Audit quality is a crucial concept that ensures confidence in the financial reporting process. The standards that directly address audit quality include SQC 1 and SA 220. These standards provide the framework and detailed guidance for establishing and maintaining quality control systems at both the firm level and at the individual audit engagement level. SQC 1 applies to all types of engagements and sets requirements for quality control at the firm level. In contrast, SA 220 focuses on the responsibilities of the engagement partner and the engagement team in implementing quality control procedures on a specific audit engagement. In addition to SQC 1 and SA 220, the overall audit quality process is also influenced by other Standards on Auditing, the Code of Ethics issued by the Institute of Chartered Accountants of India, and certain provisions of the Companies Act, 2013. These standards collectively help create a culture of quality in audit firms. There are also mechanisms established for the review and oversight of quality control by regulatory and professional bodies such as the Peer Review Board, the Quality Review Board, and the National Financial Reporting Authority. These bodies periodically assess whether audit firms are maintaining an effective system of quality control.
SQC 1 and the Firm-Level Quality Control Framework
The purpose of SQC 1 is to require audit firms to establish and maintain a system of quality control. The objective of this system is to provide reasonable assurance that the firm and its personnel comply with professional standards and applicable legal and regulatory requirements. It also ensures that the reports issued by the firm or its engagement partners are appropriate in the circumstances. SQC 1 applies to all firms regardless of their legal form, size, or nature of engagements. The system of quality control must consist of policies and procedures designed to achieve the overall objective of audit quality.
Elements of a Quality Control System
The elements that comprise a quality control system under SQC 1 include leadership responsibilities for quality within the firm, compliance with ethical requirements, acceptance and continuance of client relationships and specific engagements, human resources, engagement performance, and monitoring. Each of these elements requires the establishment of documented policies and procedures that are communicated to all relevant personnel within the firm.
Leadership Responsibilities for Quality
Audit firms need to establish procedures that promote a culture recognizing that quality is fundamental in the performance of audit and assurance engagements. These policies should require the firm’s chief executive officer or managing partner to assume ultimate responsibility for the firm’s quality control system. In cases where someone other than the CEO is assigned operational responsibility for the system of quality control, that person must have sufficient and appropriate experience, authority, and ability to carry out that responsibility effectively. One of the key considerations is ensuring that the firm’s management structure does not allow commercial interests to override audit quality. The firm should demonstrate its commitment to quality through its actions, decisions, and the resources it allocates for the development and documentation of quality control procedures.
Upholding Quality through Pre-engagement Considerations
Before accepting any new engagement, a firm must gather adequate information about the potential client. This includes understanding the integrity of the client, its promoters, and key managerial personnel. The firm must also assess whether it has the capabilities, resources, and competence to perform the engagement. Ensuring compliance with ethical requirements is another critical factor. These assessments help the firm to avoid associating with clients who may pose risks to audit quality or professional reputation.
Ethical Requirements in Audit Quality
Maintaining ethical standards is vital for preserving public trust in the auditing profession. Audit firms must establish policies and procedures that provide reasonable assurance of compliance with ethical requirements. The fundamental principles of professional ethics include integrity, objectivity, professional competence and due care, confidentiality, and professional behavior. These principles must be instilled within the firm through leadership actions, training, awareness campaigns, and regular monitoring. There should also be a clear and well-documented process to address situations of non-compliance with ethical requirements.
Maintaining Independence and Managing Threats
Independence is one of the most important ethical requirements for auditors. Audit firms must establish policies that ensure the firm, its personnel, and, where applicable, others such as experts or network firm personnel, maintain independence as required by the Code of Ethics. These policies must help communicate independence requirements to personnel, identify threats to independence, and implement safeguards or appropriate actions to eliminate or reduce such threats to an acceptable level. When threats cannot be mitigated, withdrawal from the engagement may be necessary. A formal mechanism must exist whereby engagement partners provide relevant information about engagements, and all personnel are required to promptly report circumstances that threaten independence. Any breaches must be notified to the firm without delay, and appropriate remedial action must be taken. Audit firms are required to obtain written confirmation of independence from all relevant personnel at least annually.
