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Quality Management for an Audit of Financial StatementsExposure Draft (ED): ISA 220

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Overview and background

Overall objectives• Enhance engagement quality

– Proactive management of quality

– Importance of the exercise of professional judgement andprofessional scepticism

– Encourage documentation of auditor’s judgement

– Keeping ISA 220 fit for purpose

To support this• Highlight the importance of the

– public interest role of audits

– Appropriate application of professional judgement and professionalscepticism

• Clarify the role and responsibilities of an engagement partner

• Modernise ISA 220 for an evolving environment

• Clarify the relationship between ED 220 and ISQMs

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Key changes in Proposed ED-220

Terminology of ED-220 aligned with ED ISQM 1 & 2

Emphasis on Public Interest (Par. 6)

New guidance relating to Professional Scepticism (Par. 7)

Definition of Engagement Team revised

Components revised

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Public interest role of audits

• Public interest is served by the consistent performance of quality audit engagements

• Exercise of professional scepticism and professional judgement in performing audits is required

• New application material– Impediments to the exercise of professional

scepticism

– Auditor’s bias

– Possible actions to deal with impediments

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Impediments to the exercise of professional scepticism

Tight deadlines or budget constraints

Lack of cooperation or undue pressures imposed by management

Insufficient emphasis on the importance of quality

Insufficient understanding

Difficulties in obtaining access information or persons

Overreliance on tools and templates

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Auditor biases

• Availability bias

• Confirmation bias

• Overconfidence bias

• Anchoring bias

Examples of unconscious auditor biases that may affect professional skepticism

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Possible actions to deal with impediments

• changes in the nature or circumstances of the audit engagement

Remaining alert

• situations when vulnerability to auditor biases may be greater

Alerting the engagement team

• changing the composition

• more experienced members

• specialised skills

Engagement team

• Modify nature, timing and extent of direction and supervision of engagement team members in complex areas

Audit approach

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Possible actions to deal with impediments

• Less experienced members of the engagement team to seek advice frequently from the senior members

• More experienced team members to be available to less experienced members throughout the audit

Setting expectations

• Those charged with governance when management

• undue pressure

• engagement team experiences difficulties in obtaining access to records

Communicating

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Extant ISA 220 Components

Quality

Controlfor an audit of financial statements

Leadership responsibilities

Relevant Ethical

requirements

Acceptance and

continuance

Assignment of Engagement

Teams

Engagement Performance

Monitoring

Documentation

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ED- ISA 220 Components

Quality

Managementfor an audit of

financial statements

Leadership

responsibilities

Relevant Ethical

requirements

Acceptance and

continuance

Engagement Resources

Engagement Performance

Monitoring and

Remediation

Documentation

Sufficient and appropriate involvement by the Engagement Partner

Sufficient and appropriate involvement by the Engagement Partner

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Leadership responsibilities

Suffic

ient

and a

ppro

priate

in

vo

lve

men

t th

rou

gh

ou

t th

e

engagem

ent

Leadership responsibility

Direction, Supervision and Review

Standback

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Fulfilling of leadership responsibility by EPEnvironment

• Create one that emphasises the culture of the firm

Take clear, consistent and effective actions and communicate

• All engagement team members responsible

• Importance of professional ethics

• Encourage open and robust communication

• Importance of exercising professional scepticism

Assigned procedures, tasks or actions

• Inform assignees about responsibilities and authority

• Monitor the performance of the assignees’ work

• Review the related documentation

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Relevant ethical requirements

• have understanding of relevant ethics

• determine that other members of engagement team made aware of relevant ethics

Engagement partner

• Engagement partner to evaluate

• Take appropriate action

Threats to compliance

• Remain alert to breaches of relevant ethical requirements

• Take appropriate action when relevant ethical requirements not complied with

• Determine that relevant ethical requirements have been fulfilled prior to dating the auditor’s report

In addition, engagement partner

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Acceptance and continuance

• Engagement partner shall be satisfied with

– Firm’s policies or procedures for acceptance and

continuance

– Conclusions reach

• Engagement partner shall

– Take into account information obtained during

acceptance and continuance process in performing the

audit

• If engagement partner obtains information that may

have caused the firm to decline the engagement

– Communicate this promptly to the firm

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Engagement resourcesDefinitionsDefinition of Engagement team revised

Resources• Resources required to support the audit process

– Human resources

– Technological resources

– Intellectual resources

• Engagement partner– resources are sufficient and appropriate and made available on a timely basis

– Appropriate competence, capabilities and sufficient time

– Take appropriate action when resources insufficient or not appropriate

– Take overall responsibility for using the assigned resources

• Application material – Project management for larger/complex engagements

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Engagement performance

Direction, supervision and review

• Engagement partner to

– take responsibility for nature, timing and extent of direction and supervision of engagement team and review of work performed

– Determine that sufficient appropriate audit evidence has been obtained

– Review audit documentation

– Review the financial statements and auditor’s report

– Review formal written communication

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Engagement performance

Consultation

• Engagement partner to

– take responsibility for the engagement team undertaking consultation on

• Matters were firm’s policies or procedures so require

• Other matters based on professional judgement

– Determine that • appropriate consultation has taken place

• Nature and scope of conclusions reached are agreed by all parties and implemented

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Engagement performance

Engagement quality review

• Engagement partner to

– Be satisfied that EQR has been appointed

– Cooperate with the EQR

– Discuss significant matters with the EQR

– Not date the auditor’s report until completion

of the EQR

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Engagement performance

Differences of opinion

• If difference of opinion arise

– Follow the firms policies and procedures

• Engagement partner to

– Take responsibility for differences of opinion

– Determine that conclusions reached are documented and implemented

– Not date the auditor’s report until differences of opinion are resolved

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Monitoring and remediation

• Engagement partner

– responsible for dealing with the relevant aspects of the monitoring and remediation process communicated by the firm

– should be satisfied that the engagement team is aware of the results of the firm’s monitoring and remediation process

– should remain alert throughout the engagement for information that may be relevant to the monitoring and remediation approachs

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Standing back requirement

• ED 220 requires engagement partner to

“stand-back”

• Prior to dating the auditor’s report,

engagement partner should determine

whether overall responsibility for managing

and achieving quality on the audit

engagement has been taken

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Documentation

• Application material enhanced for

evidence of the engagement partner’s

involvement in the engagement

– Examples are given in the application material

– Exercised professional scepticism

– Consultations taken place

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Scalability for different firms and engagements

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IFAC Guidance Material

Copyright statement• This survey includes extracts from the IAASB Exposure

Drafts for Quality Management at the Firm and Engagement Level, Including Engagement Reviews (QM-EDs) to provide sufficient background for those participants who have not managed to work through the QM-EDs to provide meaningful and informed answers to the survey questions. It is not mandatory for participants to read through all background information if not considered necessary.

• Contact permissions@ifac.org for permission to reproduce, store or transmit, or to make other similar uses of these extracts.

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Thank you