SAFA-IFAC SMP ForumNew Delhi, IndiaOctober 10, 2014

Quality Control and Efficient Auditing

CA.Narendra Bhattarai

President, ICA Nepal

Contents1. What is Quality and Quality Audit ?2. Quality Control3. Objectives of Quality Control4. Levels of Quality Control5. Ethical Requirements6. Quality Assurance7. Peer Review8. Cost of Quality9. Tools for Quality assurance and testing10.Quality Control Review Procedures: 2

stages

2

Theme‘Compliance of ISA is essential to enhance the Quality, Credibility and Professionalism for the Auditors’

According to ISQC 1 it is the objective of the firm to establish and maintain a system of quality control to provide it with reasonable assurance that:

The firm and its personnel comply with professional standards and applicable legal and regulatory requirements; and

Reports issued by the firm or engagement partners are appropriate in the circumstances.

What is Quality ?

What is Quality?

The International Organization for Standardization (ISO) defines quality as an essential or distinctive characteristic, property, or attribute of a product or service. It is the degree to which a set of inherent characteristics of a product or services that fulfils its requirements” (ISO9000:2000).

Quality is based on:

Conformance to requirements

Fitness for use4

What is Audit Quality?Audit quality is indeed a complex and elusive

concept. It has been much debated but it is still very little understood. 

Over the past 20 years, a number of researchers have tried to research and define audit quality. However, there is still no consensus on what audit quality is or how to measure it. That is because audit quality relies on perceptions, and those perceptions depend on whose views are taken into consideration. 

IAASB recently developed Framework for Audit Quality. It classifies those into inputs, outputs, interactions and contextual factors.

What is Audit Quality?The individual characteristics such as

independence, objectivity, professional ethics and skepticism, specialist knowledge and the expertise of the auditor are important factors contributing to the quality of auditors’ judgment and therefore to audit quality.

Similarly the perception of audit quality is affected by the auditor’s knowledge of the auditee, industry experience, compliance with auditing standards, auditor’s and audit firm’s ethics, and the economic independence of the auditor.

Characteristic of Audit Quality Scope: Audit plan properly address all issues needed Reliability: Audit findings truly reflect actual conditions, fully

supported by the data and evidence. Timeliness: Audit results delivered at an appropriate timeObjectivity: Opinion purely on the facts and proper analysis,

impartial and fair mannerClarity: Audit report clear and concise, easily understood Significance:Important matter was examined Efficiency: Resources assigned reasonable Effectiveness: Findings and recommendations get an

appropriate response, desired impact achieved.

7

System Approach in Audit Quality

Input

•Capacity of Audit Team – Knowledge, Skill, Expertise, Time and Money

•Audit Standards, Audit Manual, Computer, EWP, CAATs, and Software

•Integrity, Independence, Professional Ethics and Fairness

Process

•Audit Practices and Procedures (compliance with standard, manual)

•Audit Planning and Execution complying Audit Process as per Standards

•Supervision, Monitoring and Quality Review

Outpu

t

•Audit Report with Recommendations and Information

•Propriety of use of resources, 3Es, Compliance as sought by relevant Acts

Outcome

•Audit Result and Impact

•Consideration on Audit Report by Stakeholders – public, shareholders

•Contribution to improve corporate governance

8

Quality ControlQuality control (QC) is a procedure or set of

procedures intended to ensure that a manufactured product or performed service adheres to a defined set of quality criteria or meets the requirements of the client or customer. QC is similar to, but not identical with,quality assurance (QA).

Quality ControlThe quality control process consists of the systems

and practices designed to ensure that all phases of an audit (planning, execution, reporting, and follow-up) are carried out in compliance with the ISA's rules, practices, and procedures.

A quality control system should ensure that audits are timely, comprehensive, adequately documented, and performed and reviewed by qualified staff.

10

Objectives of Quality Control

Audit Firm establishes and maintains a system of quality control:

To ensure compliance with the professional standards, rules, and procedures

To ensure that the audit reports and other products are of a high standard and meet the requirements of the stakeholders

11

Two Levels of Quality Control

Office wide quality control requirements – Firm Level

Quality control of individual audit engagement level

12

Office-Wide QC Requirements – Firm Level

Elements of QC: Leadership Responsibilities for Quality Within the FirmRelevant Ethical RequirementsAcceptance and Continuance of Client Relationships and

Specific EngagementsHuman ResourcesEngagement Performance (Planning - Follow up)MonitoringDocumentation

(These elements should be defined, documented and communicated to all level)

13

QC of individual audit engagement

Quality Control should be implemented with respect to day-to-day operations in the following aspects of the audit process:selecting matters for audit;deciding the timing of the audit;planning the audit;executing the audit;evaluating audit findings;reporting audit results, including

conclusions and recommendations; andfollowing up audit reports to ensure that

appropriate action is taken.