Addressing Familiarity Threats
The familiarity threat arises when audit personnel become too familiar with a client due to long-term association, potentially impairing independence. Firms should develop criteria to assess the need for safeguards. Factors considered include the nature of the engagement, its public interest, and the length of service of senior engagement team members. Safeguards may include rotating senior personnel or involving an engagement quality control reviewer. This threat is particularly significant for audits of financial statements of listed entities. For such audits, engagement partners must generally be rotated after a maximum period of seven years. In cases where listed entities are audited by sole practitioners, a mandatory peer review mechanism is used to ensure quality control.
Client Acceptance and Continuance Procedures
Before accepting a new client or continuing with an existing one, audit firms must obtain information necessary for evaluating whether to proceed. This includes assessing the integrity of the client and its leadership, the firm’s competence and resource availability, and compliance with ethical standards. If any issues arise during this process, the firm must document how those issues were resolved. Conflicts of interest must be resolved before accepting any engagement. If the firm later obtains information that would have caused it to reject the engagement initially, it should reconsider whether to continue the engagement or withdraw. The firm must evaluate its legal and professional responsibilities in such situations, including whether it is required to inform regulatory authorities or the appointing party.
Assessing Client Integrity
When evaluating the integrity of a client, firms must consider factors such as the identity and reputation of the client’s owners and management, the nature of its operations and business practices, its approach to accounting standards and internal control, and any involvement in unethical or illegal activities such as money laundering. Other indicators may include pressure to reduce fees, limitations placed on audit scope, and reasons for the change in audit firms. Knowledge of client integrity generally grows with continued professional relationships, but firms must exercise due care from the outset.
Assessing Competence and Capabilities to Accept Engagements
The firm must assess whether it possesses the necessary knowledge, industry expertise, personnel, and external resources to perform the engagement effectively. This includes having adequate knowledge of industry-specific regulations, skilled personnel with the necessary expertise, and access to individuals qualified to perform engagement quality control reviews. The firm must also ensure that it can complete the audit within the required deadlines. If the necessary resources or competencies are unavailable, the firm should decline the engagement.
Human Resource Policies in Support of Audit Quality
A firm’s quality control system must include policies to ensure the recruitment, development, and retention of personnel who possess the necessary technical competence, ethical commitment, and professional experience. This is essential to perform high-quality engagements and issue appropriate audit reports. The assignment of engagement teams must be done carefully, with the firm assigning a specific engagement partner for every engagement. The identity and role of the engagement partner should be communicated clearly to the client’s management and those charged with governance. The partner must have the necessary capabilities, authority, and time to carry out the engagement and fulfill responsibilities effectively.
Engagement Performance and Consistency in Execution
Consistency in engagement performance is crucial for quality. This is achieved by clearly briefing teams on the objectives of the engagement, providing instructions for compliance with applicable standards, and supervising team activities appropriately. Training, regular performance reviews, and thorough documentation of work performed are essential. When difficult or complex issues arise during an engagement, appropriate consultation is vital. Consultation must be conducted with individuals who possess suitable experience and knowledge, whether within or outside the firm. External advisory services may be used when internal expertise is unavailable. All consultations should be properly documented, and conclusions implemented accordingly.
Engagement Quality Control Review and Independent Evaluation
An engagement quality control review involves an independent review of significant judgments made in an engagement before the auditor’s report is issued. The extent of the review depends on the complexity of the engagement and the associated risks. It is mandatory for all audits of financial statements of listed entities. For other engagements, the firm should define criteria for determining when an EQCR is required. The review must assess matters such as independence evaluations, significant risks, judgments regarding materiality, consultations, misstatements, communication with management and those charged with governance, and whether the working papers support the conclusions reached. The reviewer must be suitably qualified and independent from the engagement team. The firm’s policies must ensure that objectivity is maintained and provide for the replacement of the reviewer where required.
