger corrective action will otherwise be required to protect the interest of clients and the firm, such as:
• Reprimand (either oral or written);
• Mandatory requirement to complete defined continuing professional development;
• Written record filed in the personnel file;
• Employment suspension;
• Termination of employment; or
• Formal notification filed with the professional association’s discipline committee.

Insert additional SP policy or procedures that will be a consequence of discipline as desired. For guidance, refer to Section 4.5 of the Guide.

Rewarding Compliance

Compliance with the SP’s policies will be considered and addressed in the specific and overall assessment of individual staff members on an ongoing basis and in the regularly scheduled personnel review process.

Appropriate weighting will be assigned to the traits identified in the assessment of job performance and in determining remuneration levels, bonuses, advancement, career development, and authority within the SP.

Performance appraisals, conducted on a periodic basis, will include the form and content as defined by SP policy.

Engagement Performance

Through established policies and procedures and its quality control system, the SP requires that engagements be performed according to professional standards and applicable regulatory and legal requirements.

The SP’s overall systems are designed to provide reasonable assurance that the staff are adequately and properly planned, supervised, and reviewed and that the engagement reports are appropriate in the circumstances.

To facilitate staff performance on engagements consistently and according to professional standards and regulatory and legal requirements, the SP provides sample working paper templates for documenting the engagement process for clients. These templates are updated as required to reflect any changes in professional standards. Staff use these templates to document key facts, risks, and assessments related to acceptance or continuation of each engagement. Staff are encouraged to exercise professional judgment when modifying such templates to ensure that such matters are appropriately documented and assessed for each engagement in accordance with professional standards and firm policies.

Also available are research tools and reference materials; a quality control system, as set out in this manual; appropriate industry-standard software and hardware tools, including data and system access security and guidance; training, and education policies and programs, including support for compliance with [state applicable jurisdiction] professional development requirements.

When performing any engagement, all staff are required to:

• Follow and adhere to SP planning, supervision, and review policies;
• Use (modifying as appropriate) the SP’s templates for file preparation, documentation, and correspondence, as well as its software, research tools, and the signing and release procedures appropriate for the engagement;
• Follow and adhere to the ethical policies of the firm;
• Perform their work to professional and SP standards with due care and attention;
• Document their work, analysis, consultations, and conclusions sufficiently and appropriately;
• Complete their work with objectivity and appropriate independence, on a timely and efficient basis, and document the work in an organized, systematic, complete, and legible manner;
• Ensure all working papers, file documents, and memoranda are initialled, properly cross-referenced, and dated, with appropriate consultation on difficult or contentious matters;
• Ensure that appropriate client communications, representations, reviews, and responsibilities are clearly established and documented; and
• Ensure that the engagement report reflects the work performed and intended purpose and is issued soon after the fieldwork is complete.

Role of the SP as Engagement Leader

The engagement leader is responsible for signing the engagement report. As leader of the engagement team, the SP is responsible for:

• The overall quality for each engagement to which the engagement leader is assigned;
• Forming a conclusion on compliance with independence requirements from the client, and in doing so, obtaining the information required to identify threats to independence, taking action to eliminate such threats or reduce them to an acceptable level by applying appropriate safeguards, and ensuring appropriate documentation is completed;
• Ensuring that appropriate procedures regarding the acceptance and continuance of client relationships have been followed, and that conclusions reached in this regard are appropriate and have been documented;
• Ensuring that the engagement team collectively has the appropriate competence and capabilities to perform the engagement in accordance with professional standards and applicable legal and regulatory requirements;
• Supervising and/or performing the engagement in compliance with professional standards and regulatory and legal requirements, and ensuring that the engagement report issued is appropriate in the circumstances;
• Communicating to key members of the client’s management and those charged with governance the SP’s identity and role as engagement leader;
• Ensuring, through review of the engagement documentation and discussion with the engagement team, that sufficient appropriate evidence has been obtained to support the conclusions reached and for the engagement report to be issued;
• Taking responsibility for the engagement team by undertaking  appropriate consultation (both internal and external) on difficult or contentious matters; and
• Determining when a QCR should be appointed in accordance with professional standards and SP policy; discussing significant matters arising during the engagement and identified during the engagement quality control review with the QCR; and not dating the report until the review is complete.

