Quality control reviews. (Management of an Accounting Practice)by Rullan, Jose A.
The nine elements of quality control are spelled out in the Statement of Quality Control Standards, No. 1, issued by the Quality Control Standards Committee of the AICPA. In this article, we discuss each of these elements by grouping them as Engagement and Practice controls. We review the goal of each element, discuss the process for addressing each element, and outline some tests to determine compliance (see Exhibit 1) with each element.
Six of the quality control elements address matters applicable to individual engagements. These engagement controls are essential to the overall quality of the firm's practice.
1. Independence. The goal of the independence quality control element is to assure that the firm and all of its members are, both in fact and in appearance, independent of the audit client and its financial decision-making employees. The ethical and legal consequences of non- independence are well known to the audit practitioner. Independence is one of the hallmarks of the public accounting profession, lending credibility to the work of its members.
The process to implement the independence standard requires that all members of the firm understand the importance and meaning of independence. It is necessary to define independence-related terms, such as investment, relationship, and materiality. It is also essential to keep the individual members of the firm current on the list of clients served by the firm.
2. Assignment of Personnel to Engagements. The assignment of personnel standard has as its goal the assurance that audit engagements are staffed by properly qualified and experienced personnel. To implement this standard, a process for reviewing engagement requirements and relating those requirements to the firm's staff must be established. The interplay of this standard with other standards (e.g., hiring, professional development, advancement) is obvious. The melding of all of the functional areas assists each of the individual areas. For instance, in order for the `assignment' function to work well, one must have good `hiring,' `advancement,' and `professional development' functions.
3. Consultation. This function deals with the professional assistance that the auditor seeks in making decisions concerning the technical areas of an engagement. It may come from fellow members of the firm, from outside professionals, and from written material used to support a position. The goal is to assure that such consultation does in fact occur when warranted, and that the level of consultation is appropriate in the circumstances.
To implement the consultation function, a firm should make certain that its professionals recognize the need to properly support decisions on technical matters. Professionals with particular technical expertise should be identified so that they can be consulted when appropriate.
4. Supervision. The supervision goal is to assure that staff at all levels in an engagement are afforded proper job monitoring. This is accomplished by providing for stratified levels of review within engagements, staffed by personnel qualified to review the work of subordinates.
5. Acceptance and Continuance of Clients. Firms must be selective in the decision to accept, or for that matter, to continue to serve a client. Procedures are needed to insure that the firm does not become involved with clients whose management lacks integrity. New clients must be properly evaluated, which includes a discussion with predecessor auditors. Continuing clients should be periodically reviewed, especially when relationships have changed as, for example, when new management is hired by the client.
6. Inspection. This quality control element is important in ensuring that the other quality control elements are in fact in place and functioning properly. The process requires a self-monitoring system which will promptly disclose the existence of any deficiencies in the quality control program, and provide for remedy of any such deficiencies. It may sometimes be necessary to seek assistance from professionals outside the firm.
The importance of sound practice controls is highlighted in GAAS, including the need to exercise due care in every engagement and to maintain independence from clients. However, the quality of the services provided by a firm can only be as good as the people used to provide those services. This requires that the firm be successful in attracting, using, and retaining qualified professional staff.
As indicated in Exhibit 1, there are three final elements that will determine a firm's success with professionally competent staff. These are the practice aspects of hiring practices and procedures, professional development policies, and philosophy and approach to performance evaluation and promotion.
7. Hiring. The desired result of a good hiring program is to attract only the most qualified individuals to the firm. Procedures to accomplish this objective consist of a statement of minimum acceptable requirements (e.g., bachelor's degree from an accredited college, stated grade point average, etc.), a provision for obtaining references and transcripts, and the delineation of the selection process.
8. Professional Development. Professional development includes the areas of training, both formal and on-the-job, and the individual professional growth of personnel. This task is best accomplished by providing appropriate training to each staff member according to needs, abilities, interests, and accomplishments. Of course, provision should also be made for their growth through constant participation in professional and technical group activities, such as seminars and CPA society committee participation.