Addressing Differences of Opinion in Engagements
Differences of opinion may arise within the engagement team, between the team and the EQC reviewer, or with those consulted. Such differences must be resolved before the auditor’s report is issued. If the engagement partner does not agree with the recommendations of the reviewer and the matter remains unresolved, the issue should be escalated to another independent party, such as another practitioner or regulatory authority. The engagement report should not be finalized until the matter is resolved satisfactorily.
Documentation of Engagements and Review Process
Firms must establish policies and procedures for assembling final engagement files within a reasonable timeframe after completing the engagement. The documentation should be finalized within 60 days of the date of the auditor’s report. If multiple reports are issued on the same subject matter, each set of documentation must be finalized independently. Engagement documentation must be maintained securely, with attention to confidentiality, integrity, accessibility, and retrievability. Unless specified otherwise by law, engagement documentation belongs to the firm. Portions may be shared with the client if doing so does not compromise the integrity or independence of the engagement. For audit engagements, documentation should be retained for at least seven years from the date of the auditor’s report or the group auditor’s report, whichever is later. Documentation related to EQCR must demonstrate that the procedures were performed, that the review was completed before the report was issued, and that no unresolved issues remain that could affect the appropriateness of the report.
Monitoring the System of Quality Control
Monitoring is a critical component of the firm’s system of quality control. The objective of monitoring is to provide reasonable assurance that the quality control policies and procedures are relevant, adequate, and operating effectively, and that they are being complied with in practice. This process involves both ongoing consideration and evaluation of the system, including periodic inspections of a selection of completed engagements. Effective monitoring helps identify areas where the system may be failing or needs improvement and provides a basis for making necessary changes.
Designing a Monitoring Process
To ensure the quality control system functions as intended, the firm must establish a systematic approach to monitoring. This includes designing and implementing procedures to assess whether the firm’s quality control policies are properly designed and operating effectively. The process should involve evaluating whether the latest changes in professional standards and legal or regulatory requirements have been reflected in the firm’s internal policies. The monitoring process must be objective and must be assigned to individuals with sufficient experience, authority, and independence from the engagements being reviewed.
Responsibilities in the Monitoring Process
The responsibility for monitoring should rest with an individual or group within the firm thatpossesses the requisite authority and competence. This person must be independent of the performance of the engagements being reviewed. If a firm lacks sufficient internal resources, it may seek external assistance from other firms or professionals, provided that independence and objectivity can be maintained. The monitoring process must include mechanisms for addressing complaints or allegations concerning non-compliance with professional standards or firm policies. These mechanisms should ensure that appropriate actions are taken in response to identified deficiencies.
Addressing Monitoring Findings
When deficiencies in the design or operation of the firm’s system of quality control are identified, or when individuals fail to comply with established policies and procedures, the firm must take appropriate remedial actions. These actions may include revising the quality control policies, enhancing training, reassigning personnel, or taking disciplinary steps. It is also important to maintain documentation of the monitoring process, findings, and actions taken in response. The firm must evaluate whether deficiencies are isolated or systemic and adjust its procedures accordingly to prevent recurrence.
Evaluating the Effectiveness of Quality Control
The effectiveness of the quality control system is not only measured by compliance but also by its ability to continuously adapt and respond to changing circumstances. A well-functioning system includes periodic evaluations of whether the firm’s policies remain appropriate given new standards, client demands, or external developments. Evaluation may include assessing whether staff have been properly trained, whether leadership has reinforced a quality-focused culture, and whether resources are sufficient to support the performance of high-quality audits. Firms should establish formal mechanisms for internal feedback, regular peer review, and opportunities for quality improvement based on observed weaknesses.
SA 220 and Quality Control at the Engagement Level
While SQC 1 applies at the firm level, SA 220 applies at the engagement level. The standard places specific responsibilities on the engagement partner to implement quality control procedures for individual audits. These procedures aim to provide reasonable assurance that the audit complies with professional standards and legal and regulatory requirements, and that the audit report is appropriate in the circumstances. The engagement team must work within the framework of the firm’s quality control system but must also tailor procedures based on the specific nature of each audit engagement.