Consultation

The SP encourages consultation among the engagement team and, for significant matters with others inside and, with authorization, outside the SP. Internal consultation uses the SP’s collective experience and expertise (or that available to the SP) to reduce the risk of error and improve the quality of engagement performance. A consultative environment improves the SP’s or staff’s learning and development process and adds strength to the SP’s collective knowledge base, quality control system, and professional capabilities.

For any significant, difficult, or contentious issue identified during planning or throughout the engagement, the SP shall consult suitably qualified external persons.

When external consultation is required, the situation shall be sufficiently documented providing enough detail to allow file readers to understand the full extent of the nature of the consultation, the external expert’s qualifications and relevant competencies, and the course of action recommended.

The external expert shall be supplied with all relevant facts to be able to provide informed advice. When seeking advice, it is not appropriate to withhold facts or direct the information flow in order to get a particular desired result. The external expert shall be independent of the client, free of conflict of interest, and held to a high standard of objectivity.

The external expert’s advice will ordinarily be implemented as the resolution or form part of the resolution of the contentious issue. If the advice is not implemented or is substantially different from the conclusion, there shall be an explanation documenting the reasons and alternatives considered, with (or cross-referenced to) the consultation record provided by the SP.

If more than one consultation is completed, a summary of the general discussions and range of opinions or options provided shall be added to the working papers. The final position(s) adopted and the reasons for this shall also be documented.

The SP will make the final decision on all such matters, and will document the consultations and the reasons for the final decision.

Differences of Opinion

The SP and staff shall strive to be objective, conscientious, open-minded, and reasonable in assisting, facilitating, or reaching a timely and non-confrontational resolution of any disputes or differences of opinion between personnel.

Anyone who is party to a dispute or difference of opinion shall attempt to resolve the matter in a timely, professional, respectful, and courteous manner through discussion, research, and consultation with the other individual(s).

The SP will consider the matter promptly and decide, through consultation with the parties, how to resolve the matter. The SP shall then inform the parties of this decision and the reasons behind it. In all cases, the nature and scope of, and conclusions resulting from, consultations undertaken during the course of the engagement shall be documented.

All staff are protected from any form of retribution, career limitation, or punitive actions for bringing attention to a legitimate and significant issue, in good faith and with the true interests of the public, client, SP, or co-worker in mind.

If the individual is still not satisfied with the matter’s resolution and no further recourse is available within the SP, the individual will need to consider the matter’s significance, along with his or her position or continuing employment with the SP.

Disputes or differences of opinion shall be documented appropriately. In all instances, the engagement report will not be dated until the matter is resolved.

Engagement Quality Control Review (EQCR)

All engagements must be assessed against the SP’s established criteria to determine whether an EQCR shall be performed. This assessment should be made, in the case of a new client relationship, before the engagement is accepted, and in the case of a continuing client, during the planning phase of the engagement.

The SP policy shall require the resolution of all issues raised by the QCR, before dating the engagement report.

An EQCR is required before dating any audit report of the financial statements of listed entities. In any other circumstances where an EQCR is conducted, the engagement report shall not be dated until completion of the EQCR.

Criteria requiring an EQCR A completed quality control review may be considered for engagements before dating an engagement report when:

• It is part of a set of safeguards applied where the SP has a significant and recurring independence threat resulting from a prolonged close personal relationship or close business relationship with the client, which had been previously reduced to an acceptable level by other safeguards;
• An identified threat to independence involving the SP is recurring and deemed significant but use of an EQCR may reasonably reduce these threats to an acceptable level;
• The engagement’s subject matter relates to organizations that are important to specific communities or the general public;
• A large number of passive shareholders, equivalent-ownership unit holders, partners, co-venturers, beneficiaries, or other similar parties receive and rely on the engagement report;
• There is significant risk identified and associated with the decision to accept or continue the engagement;
• There are questions about an entity’s ability to continue as a going concern, and the potential impact to third-party users (other than management) is significant;
• Substantial impacts and risks to users involve new and very complex specialized transactions, such as derivatives and hedges, stock-based compensation, unusual financial instruments, extensive use of management estimates, and judgments that potentially have significant impact to third-party users;
• The entity is a large private entity (or related group under the responsibility of the same engagement partner); and
• • The total fees paid by the client represent a large proportion to the SP (for example, greater than 10–15%). Additionally, there may be factors which trigger an engagement quality control review after an engagement has already commenced. These may include situations where:
• The risk of the engagement has increased during the engagement, for example, where the client becomes the focus of a takeover;
• There is concern among engagement team members that the report may not be appropriate in the circumstances;
• New and significant users of the financial statements are identified;
• The client is subject to significant litigation which was not present during the engagement acceptance process;
• The significance and disposition of corrected and uncorrected misstatements identified during the engagement are a concern;
• There have been disagreements with management on significant accounting matters or audit scope limitations; and
• There have been scope limitations.

