Question

Evaluate the effectiveness of the current quality control standards and practices in the accounting profession. Next, identify at least one (1) standard or practice that merits improvement and the corresponding improvements recommended.

Answer 1

A system of quality control consists of policies designed to achieve the objectives of the system and the procedures necessary to implement and monitor compliance with those policies. The nature, extent, and formality of a firm’s quality control policies and procedures will depend on various factors such as the firm’s size; the number and operating characteristics of its offices; the degree of authority allowed to, and the knowledge and experience possessed by, firm personnel; and the nature and complexity of the firm’s practice.

Communication of Quality Control Policies AND pracitices.

The firm should communicate its quality control policies and procedures to its personnel. Most firms will find it appropriate to communicate their policies and procedures in writing and distribute, or make available electronically, them to all professional personnel. Effective communication includes the following:

• A description of quality control policies and procedures and the objectives they are designed to achieve
• The message that each individual has a personal responsibility for quality
• A requirement for each individual to be familiar with and to comply with these policies and procedures Effective communication also includes procedures for personnel to communicate their views or concerns on quality control matters to the firm’s management.

Elements of a System of Quality Control.

A firm must establish and maintain a system of quality control. The firm’s system of quality control should include policies and procedures that address each of the following elements of quality control identified in SQCS No. 8:

• Leadership responsibilities for quality within the firm (the "tone at the top")
• Relevant ethical requirements
• Acceptance and continuance of client relationships and specific engagements
• Human resources
• Engagement performance
• Monitoring

Leadership Responsiblities for Quality Within the firm.

The purpose of the leadership responsibilities element of a system of quality control is to promote an internal culture based on the recognition that quality is essential in performing engagements. The firm should establish and maintain the following policies and procedures to achieve this purpose:

• Require the firm’s leadership (managing partner, board of managing partners, CEO, or equivalent) to assume ultimate responsibility for the firm’s system of quality control.

• Provide the firm with reasonable assurance that personnel assigned operational responsibility for the firm’s quality control system have sufficient and appropriate experience and ability to identify and understand quality control issues and develop appropriate policies and procedures, as well as the necessary authority to implement those policies and procedures.

Relevent Ethical Requirements

The purpose of the relevant ethical requirements element of a system of quality control is to provide the firm with reasonable assurance that the firm and its personnel comply with relevant ethical requirements when discharging professional responsibilities. Relevant ethical requirements include independence, integrity, and objectivity. Establishing and maintaining policies such as the following assist the firm in obtaining this assurance: • Require that personnel adhere to relevant ethical requirements such as those in regulations, interpretations, and rules of the AICPA, state CPA societies, state boards of accountancy, state statutes, the U.S. Government Accountability Office, and any other applicable regulators.

• Establish procedures to communicate independence requirements to firm personnel and, where applicable, others subject to them.

• Establish procedures to identify and evaluate possible threats to independence and objectivity, including the familiarity threat that may be created by using the same senior personnel on an audit or attest engagement over a long period of time, and to take appropriate action to eliminate those threats or reduce them to an acceptable level by applying safeguards.

• Require that the firm withdraw from the engagement if effective safeguards to reduce threats to independence to an acceptable level cannot be applied.

• Require written confirmation, at least annually, of compliance with the firm’s policies and procedures on independence from all firm personnel required to be independent by relevant requirements.

Engagement performance.

Establishing and maintaining policies such as the following assist the firm in obtaining the assurance required relating to the engagement performance element of quality control:

• Plan all engagements to meet professional, regulatory, and the firm’s requirements.
• Perform work and issue reports and other communications that meet professional, regulatory, and the firm’s requirements.
• Require that work performed by other team members be reviewed by qualified engagement team members, which may include the engagement partner, on a timely basis.
• Require the engagement team to complete the assembly of final engagement files on a timely basis.
• Establish procedures to maintain the confidentiality, safe custody, integrity, accessibility, and retrievability of engagement documentation.
• Require the retention of engagement documentation for a period of time sufficient to meet the needs of the firm, professional standards, laws, and regulations.

Monitoring.

The purpose of monitoring compliance with quality control policies and procedures is to provide an evaluation of the following:

• Adherence to professional standards and regulatory and legal requirements
• Whether the quality control system has been appropriately designed and effectively implemented
• Whether the firm’s quality control policies and procedures have been operating effectively so that reports issued by the firm are appropriate in the circumstances.

Policies.

Policy 1: The firm’s managing partner assumes ultimate responsibility for the firm’s system of quality control. Single-Office CPA Firm implements this policy through the following procedures:

• Having the managing partner accept ultimate responsibility for the firm’s system of quality control and for setting a tone that emphasizes the importance of quality and of following the firm’s system of quality control
• Informing personnel that failure to adhere to the firm’s policies and procedures regarding performance quality and commitment to ethical principles may result in disciplinary action.

Policy 2:   Commercial considerations do not override the quality of the work performed. Single-Office CPA Firm implements this policy through the following procedures:

• Having the managing partner continually evaluate client relationships and specific engagements so that commercial considerations do not override the objectives of the system of quality control
• Emphasizing to all personnel that fee considerations and scope of services should not infringe upon quality work.

Standards on quality Controls.

International Standard on Quality Control (ISQC 1), Quality Control for Firms That Perform Audits and Reviews of Financial Statements in SMPs. It also discussed how to overcome these challenges, and the benefits of doing so. The effective implementation of ISQC 1 and International Standard on Auditing (ISA) 220, Quality Control for an Audit of Financial Statements is fundamental to audit quality and underpins users’ confidence in an audit and in financial reporting.

As part of its outreach related to the project, the working group identified certain issues, including:

• Concern about the proportionate application of ISQC 1 to smaller entities, and about the policies and procedures specific to assurance engagements related to smaller entities;
• Concern about the proportionate application of ISA 220 in the audit of smaller entities;
• Inconsistencies in the performance of the monitoring process required by ISQC 1, in particular, the extent to which the firm’s quality control systems are considered, and engagement files are reviewed; and
• The need for firms to evaluate the effect of deficiencies identified as part of internal and external inspections, including appropriate remedial actions to the firm’s systems of quality control.