Leadership Responsibilities of the Engagement Partner
The engagement partner plays a central role in ensuring quality control at the engagement level. This includes taking overall responsibility for the quality of each audit engagement and setting the tone for the engagement team. The engagement partner must emphasize the importance of complying with professional standards and applicable laws and regulations, as well as the firm’s internal quality control policies. The engagement team must be encouraged to raise concerns about quality or ethical issues without fear of retaliation. A culture of quality must be fostered within the team by consistent messaging from leadership and by making quality an essential part of the team’s objectives.
Ethical Requirements under SA 220
The engagement partner is responsible for ensuring that all members of the engagement team comply with relevant ethical requirements. These include maintaining integrity, objectivity, professional competence, due care, confidentiality, and professional behavior. If a threat to ethical compliance arises that cannot be eliminated or reduced to an acceptable level through safeguards, the engagement partner must take appropriate action. This may include withdrawing from the engagement if permitted by law. All such issues must be documented, and if necessary, reported to the firm for further action.
Ensuring Independence at the Engagement Level
The engagement partner must form a conclusion regarding compliance with independence requirements specific to the audit engagement. This includes gathering relevant information from the firm or network firms, identifying and evaluating threats to independence, and implementing appropriate safeguards. The engagement partner must evaluate any breaches of the firm’s independence policies and determine whether they pose a threat to the integrity of the audit. If a breach cannot be resolved through safeguards, the engagement partner must consider whether withdrawal from the audit is appropriate and must report the issue to the firm immediately.
Evaluating Client Acceptance and Continuance
The engagement partner must ensure that proper procedures for client acceptance and continuance have been followed. This includes assessing whether the engagement team has the necessary competence, whether sufficient resources are available, and whether the engagement complies with ethical and professional standards. If the engagement partner becomes aware of information during the audit that would have led the firm to decline the engagement initially, that information must be communicated to the firm immediately. Together, the firm and the engagement partner must determine whether to continue or withdraw from the engagement based on the updated information.
Considerations in Accepting or Continuing an Engagement
Some key factors in determining whether to accept or continue with an audit engagement include the integrity and reputation of the client’s leadership, the firm’s capability to perform the audit, compliance with independence requirements, and the implications of past audit issues. If red flags such as aggressive accounting practices, refusal to share necessary documentation, or potential involvement in unlawful activities are present, these must be carefully evaluated. The decision to continue an engagement must be documented along with the rationale and steps taken to address any concerns.
Assigning a Competent Engagement Team
The engagement partner must ensure that the engagement team, including any external experts involved, has the appropriate competence and capabilities to perform the audit effectively. The team should have adequate industry knowledge, technical expertise, and familiarity with applicable laws and standards. The partner must also ensure that engagement roles and responsibilities are clearly defined and that team members understand the scope of the audit and their contributions. The performance of team members must be supervised and reviewed at appropriate stages to ensure consistent quality.
Direction, Supervision, and Review
The engagement partner is responsible for directing, supervising, and reviewing the work of the engagement team. Direction involves briefing the team about their responsibilities, the audit plan, the nature and timing of procedures, and key areas of focus. Supervision ensures that work is performed as planned, issues are resolved timely manner, and that team members are provided with support and guidance. Review ensures that audit documentation is complete, that sufficient appropriate audit evidence has been obtained, and that the conclusions reached are sound. Before issuing the audit report, the engagement partner must review the audit documentation and confirm that it supports the conclusions reached.
Adequacy of Audit Evidence
One of the key responsibilities of the engagement partner is to ensure that sufficient appropriate audit evidence has been obtained. This evidence must support the auditor’s opinion as expressed in the audit report. The partner must be satisfied that all necessary audit procedures have been performed and that significant findings are properly documented and addressed. If any material misstatements or limitations on the scope of the audit are identified, these must be resolved before the report is finalized. Where differences of opinion or complex issues arise, the engagement partner must ensure proper consultation is undertaken.
