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SA 220 — Quality Control for Audit of Financial Statements

Imagine you're the senior partner at a CA firm and you've just signed off on Rajesh & Co. Pvt. Ltd.'s audit report. Six months later, NFRA comes knocking because the audit was shoddy — wrong figures, team members had no clue what they were doing. SA 220 exists precisely to prevent this nightmare. It puts the responsibility for audit quality squarely on the Engagement Partner (EP) and, behind them, the audit firm itself.

Here's the core idea: SA 220 says the engagement partner must be satisfied that the entire audit team followed ethical requirements (independence, objectivity), that the right people with the right skills were assigned, that their work was properly supervised and reviewed, and that appropriate consultation happened when tricky issues arose. The firm, in turn, must have a System of Quality Management (SQM) — think of it as the firm's rulebook for how every audit should be run. SA 220 links the individual engagement to that firm-wide rulebook.

The standard has four big pillars you must know for the exam. First, the EP takes overall responsibility — not the team, not the manager, the partner. Second, ethical requirements — including independence — must be confirmed before and during the engagement. If a conflict is spotted (say, the audit manager owns shares in the client company), it must be resolved or the firm withdraws. Third, the EP must ensure the team has the competence and capability for the job — you can't send a first-year articleship student to handle a ₹500 crore listed company audit alone. Fourth, for listed entities or high-risk engagements, an Engagement Quality Review (EQR) is mandatory — a second, independent partner reviews significant judgements before the report is signed. This is asked frequently as a 5-mark theory question: 'What is EQR and when is it required?' The answer: it's an objective evaluation of significant judgements by an Engagement Quality Reviewer (EQR), required for listed entities and determined by firm policy for others. The report cannot be signed until the EQR is complete.

📊 Worked example

Example 1: Identifying an EQR requirement

Scenario: CA Priya is the Engagement Partner for the statutory audit of Mehta Pharmaceuticals Ltd., a company listed on NSE with a turnover of ₹320 crores. Her audit manager, Rohan, suggests they skip the Engagement Quality Review to save time since the deadline is tight.

Working:

Step 1 — Determine if EQR is mandatory.

Mehta Pharmaceuticals Ltd. is a listed entity → SA 220 makes EQR mandatory without exception.

Step 2 — Assess Rohan's suggestion.

Skipping EQR for a listed entity violates SA 220 directly. No time pressure justifies this.

Step 3 — Consequence if skipped.

CA Priya cannot date or sign the audit report until EQR is completed. Signing without EQR exposes her and the firm to NFRA disciplinary action.

Answer: EQR cannot be skipped. CA Priya must arrange for an Engagement Quality Reviewer (a partner not involved in the engagement) to review significant judgements before signing.

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Example 2: Independence threat resolution

Scenario: During the audit of Sunrise Textiles Pvt. Ltd. (audit fee: ₹8 lakhs), CA firm notices that one of its audit managers, Ms. Sunita, holds 500 shares worth ₹75,000 in the client company. The audit is in its second week.

Working:

Step 1 — Identify the threat.

Ms. Sunita has a financial interest in the audit client → this is a self-interest threat to independence under ethical requirements linked by SA 220.

Step 2 — Apply SA 220 requirement.

The EP must ensure all team members meet independence requirements. This threat is identified mid-engagement.

Step 3 — Resolution options.

Option A: Ms. Sunita divests the shares immediately and documents this → threat eliminated, she may continue.

Option B: Ms. Sunita is removed from the engagement team.

Answer: The firm must act — either Ms. Sunita sells her shares before continuing, or she is replaced. Doing nothing and continuing the audit violates SA 220 and independence standards. Document all steps taken.

⚠️ Common exam mistakes

  • Confusing SA 220 with SQM (SQMS 1). Students mix these up. SA 220 applies at the individual engagement level — it's the partner's responsibility for one specific audit. SQMS 1 (formerly SQC 1) is the firm-wide system. SA 220 links to the firm's SQM but is not the same standard.
  • Thinking EQR is required for all audits. It is mandatory only for listed entities. For unlisted or non-public interest entities, EQR depends on firm policy or specific risk factors. Don't write 'EQR is always required' in your answer.
  • Assuming the audit manager is responsible for quality. SA 220 is crystal clear — the Engagement Partner bears overall responsibility. Managers supervise and execute, but accountability for quality sits with the EP.
  • Forgetting that the audit report cannot be signed before EQR is complete. Students write that EQR happens 'during' the audit without noting this hard stop. The EQR must be finished and the reviewer must confirm no unresolved issues before the report date.
  • Missing the 'consultation' angle. SA 220 requires the EP to ensure difficult or contentious matters are consulted upon (internally or with external experts) and that conclusions are documented. Don't skip this in theory answers — examiners specifically look for it.
📖 Reference: SA 220 — Institute of Chartered Accountants of India
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