One of the root causes of negative regulatory inspection findings is the lack of appropriate involvement by engagement partners on engagements. There are also many instances where audit documentation does not reflect the application of appropriate levels of professional scepticism when auditing and exercising professional judgment. The new quality management standards place increased emphasis on these important aspects to achieve the appropriate level of engagement quality.
ISQM 1 para 31 requires firms to establish quality objectives that address the performance of quality engagements, including the following:
a. Engagement teams understand and fulfil their responsibilities, and engagement partners take overall responsibility for managing and achieving quality on engagements, and are sufficiently and appropriately involved throughout engagements
b. Appropriate direction and supervision of engagement teams, and review of the work performed, as well as documentation of the nature, timing and extent
c. Engagement teams exercise appropriate professional judgment and professional scepticism
d. Consultation is undertaken where knowledge and expertise to perform an aspect of audit procedures are not appropriate, and mutually agreed conclusions are implemented
e. Differences of opinion are brought to the attention of the firm and resolved, in terms of firm procedures
f. Engagement documentation is assembled, in terms of firm policy, and legal and regulatory requirements, in a timely manner after the date of the audit report, and access and integrity is appropriately controlled and retained, in terms of firm policy and relevant requirements.
ISQM 1 para 34(f) requires firms to establish policies or procedures that address engagement quality reviews, and requires such reviews for:
a. Audits of financial statements of listed entities
b. Audits or other engagements for which such a review is required by law or regulation
c. Audits or other engagements for which the firm determines that such a review is an appropriate response to address one or more quality risks.
The engagement partner must take responsibility for direction and supervision of the engagement team members, and review of their work. The nature, timing and extent of direction, supervision and review must be planned and performed, in line with policies and requirements, and should be responsive to the nature and circumstances of the audit, and resources assigned.
It is important that the engagement partner reviews audit documentation at appropriate points in time during the audit to ensure that the engagement team receives the necessary guidance and direction throughout the audit. This review focuses on significant matters, significant judgments, conclusions reached, and other matters considered relevant to the engagement partner’s responsibilities. Prior to dating the audit report, the engagement partner must review the financial statements and audit report, and determine whether sufficient appropriate audit evidence was obtained to support the conclusions reached and audit report to be issued. Any formal written communication to management, those charged with governance or regulatory authorities must also be reviewed by the engagement partner, prior to being issued.
The engagement partner must emphasise the importance of exercising professional scepticism throughout the audit, especially when applying professional judgment. Conditions and pressures may exist that impede the appropriate exercise of professional scepticism, and the team should consider possible actions to mitigate such impediments.
The engagement partner must ensure that the engagement team undertakes appropriate consultation, where necessary; agrees on the nature, scope and conclusions of consultations with the party consulted; and implements the conclusions.
If differences of opinion arise, the engagement team must follow firm policies, and procedures to deal with and resolve such differences. The engagement partner must ensure that such differences are addressed and resolved, conclusions reached are documented and implemented, and the audit report is only dated after the differences are resolved.
The engagement partner must also ensure that engagement quality reviews are performed when required, and only date the audit report after the engagement quality review is completed.
Common concerns identified
Audit regulators consistently find instances where audit documentation does not reflect the appropriate involvement of the engagement partner throughout the engagement. In many instances, the engagement partner only signed off all working papers on or very close to the audit report date. This raises the question whether the engagement partner provided timely supervision and direction to the engagement team, and reviewed the work appropriately. Evaluation of audit teams, and consideration of appropriate delegation of supervision and review to managers, or senior members of the engagement team need to be documented to support reduced supervision and review by the engagement partner.
Some concerns have been noted regarding the timely assembly of engagement documentation, thorough performance of engagement quality reviews and, occasionally, conclusions of consultations not appropriately implemented. One of the most common concerns reported by regulators, however, is the lack of adequate documentation to support professional judgments made and conclusions reached, and the lack of evidence to show that professional scepticism was applied. Auditors tend to reflect their conclusions, without adequately explaining the thought process applied. Furthermore, auditors tend to reflect management responses to issues raised, without documenting how these responses were challenged by the auditor and corroborated against other evidence.
One can clearly see that the engagement partner plays a crucial role in ensuring audit quality and, therefore, needs to be involved throughout the engagement to properly fulfil this role. Evidencing the application of appropriate levels of professional scepticism when making professional judgments also poses a challenge during the performance of engagements.
LEAF can assist firms with the assessment of engagement performance considerations through firm and engagement-level monitoring reviews, methodology design reviews, and staff training on the relevant requirements and procedures.
1. IAASB, ISQM 1: Quality management for firms that perform audits or reviews of financial statements, or other assurance or related services engagements
2. IAAS, ISA 220 (Revised): Quality management for an audit of financial statements