SQC 1 & SA 220 - Quality Control

# SQC 1 & SA 220 — Quality Control

## The big picture

Quality Control operates at two levels:

• Firm level (SQC 1) — covers the entire firm and ALL engagements (audit, review, other assurance, related services).
• Engagement level (SA 220) — covers a particular audit engagement.

> Key premise: SA 220 assumes the firm is already subject to SQC 1. SA 220 sits ON TOP of SQC 1.

## Objective of QC System (QCS)

Firms must establish a QCS providing reasonable assurance that:

• The firm complies with Professional, Regulatory & Legal (PRL) requirements.
• Reports issued are appropriate in the circumstances.

## The Six Elements (firm) vs Six Responsibilities (EP)

Use the same six headings — read 'firm' for SQC 1 and 'Engagement Partner' for SA 220:

1. Leadership responsibility for quality

2. Ethical requirements (incl. independence)

3. Acceptance & continuance of client relationships and engagements

4. Human Resources (SQC 1) / Assignment of Engagement Teams (SA 220)

5. Engagement performance

6. Monitoring

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## 1. Leadership Responsibilities for Quality on Audits

The Engagement Partner (EP) is personally responsible for overall quality on each audit. EP's actions must emphasise:

• Quality is essential.
• Compliance with PRL requirements.
• Compliance with the firm's QCS policies & procedures.
• The team's ability to raise concerns without fear of reprisals (punishment).
• Issuing audit reports appropriate in the circumstances.

## 2. Ethical Requirements — Independence is the core

The firm/EP must:

• Communicate independence requirements to personnel.
• Identify & evaluate threats to independence.
• Evaluate breaches and take action — apply safeguards or withdraw.
• Ensure breaches are promptly notified to the firm.
• Obtain a written confirmation of compliance with independence policies from all firm personnel at least annually.

## 3. Acceptance & Continuance of Client Relationships

Before accepting, gather info on:

• Integrity of the client.
• Competence (capabilities, time, resources).
• Compliance with ethical requirements.
• Significant matters from current/previous engagements.

If issues arise but the firm still accepts — document how issues were resolved.

### Matters re: integrity of client

• Reasons for proposed appointment / non-reappointment of previous firm.
• Nature of client's operations.
• Identity & business reputation of principal owners, key mgt, TCWG.
• Attitude of those parties towards control environment and accounting standards.
• Indications of inappropriate scope limitation.
• Aggressive fee minimisation by client.
• Indications of money laundering / criminal activity.

### When info points to DECLINING

• Consider PRL responsibilities — whether to report to appointing person / regulator.
• Consider possibility of withdrawing.

## 4. Human Resources

Sufficient personnel with capabilities, competence and commitment to ethical requirements.

## 5. Engagement Performance

### Consultation

Consultation takes place on difficult or contentious (controversial) matters — within or outside the firm.

### Engagement Quality Control Review (EQCR)

• Reviews significant judgments in the engagement.
• Does NOT reduce the EP's responsibilities.
• Mandatory for audits of listed entities. For others, the firm should form its own criteria.

EP's duties re: EQCR:

• Determine that an EQCR has been appointed.
• Discuss significant matters with the EQCR.
• Do not date the audit report until the EQCR is complete.

### Difference of Opinion

• May arise within the team, with consultants, or between the EP and EQCR.
• The audit report can only be issued after the difference is resolved.
• If EQCR's recommendations are not accepted and the matter is not resolved to the reviewer's satisfaction — escalate via firm's procedures (another practitioner, professional/regulatory body).

### Engagement Documentation

Maintain confidentiality, safe custody, integrity, accessibility and retrievability (mnemonic: C-SIAR).

## 6. Monitoring

Ensure QCS policies are relevant, adequate, operating effectively and complied with.

## EP Documentation Requirements

EP must document:

• Issues identified about compliance with ethical requirements & how resolved.
• Conclusions on compliance with independence requirements.
• Conclusions on acceptance & continuance.
• Nature & scope of consultations during the audit.