9. Advancement. The goal of the advancement element of quality control is to ensure that those members of the firm who are selected for advanced positions possess the qualifications for their new responsibilities. It is imperative that advancement not be merely a reward for time served, but that it relate to a person's abilities to perform the new tasks. To accomplish this objective, the firm must carefully set out the criteria for each different level of responsibility within the firm, and then monitor the progress of staff members.
Typical Quality Control Deficiencies
Our experience in quality control reviews points to the lack of appropriate documentation of quality control plans, procedures, and reviews as the single most prevalent weakness of many firms. It is not unusual to find a clear understanding and desire for a strong quality control program, but for documentation to be completely lacking. Some additional recurring findings from quality control reviews are listed in Exhibit 2.
Results of peer reviews conducted to date indicate that just slightly over one percent of the reviews resulted in adverse opinions, and only ten percent required modified opinions. Furthermore, there are many sources of assistance available to help in implementing a quality control program. Merely performing a self-evaluation using the AICPA nine quality control standards can be a worthwhile start.
TYPICAL COMPLIANCE TESTS BY QUALITY CONTROL AREA
ENGAGEMENT CONTROLS: Independence
--how is the independence policy communicated to the staff
--how is the client list (and staff) kept current
--what is the involvement of (rules for) the nonprofessional staff regarding independence
--what are the documentation procedures relating to the independence function Assignment of Personnel
--how is the assignment of personnel accomplished in the firm
--are experience and skill levels addressed
--are continuity and rotation considered
--does the engagement partner have final say in the planned staffing
--how are these considerations and decisions documented Consultation
--what are the firm's procedures for consultation
--how are unresolved technical problems concluded
--how are specialized industry problems addressed
--is there an adequate technical library available to all staff
--what are the consultation documentation requirements Supervision
--does the audit plan delineate supervisory personnel on the engagement
--are these individuals available during the engagement
--is there indication of review of workpapers by supervisory personnel
--is the supervision of the work properly documented Acceptance and Continuance of Clients
--are company references obtained, especially as to key management
--is company history reviewed (and unusual trends evaluated)
--are predecessor auditor workpapers reviewed
--are relationships with key company management monitored for major changes in
--how are acceptance/continuance decisions documented Inspection
--is a formal inspection program available in the firm
--are the personnel responsible for the inspection program properly qualified for their
--are any deficiencies followed-up for proper resolution
--is the firm complying with any peer review requirements of its class of membership
in the AICPA
--how is the inspection process documented PRACTICE CONTROLS: Hiring
--do formal hiring procedures exist
--how are decisions made among candidates
--are transcripts, references, and previous employment records obtained and
--are recruiters trained to select qualified staff
--how is the process documented Professional Development
--is the firm training program monitored for quality and quantity, as well as for
appropriateness of coverage
--how is on-the-job training accomplished and monitored
--are technical pronouncements available to all staff
--are staff encouraged to participate in professional organizations (perhaps by
reimbursement of costs)
--how are training and development documented Advancement
--are firm policies on advancement delineated and available to all staff
--is there an evaluation/counseling system in place
--are staff evaluated by more than a single superior
--are goals set for individual staff to help them recognize and resolve any deficiencies
standing in the way of advancement
--how are advancement procedures documented
TYPICAL QUALITY CONTROL DEFICIENCIES
ENGAGEMENT CONTROLS: Independence
--dissemination of new client information left to word-of-mouth
--staff not clear on specific independence questions
--no regular monitoring of individual independence considerations Assigning Personnel to Engagements
--continuity and rotation of staff on engagements not addressed
--special skills needed for engagement not possessed by staff assigned Consultation
--specialized industry problems not addressed
--technical library outdated Supervision
--lack of adequate review of engagement progress
--engagement `in-charge' spread too thin to provide adequate supervision Acceptance and Continuance of Clients
--no contact with business community acquaintances of new client
--no formal review ever of a continuing client Inspection
--no established responsibility for the inspection function
--quality control reviews put off indefinitely due to time constraints PRACTICE CONTROLS: Hiring
--college transcripts not obtained to support staff members' preparation and
--insufficient documentation of follow-up of references
--recruiters not properly trained Professional Development
--adequate (or required level of) training not provided for or accomplished by staff
--professional activities not encouraged/supported Advancement
--staff unaware of specific advancement requirements
--no formal staff evaluation procedures
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