Strengthening Compliance with SQC 1
Key Observations and Recommendations from the AASB of ICAI
Strengthening Compliance with SQC 1
Key Observations and Recommendations from the AASB of ICAI
Introduction
Standard on Quality Control 1 (SQC 1) provides essential guidelines that audit firms must adhere to to establish and maintain a rigorous quality control system. These guidelines ensure that audits are conducted with the utmost professionalism and due diligence in accordance with established standards. Failure to comply with SQC 1 can compromise audit quality, increase legal and reputational risks, and negatively impact stakeholders who rely on accurate and fair financial statements. The Auditing and Assurance Standards Board (AASB) of the Institute of Chartered Accountants of India (ICAI) has expressed concerns regarding the declining audit quality due to audit firms' non-compliance with SQC 1.
Below are examples of such non-compliance, along with the AASB's recommended guidelines for addressing these issues:
1. Non-compliance in Retaining Audit Documentation Post-Audit Completion
PParagraph 82 of Standard on Quality Control 1 (SQC 1) requires audit firms to establish policies and procedures for retaining engagement documentation for a period that meets the firm's needs or complies with legal or regulatory requirements. Paragraph 83 further emphasizes that the retention period for engagement documentation may vary depending on the nature of the engagement and the specific circumstances of the firm.
AASB—Key Observations and Recommendations
The Auditing and Assurance Standards Board (AASB) has noted that many audit firms lack structured policies and procedures for retaining audit documentation. It is often observed that firms fail to retain these documents for an adequate period after completing an audit engagement, which violates Paragraphs 82 and 83 of SQC 1.
To address this issue, the AASB recommends that audit firms develop robust policies and procedures to support the organization and archiving of audit files. This includes the use of secure electronic archiving tools and implementing appropriate measures to safeguard manual working papers. Firms should ensure that manual documentation is compiled in binders or scanned for inclusion in the electronic audit file, thereby ensuring comprehensive and secure record-keeping.
Additionally, as stipulated by SQC 1, audit firms should establish retention policies that satisfy the firm's needs or comply with legal or regulatory requirements. Specifically, SQC 1 indicates that for audit engagements, the retention period should generally be no less than seven years from the date of the audit report or, if later, the date of the group audit report.
2. Failure to Assemble the Final Audit File Within the Stipulated Time
Paragraph 74 of SQC 1 requires firms to establish policies and procedures that ensure engagement teams promptly complete the assembly of final engagement files after the engagement reports are finalized. Paragraph 75 further notes that specific laws or regulations may dictate time limits for finalizing the assembly of engagement files for certain types of engagements.
AASB—Key Observations and Recommendations
An audit file consists of one or more folders or storage media, whether physical or electronic, that contain the audit documentation for a specific engagement. According to SQC 1 and SA 230, "Audit Documentation," the auditor must assemble the final audit file upon completing the engagement. The AASB has observed that many firms do not have established policies and procedures to ensure the timely assembly of the final audit file after the audit report is finalized, resulting in non-compliance with SQC 1 and SA 230.
The AASB recommends that firms adhere to any time limits specified by law or regulation when assembling the final audit file for specific types of engagements. In the absence of such prescribed time limits, firms should set reasonable internal deadlines, taking into account the nature of the engagement and the prevailing circumstances. Generally, if a firm sets its own policies, the time limit for assembling the audit file should not exceed 60 days from the date of the auditor's report.
3. Failure to Record the Resolution of Differences of Opinion During the Audit
Paragraph 57 of SQC 1 requires firms to establish clear policies and procedures for managing and resolving differences of opinion within the engagement team, among consulted parties, and, where applicable, between the engagement partner and the engagement quality control reviewer. The conclusions from these discussions must be documented and implemented accordingly.
AASB—Key Observations and Recommendations
The AASB has noted that when differences of opinion arise within the engagement team or between the engagement partner and the engagement quality control reviewer, firms often fail to seek external expertise. Even when an external expert is consulted and resolves the issue, there is frequently inadequate documentation of the conclusions and the rationale behind them.
The AASB recommends that auditors document potential disagreements in accordance with SA 230. This documentation, which may be termed a Memorandum of Dispute Resolution (MDR) or a similar name chosen by the firm, should detail the key facts, differing opinions, and technical perspectives on the matter.
Additionally, if an internal resolution cannot be achieved, the firm must refer the issue to an external expert. The expert's opinion, along with the rationale for their conclusions, should be documented and retained. The MDR must include the signatures and dates from the engagement partner, review partner, or external expert confirming the resolution of the disagreement and the basis for the conclusions reached.
4. Violation of the Principle of Confidentiality When Raising a Whistleblowing Complaint
Paragraph 86 of SQC 1 requires that firms and their personnel adhere to relevant ethical requirements, including the obligation to maintain the confidentiality of information contained in engagement documentation. Disclosure of such information is permitted only with specific client authorization or when there is a legal or professional duty to do so.
AASB—Key Observations and Recommendations
When non-compliance or suspected non-compliance is identified, firm personnel often raise whistleblowing complaints. However, the AASB has observed that these complaints frequently fail to uphold the principles of confidentiality. Additionally, many audit firms lack sufficient controls to protect the confidentiality of client information.
SQC 1 mandates that firms establish comprehensive policies and procedures to ensure the confidentiality, secure custody, integrity, accessibility, and retrievability of engagement documentation. It is crucial that audit firm personnel maintain confidentiality at all stages of the engagement, including when raising whistleblowing complaints.
The AASB recommends that audit firms emphasize to their personnel the importance of maintaining confidentiality while ensuring that sufficient information is provided when submitting whistleblowing complaints. To strengthen controls over client information confidentiality, the AASB advises implementing the following measures:
a) Using passwords among engagement team members to restrict electronic document access to authorized users.
b) Establishing regular backup routines for electronic documentation throughout the engagement.
c) Implementing procedures for distributing, processing, and collating engagement documentation at the beginning, during, and at the conclusion of the engagement.
d) Establish controls to limit access to hardcopy documentation and ensure its proper distribution and secure storage.
5. Addition of New Documents to the Audit File After Final Assembly
Paragraph 16 of SA 230 stipulates that if the auditor finds it necessary to modify existing audit documentation or add new documentation after the final audit file has been assembled, the auditor must document the following, regardless of the nature of the modifications or additions:
a) The specific reasons for making the changes.
b) When and by whom were the changes made and reviewed?
AASB—Key Observations and Recommendations
The AASB has noted that audit firms often face uncertainty about whether they can add new documents to audit documentation after the final audit file has been assembled. Additionally, when new documents are added, firms frequently fail to document these changes as required by SQC 1.
The AASB advises that while SQC 1 permits audit firms to make changes to audit documentation even after the final audit file has been completed, it is essential that the following details are documented:
a) The date when the new information was added and reviewed.
b) The name of the individual who prepared and reviewed the additional information.
c) The circumstances leading to the addition and the reasons for including the new information.
d) The new or additional audit procedures were performed, the audit evidence was obtained, and the conclusions were reached.
e) The impact on the auditor's report.
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