14

Hot review Hot review is conducted during the audit

work is conducted but before the auditor’s report is issued with a prime objective to ensure compliance with relevant auditing standards and achieving engagement’s objectives

Cold ReviewCold review is conducted with a view to

check for the weaknesses in the firm’s quality control procedures and system, proficiency of audit team members and how they can be improved to make later audit assignment more effective and efficient.

Ethical Requirements and Safeguards Code of Ethics: Values and Principle of Auditing1.Trust, Confidence and Credibility 2.Integrity; Objectivity; and Professional behavior.3.Independence, Objectivity and Impartiality

Financial, business, employment and personal relationships Employment with audit assurance clients Long Association of Senior Personnel with Assurance Clients Gifts and hospitality Activities Incompatible with the Practice of Public sector audit

4.Professional Secrecy and Confidentiality; 5.Professional competence and due care;

17

Quality Assurance QA is defined as a procedure or set of

procedures intended to ensure that a product or service under development (before work is complete, as opposed to afterwards) meets specified requirements. QA is sometimes expressed together with QC as a single expression, quality assurance and control (QA/QC).

Quality AssuranceQuality assurance is an assessment process

focusing on the establishment and operation of the quality control system. It is a review completed after the audit by persons who are independent of the audit under review. Quality assurance necessarily involves the examination of specific audits. However, the purpose of the review is not to criticize specific audits. Rather, it is to determine what controls were intended to be applied to those audits, how those controls were implemented, any gaps in the controls, and other ways of improving the audit quality system.

19

Objective of QA

Quality Assurance is the process established by a firm to ensure that: the firm and its personnel have adhered to professional standards and applicable legal and statutory requirements;necessary quality controls are in place; quality controls are being properly implemented; and potential ways of strengthening or improving quality controls are identified.

20

Peer Review

Peer as per dictionary meaning:- A person who is of equal standing with another in a group

Peer Review?Peer review refers to a review of a firm by one or several other

firms. They volunteer to conduct or undergo such a review exercise.

Reviewer Firm do not have any power of enforcing the results of the peer review rather it is reported to Institute (ICAN).

The Reviewer Firm are free to decide on the contents and exercise of the peer review as well as on the use of the findings generated based on the guidelines given by ICAN.

The result of Peer Review is not that encouraging and therefore ICAN is moving towards forming AQA Board.

21

Cost of Quality

The cost of quality is the cost of conformance plus the cost of nonconformance.Conformance means delivering products

that meet requirements and fitness for use.

Cost of nonconformance means taking responsibility for failures or not meeting quality expectations.

22

Five Cost Categories Related to Quality

Prevention cost: Cost of planning and executing audit so it is error-free or within an acceptable error range.

Appraisal cost: Cost of evaluating audit processes and their result to ensure quality.

Internal failure cost: Cost incurred to correct an identified errors before the audit reports are issued and gone to public.

External failure cost: Cost that relates to all errors not detected and corrected before issuance of the report.

Measurement and test equipment costs: Capital cost of equipment used to perform prevention and appraisal activities.

23

Tools for Quality Assurance and Testing

Maturity Model

Maturity Model is used to benchmark the capability of an organization in terms of People, Processes and Technology to effectively produce high quality product and services.

The maturity model is focused on understanding current challenges and introducing efficiencies pertaining to People, Process and Technology to maximize on investments made into quality assurance and  testing to achieve high capability to produce high quality product and services.

Maturity models are the frameworks for helping organizations improve their processes and systems.

24

Tools for Quality Assurance and Testing

Excellence ModelExcellence Model is a practical tool to help

organizations do this by measuring where they are on the path to excellence; helping them understand the gaps; and then stimulating solutions.

25

Quality Control System in SMPThe nature, extent, and documentation of the

quality control policies and procedures that firms develop will vary and depend on many factors, including the size and nature of the firm and its operating characteristics.

Effective policies and procedures do not need to be time-consuming or complex. In a small firm, one person may have to perform most of the functions necessary to implement a quality control system, or a firm may decide to retain the services of a qualified person outside the firm to provide this service.

Queries ?

Thank you27