Provide a listing of other required criteria as determined by SP policy. Each SP shall determine its own EQCR criteria. For guidance, refer to Section 5.6 of the Guide.

Nature, Timing, and Extent of an Engagement Quality Control Review

The SP must review the file and any identified issues before the full EQCR. The decision to conduct an EQCR, even if the engagement meets the criteria, and the extent of the EQCR, will depend on the engagement’s complexity and associated risks. An EQCR does not diminish the SP’s responsibility for the engagement.

The EQCR shall include, as a minimum:

• A discussion of significant matters with the SP;
• A review of the financial statements or other subject matter information and the proposed report;
• Consideration of whether the proposed report is appropriate in the circumstances; and
• A review of selected working paper file documentation relating to the significant judgments the engagement team made and the conclusions it reached.

The SP shall have the QCR use standardized engagement quality control checklists in order to complete the review and provide appropriate documentation of such review.

For listed entities (and other organizations if included in the SP’s policy), the EQCR must also consider:

• The engagement team’s evaluation of SP’s independence in relation to the specific engagement;
• Whether appropriate consultation has taken place on matters involving differences of opinion or other difficult or contentious matters and the conclusions arising from those consultations; and
• Whether documentation selected for review reflects the work performed in relation to the significant judgments made and supports the conclusions reached.

The SP should allow a minimum of [insert number of days pursuant to SP policy] business days from the release date for the initial review, with two of those days allocated for the final review completion. The time allowed for larger, more complex engagements must naturally be substantially longer.

The engagement report shall not be dated until the completion of the engagement quality control review.

Engagement Quality Control Reviewer (QCR)

The SP is responsible for establishing criteria for the appointment of QCRs and determining their eligibility.

The QCR must be objective, independent, and a suitably qualified external person who has time to fulfill this role. The characteristics commonly attributed to a candidate suitable to serve this role include superior technical knowledge of current accounting and assurance standards and a breadth of experience which would be exhibited at a senior level.

The QCR cannot be a member of the engagement team and cannot, directly or indirectly, review his or her own work, or make important decisions regarding the performance of the engagement.

Consultation among qualified professionals who serve the EQCR function is encouraged, and it is not unusual for the engagement team to consult with the QCR during the engagement. This will not normally compromise the QCR’s objectivity, as long as the SP (and not the QCR) makes the final decisions and the issue is not overly significant. This process can avoid differences of opinion later in the engagement.

If the objectivity of the QCR becomes compromised following a consultation on a specific matter, the SP should appoint an alternate QCR.

 

Monitoring

The quality control policies and procedures are a key part of the SP’s internal control system. Monitoring consists primarily of understanding this control system and determining — through interviews, walk­through tests, and file inspections — whether, and to what extent, this control system is operating effectively. It also includes developing recommendations to improve the system, especially if weaknesses are detected or if professional standards and practices have changed.

The SP will also consider any feedback received from the [insert name of relevant professional association or institute]’s practice inspection and licensing regime. However, this is not a substitute for the SP’s own internal monitoring program.

Safeguards that act as monitoring mechanisms for the SP include:

• Internal and external education and training programs;
• Requirements that external professionals engaged by the SP know, understand, and enforce the SP’s policies and procedures for engagement reviews, quality control reviews, and engagement leader approvals;
• A policy statement instructing staff not to release any engagement financial statement information of any kind unless all necessary approvals are signed off;
• The SP’s standard engagement completion and release control system, which outlines the required approvals and sign-offs by engagement type, function, and individual responsible; and
• Instructions to staff to advise the SP when they observe significant or repeated smaller breaches of SP policies or protocols.

Monitoring Program

The responsibility for monitoring the application of quality control policies and procedures is separate from the overall responsibility for quality control. The purpose of the monitoring program is to assist the SP in obtaining reasonable assurance that its policies and procedures relating to the system of quality control are relevant, adequate, and operating effectively. The program shall also help ensure compliance with practice and regulatory review requirements.

