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1
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 [email protected] for permission to reproduce, store or transmit, or to make other similar uses of these extracts.
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Thank you