Consulting on Difficult or Contentious Matters
During an audit, the engagement team may encounter complex accounting, auditing, or ethical issues. The engagement partner must ensure that these matters are appropriately addressed through consultation. Consultation should be conducted with individuals having relevant experience and expertise either within or outside the firm. The engagement team must implement the conclusions arising from consultation, and proper documentation of the issues, advice received, and decisions made must be maintained. The consultation process helps maintain audit quality and ensures that contentious matters are resolved appropriately.
Role and Responsibilities of the EQC Reviewer under SA 220
In audits that require an engagement quality control review, the engagement partner must cooperate with the reviewer to facilitate the review process. The EQC reviewer conducts an objective evaluation of the significant judgments made by the engagement team and the conclusions reached. This review must be completed before the auditor’s report is issued. It involves discussions with the engagement partner, a review of the financial statements, a proposed audit report, and selected documentation related to significant judgments. The reviewer evaluates whether the report to be issued is appropriate in the circumstances and whether the documentation supports the conclusions reached.
EQCR in Listed Entity Audits
In the case of listed entities, EQCR is mandatory. The review must include an evaluation of the firm’s independence, assessment of significant risks and responses, and evaluation of judgments relating to materiality and misstatements. The reviewer also ensures that proper consultations were held for difficult or disputed matters and assesses whether the audit documentation selected for review reflects the actual work performed. These reviews provide an additional safeguard for public interest entities and enhance confidence in the quality of audits. The reviewer must be independent of the engagement and must not be involved in the audit execution. Where the reviewer’s objectivity is in question, another qualified person must be assigned to perform the review.
Dealing with Differences of Opinion during the Audit
Differences of opinion may arise within the engagement team or between the team and those consulted, including the EQC reviewer. The engagement partner must ensure these differences are resolved before the audit report is issued. If an issue remains unresolved, the engagement partner should consult with other professionals within or outside the firm. If the reviewer does not agree with the conclusions and believes the report should not be issued, the engagement partner must either resolve the matter to the reviewer’s satisfaction or escalate the issue. Documentation of the nature of the disagreement and how it was resolved is necessary to support the final decision.
Documentation at the Engagement Level
The engagement partner must ensure that proper documentation is maintained to provide a clear understanding of the work performed, evidence obtained, and conclusions reached. Engagement files must be assembled promptly after the audit report is finalized, generally within 60 days. The documentation must be complete and enable an experienced auditor, with no prior connection to the audit, to understand the nature, timing, and extent of audit procedures, results obtained, and conclusions reached. The engagement team must ensure that the documentation is sufficient to support the auditor’s report and to facilitate effective monitoring and review. Confidentiality, safe custody, and accessibility of engagement documentation must be maintained. Files must be retained for at least seven years or longer if required by law or regulation. Documentation related to the engagement quality control review must indicate that the review was completed before the audit report was issued and that the reviewer had no unresolved concerns.
Documentation and Monitoring Requirements
The importance of documentation in ensuring audit quality cannot be overstated. Documentation serves as the evidence of compliance with SQC 1 and SA 220 and is crucial for both internal and external reviews. As per SQC 1, the firm shall establish policies and procedures requiring appropriate documentation of the policies and procedures related to quality control. This includes documentation of matters that are significant in providing evidence of the operation of each element of the system of quality control. For instance, the firm must maintain records of the independence confirmations received from personnel, decisions related to the acceptance and continuance of client relationships, and the resolution of differences of opinion. In addition, audit documentation should demonstrate that the audit was planned and performed by SAs and applicable legal and regulatory requirements. SA 220 further emphasizes the need for timely completion of audit documentation and for the engagement partner to be satisfied that sufficient appropriate documentation exists to support the auditor’s report. Monitoring is another essential component of a firm’s system of quality control. SQC 1 requires the firm to establish a monitoring process designed to provide reasonable assurance that the policies and procedures relating to the system of quality control are relevant, adequate, operating effectively, and complied with in practice. This includes an ongoing consideration and evaluation of the firm’s system of quality control. The monitoring process must include inspection procedures, such as periodic inspection of selected completed engagements, to provide evidence of compliance. The monitoring process should be objective and conducted by individuals who are not involved in performing the engagements being reviewed. In larger firms, this could involve a dedicated quality control department, while in smaller firms, external consultants might be engaged to perform such reviews. It is important that deficiencies identified through the monitoring process are communicated to appropriate personnel and that appropriate remedial actions are taken. SA 220 complements this requirement by emphasizing the engagement partner’s role in addressing issues identified during the engagement that indicate deficiencies in the firm’s quality control policies and procedures.