The system has been designed to provide the SP with reasonable assurance that significant and sustained breaches of policy and quality control are unlikely to occur or go undetected.

The SP and staff must co-operate with the monitor, recognizing that this individual is an essential part of the quality control system. Disagreement, non-compliance with, or disregard for the monitor’s findings shall be resolved through the SP’s dispute resolution process.

The suitably qualified external person(s) who conduct the review will follow the SP’s established procedures for monitoring.

Inspection Procedures

Monitoring of the SP’s quality control system will be completed on a periodic basis. The selection of individual engagements for inspection will be conducted annually, with the SP’s files being inspected on a cyclical basis.

The inspection cycle will span a three-year period.

The monitor will consider the results of previous monitoring, the nature and extent of authority given to staff, the nature and complexity of the SP’s practice, and the specific risks associated with the SP’s client when designing the inspection.

The SP will instruct the monitor to prepare appropriate documentation of inspections that will include:

• An evaluation of adherence to professional standards and applicable regulatory and legal requirements;
• The results from evaluating elements of the quality control system;
• An evaluation of whether the SP has appropriately applied quality control policies and procedures;
• An evaluation of whether the engagement report is appropriate in the circumstances;
• Identification of any deficiencies, their effect, and a decision on whether further action is necessary, describing this action in detail; and
• A summary of results and conclusions reached (provided to the SP), with recommendations for corrective actions or changes needed.

The SP will meet with the monitor (along with other appropriate personnel) to review the report and decide on the corrective action and/or changes to make to the system, roles and responsibilities, disciplinary action, recognition, and other matters as determined.

Report on the Results of Monitoring

After completing the assessment of the quality control system, the monitor must report the results to the SP. The report must include a description of the procedures performed and the conclusions drawn from the review. If systemic, repetitive, or significant deficiencies are noted, the report must also include the action taken to resolve them.

The SP will instruct the monitor to prepare a report that will, at a minimum, include:

• A description of monitoring procedures performed;
• The conclusions drawn from monitoring procedures; and
• Where relevant, a description of systemic, repetitive or other significant deficiencies and of the actions recommended to resolve these deficiencies.

Insert sample of SP Monitor’s Report

Evaluating, Communicating, and Remedying Deficiencies

The SP shall address all deficiencies detected and reported by the monitor. The SP shall consider whether these deficiencies indicate structural flaws in the quality control system or demonstrate non-compliance by a particular staff.

Structural flaws indicated by deficiencies may require changes to the quality control or documentation system. The monitor shall refer these changes to the SP or staff responsible for the quality control or documentation system so that the correction can be made.

The SP shall carefully consider significant deficiencies and follow professional standards and regulatory and legal requirements if it appears it has issued an inappropriate engagement report or that the engagement report’s subject matter contained a misstatement or inaccuracy. In such a circumstance, the SP will also consider obtaining legal advice.

If deficiencies are determined to be systemic or repetitive, immediate corrective action will be taken. In most cases, deficiencies related to independence and conflict of interest will require immediate corrective action.

The HR shall review detected deficiencies to determine whether courses or supplemental education work could effectively address some of the issues behind the deficiencies.

Non-compliance

Non-compliance with the SP’s quality control system is a serious matter, particularly if staff has wilfully refused to comply with SP policy.

Since the quality control system is in place to protect public interest, the SP will address wilful non-compliance transparently and rigorously. Wilful non-compliance will be addressed in a number of ways, including instituting a plan to improve performance; performance reviews and reconsideration of opportunities for promotion and increased compensation; and ultimately termination of employment.

Complaints and Allegations

The SP manages all complaint and allegation matters.

Complaints and allegations — particularly concerning failure to exercise a duty of care in relation to client work, or other breach of professional or legal duties by staff toward each other or clients — are serious matters. The SP shall give serious consideration to notifying the firm’s insurance company and/or seeking legal advice. If there is any uncertainty, the SP shall consult other trusted professional colleagues.

Any complaint received from a client or other third party will be responded to at the earliest practical moment, with an acknowledgement that the matter is being attended to, and that a response will be forthcoming after it has been appropriately investigated.

The SP maintains a defined policy with accompanying procedures that details the procedures to be followed if a complaint or allegation arises.

The results from this process will be documented together with the response.

The process provides that all staff are free to raise concerns without fear of reprisal.

Insert additional SP policy or procedures that may describe the process to be followed in such a circumstance. For guidance, refer to Section 6.6 of the Guide.