Ethical Requirements and Independence
Ethical requirements, particularly those relating to independence, are at the core of audit quality. SQC 1 mandates that the firm shall establish policies and procedures designed to provide it with reasonable assurance that the firm and its personnel comply with relevant ethical requirements. These requirements include integrity, objectivity, professional competence and due care, confidentiality, and professional behavior. Independence, both in mind and in appearance, is critical to the auditor’s ability to express an unbiased opinion. SQC 1 requires firms to obtain written confirmation, at least annually, of compliance with the firm’s policies and procedures on independence from all firm personnel required to be independent. SA 220 reinforces the importance of independence at the engagement level. It requires the engagement partner to form a conclusion on compliance with independence requirements that apply to the audit engagement. If threats to independence are identified, the engagement partner must evaluate the significance of the threats and apply appropriate safeguards to eliminate the threats or reduce them to an acceptable level. Furthermore, when independence issues arise, proper documentation and resolution are required. Both SQC 1 and SA 220 emphasize that threats to independence should be addressed promptly and appropriately, and such issues should be communicated to those charged with governance when necessary. Maintaining independence is not a one-time activity but a continuous process throughout the audit engagement. The auditor must continually assess threats and ensure that safeguards are effective and adequate.
Differences of Opinion and Resolution
Differences of opinion may arise during an audit, whether between the engagement team members or between the engagement team and the engagement quality control reviewer or other firm personnel. SQC 1 requires the firm to establish policies and procedures for resolving differences of opinion. These policies should ensure that conclusions reached are documented and implemented and that the report is not issued until the matter is resolved. The engagement team must be encouraged to consult with others within the firm when differences arise. The policies should also provide a clear process for consultation and resolution, including escalating the matter to higher levels within the firm if necessary. The objective is to arrive at a well-considered conclusion that is in line with professional standards and firm policies. SA 220 specifically requires the engagement partner to take responsibility for ensuring that differences of opinion are resolved by the firm’s policies and procedures. The engagement partner must be satisfied that sufficient consultation has taken place and that the resolution is properly documented. It is also necessary for the firm to create an environment that promotes consultation without fear of negative consequences, encouraging open dialogue and professional skepticism. This is especially important when dealing with complex or judgmental issues that may impact the auditor’s opinion.
Leadership Responsibilities and Ethical Culture
Strong leadership is essential to establish and maintain an effective system of quality control. SQC 1 places the ultimate responsibility for the firm’s system of quality control on the firm’s leadership. The firm must promote an internal culture that recognizes that quality is essential in performing engagements. The tone at the top significantly influences the behavior of all personnel and sets expectations for ethical conduct, quality, and professional competence. Leaders must consistently communicate the importance of quality and the need to comply with professional standards and ethical requirements. SA 220 supports this view by assigning ultimate responsibility for audit quality to the engagement partner. The engagement partner must take responsibility for the overall quality of each audit engagement and ensure that the audit is performed by professional standards and regulatory and legal requirements. The partner must also ensure that the audit report issued is appropriate in the circumstances. Leadership’s role also includes investing in training, resources, and support systems necessary to maintain high audit quality. This includes updating staff on new developments in auditing standards and regulatory changes. Ethical behavior and competence should be reinforced through continuous professional education and performance evaluations. Firms that succeed in embedding quality into their organizational culture are more likely to produce consistently high-quality audits.
Responsibilities of the Engagement Partner under SA 220
The engagement partner has a critical role in promoting audit quality throughout the engagement. SA 220 emphasizes their responsibility for:
- Ensuring that the engagement team collectively possesses the appropriate competence and capabilities.