 

Documentation

Documentation of the Firm’s Policies and Procedures

The SP maintains policies and procedures that specify the level and extent of documentation required in all engagements and for general SP use (as established in the SP manual/engagement templates). The SP also maintains policies and procedures requiring appropriate documentation to provide evidence of the operation of each element of its system of quality control.

These policies ensure that documentation is sufficient and appropriate to provide evidence of:

• Adherence to each element of the SP’s quality control system; and
• Support for each engagement report issued, according to professional and SP standards and regulatory and legal requirements, together with evidence that the EQCR has been completed on or before the date of the report (if applicable).

Documentation of the Engagement

It is the SP’s policy that engagement documentation shall include:

• Engagement planning checklist or memorandum;
• Identified issues with respect to ethics requirements (including demonstration of compliance);
• Compliance with independence requirements and documentation of any discussions related to these issues;
• Conclusions reached with respect to acceptance and continuance of client relationship;
• Procedures performed to assess the risk of material misstatement due to fraud or error at the financial statement and assertion level;
• Nature, timing, and extent of procedures performed in response to assessed risk including results and conclusions;
• Nature, scope, and conclusions drawn from consultations;
• All communications issued and received;
• Results of the EQCR which has been completed on or before the date of the report;
• Confirmation that no unresolved matters exist that would cause the reviewer to believe that the significant judgments made and conclusions drawn were not appropriate;
• Conclusion that sufficient, appropriate audit evidence has been accumulated and evaluated, and supports the report to be issued; and
• File closing, including appropriate sign-off.

Insert additional minimum engagement documentation requirements as desired. For guidance, refer to Section 7.3 of the Guide.

SP policy requires that final assembly of the engagement file be completed within [state number of days, ordinarily no more than 60 days after the date of the auditor’s report]. If there are two or more reports issued for the same subject matter information, SP policy should indicate that the time limits for assembly of the engagement file should be such that each report is treated as if it were a separate engagement.

Documentation of any kind must be retained for a period of no less than [state period of retention, normally not shorter than five years from the date of the auditor’s report, or, if later, the date of the group auditor’s report] to allow those performing monitoring procedures to evaluate the extent of the SP’s compliance with its internal control system, as well as the needs of the firm, as required by professional standards, law, or regulations.

 

Documentation of the Engagement Quality Control Review

Each professional engaged by the SP serving in the capacity of QCR must complete the SP’s standardized EQCR checklist, in order to provide documentation that the review was performed. This must include confirmation and supporting evidence or cross-references to it, affirming that:

• Appropriately qualified external professional(s) have performed the procedures required for an EQCR;
• The review was completed on or before the date of the engagement report;
• No unresolved matters have come to the QCR’s attention that would cause him or her to believe that the significant judgments the engagement team made and the conclusions reached were not appropriate.

File Access and Retention

The SP has established policies and procedures designed to maintain the confidentiality, safe custody, integrity, accessibility, and retrievability of the engagement documentation.

These policies include consideration of various retention requirements under statute and regulations to ensure that engagement documentation is retained for a period sufficient to meet the needs of the SP.

All working papers, reports, and other documents prepared by the SP, including client-prepared worksheets, are confidential and shall be protected from unauthorized access.

The SP must approve all external requests to review working papers.

Working papers will not be made available to third parties unless:

• The client has authorized disclosure in writing;
• There is a professional duty to disclose the information;
• Disclosure is required by a legal or judicial process; or
• Disclosure is required by law or regulation.

Unless prohibited by law, the SP must inform and obtain written authorization from the client before making working papers available for review. An authorization letter must be obtained when there is a request to review files from a prospective purchaser, investor, or lender. Legal advice shall be sought if the client does not authorize disclosure of information.

In the event of litigation or potential litigation, or regulatory or administrative proceedings, working papers shall not be provided without obtaining consent from the SP’s legal counsel.

 

The SP’s policy dictates the number of years for which retention will apply for each of the following types of files:

• Permanent files (10 years)
• Tax files (7 years)
• Financial statements and reports (7 years)
• Annual or periodic working papers (7 years)
• Correspondences (7 years)

An accessible, permanent record of all files stored off-site will be maintained, and each storage container will be appropriately labelled for easy identification and retrieval. The partner responsible for office administration shall approve any destruction of files and keep permanent records of all materials destroyed.