- Leading by example, especially in matters of ethics and professional conduct.
- Taking responsibility for the overall quality of the audit engagement.
- Communicating clearly to the team the importance of quality, objectivity, and compliance with professional standards.
- Reviewing critical audit areas and audit documentation to ensure sufficient and appropriate audit evidence has been obtained.
These responsibilities underscore the importance of leadership in audit quality control. The engagement partner must not only supervise but also actively guide and support the team.
Ethical Requirements and Independence
SA 220 mandates compliance with the relevant ethical requirements, particularly independence. The engagement partner must remain alert to circumstances that may threaten independence and take appropriate action to eliminate or mitigate such threats.
The partner should:
- Obtain relevant information from the firm and, when applicable, from network firms.
- Evaluate information on identified threats to independence.
- Implement safeguards or decline/withdraw from the engagement if threats cannot be reduced to an acceptable level.
Maintaining independence in both fact and appearance is crucial for the credibility of the audit.
Acceptance and Continuance of Client Relationships
Before accepting or continuing an audit engagement, the engagement partner must consider whether:
- The firm and the engagement team can comply with ethical requirements, including independence.
- The engagement team has the necessary competence, time, and resources.
- The integrity of the client’s management supports continued engagement.
These factors ensure that the firm does not compromise audit quality for commercial or other reasons.
Engagement Performance
The engagement partner must take responsibility for:
- The direction, supervision, and performance of the audit engagement.
- Ensuring that reviews are conducted by professional standards.
- Addressing significant matters arising during the engagement.
This includes resolving differences of opinion, ensuring adequate documentation, and reviewing judgments made by the engagement team, especially in areas involving significant risks or estimates.
Monitoring and Remedial Actions
SA 220 aligns with SQC 1 by reinforcing that findings from monitoring activities must be evaluated by the engagement partner. If issues are identified:
- The partner should determine their impact on the current engagement.
- Appropriate corrective action must be taken.
- Lessons should be fed back into the firm’s quality control systems.
Monitoring is not just a firm-level function; engagement-level action is also expected where relevant.
Documentation Requirements
SA 220 requires the audit documentation to demonstrate:
- That the engagement complied with professional standards and legal/regulatory requirements.
- That significant matters and judgments were properly addressed.
- Who performed and reviewed the work, along with the dates of completion.
Clear and complete documentation provides evidence that the audit was conducted by auditing standards. It also supports the conclusions reached and helps in quality reviews or regulatory inspections.
Relationship Between SQC 1 and SA 220
While SQC 1 lays down the firm-wide policies for quality control, SA 220 focuses on the application of those policies at the individual engagement level. Together, they create a cohesive quality framework.
Key interrelations include:
- SA 220 relies on firm-level procedures in SQC 1 to establish ethical guidelines, monitoring, and resource allocation.
- SQC 1 expects engagement teams to provide feedback and adhere to policies, as operationalized through SA 220.
- The monitoring and remedial actions in SQC 1 are executed partly through engagement-level compliance ensured by SA 220.
The complementary nature of the two standards ensures both the systemic and operational aspects of quality are addressed.
Implications for Audit Firms
Audit firms must integrate both standards into their practice to:
- Maintain audit credibility and professional reputation.
- Ensure compliance with regulatory frameworks.
- Reduce the risk of audit failures or professional negligence.
- Facilitate a culture of continuous improvement and accountability.
Small and mid-sized firms must especially ensure that even with limited resources, the core principles of both SQC 1 and SA 220 are not compromised.
Conclusion
The standards SQC 1 and SA 220 together serve as the backbone of audit quality control in India. SQC 1 provides a systemic foundation through firm-level policies and procedures, while SA 220 ensures those controls are applied effectively at the engagement level. Both standards demand a high level of ethical compliance, documentation, leadership responsibility, and monitoring. Adherence to these standards enhances not only regulatory compliance but also client trust and public confidence in the auditing profession.