SAFA-IFAC SMP Forum New Delhi, India October 10, 2014 Quality Control and Efficient Auditing CA.Narendra Bhattarai President, ICA Nepal

Contents

1.

What is Quality and Quality Audit ?

2.

3.

4.

5.

Quality Control Objectives of Quality Control Levels of Quality Control Ethical Requirements 6.

7.

8.

9.

10.

Quality Assurance Peer Review Cost of Quality Tools for Quality assurance and testing Quality Control Review Procedures: 2 stages 2

Theme

‘Compliance of ISA is essential to enhance the Quality, Credibility and Professionalism for the Auditors’

 According to ISQC 1 it is the objective of the firm to establish and maintain a system of quality control to provide it with reasonable assurance that:  The firm and its personnel comply with professional standards and applicable legal and regulatory requirements; and  Reports issued by the firm or engagement partners are appropriate in the circumstances.

What is Quality ?

 The International Organization for Standardization (ISO) defines

quality

as an essential or distinctive characteristic, property, or attribute of a product or service. It is the degree to which a set of inherent characteristics of a product or services that fulfils its requirements ” (ISO9000:2000).

 Quality is based on: 

Conformance to requirements



Fitness for use

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What is Audit Quality?

 Audit quality is indeed a complex and elusive concept. It has been much debated but it is still very little understood.

 Over the past 20 years, a number of researchers have tried to research and define audit quality. However, there is still no consensus on what audit quality is or how to measure it. That is because audit quality relies on perceptions, and those perceptions depend on whose views are taken into consideration.

 IAASB recently developed Framework for Audit Quality. It classifies those into inputs, outputs, interactions and contextual factors.

What is Audit Quality?

 The individual characteristics such as independence, objectivity, professional ethics and skepticism, specialist knowledge and the expertise of the auditor are important factors contributing to the quality of auditors’ judgment and therefore to audit quality.

 Similarly the perception of audit quality is affected by the auditor’s knowledge of the auditee, industry experience, compliance with auditing standards, auditor’s and audit firm’s ethics, and the economic independence of the auditor.

 Scope:  Reliability: Audit plan properly address all issues needed Audit findings truly reflect actual conditions, fully supported by the data and evidence.

 Timeliness: Audit results delivered at an appropriate time  Objectivity: Opinion purely on the facts and proper analysis, impartial and fair manner  Clarity: Audit report clear and concise, easily understood  Significance: Important matter was examined  Efficiency: Resources assigned reasonable  Effectiveness: Findings and recommendations get an appropriate response, desired impact achieved.

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Input • Capacity of Audit Team – Knowledge, Skill, Expertise, Time and Money • Audit Standards, Audit Manual, Computer, EWP, CAATs, and Software • Integrity, Independence, Professional Ethics and Fairness Process • Audit Practices and Procedures (compliance with standard, manual) • Audit Planning and Execution complying Audit Process as per Standards • Supervision, Monitoring and Quality Review Output • Audit Report with Recommendations and Information • Propriety of use of resources, 3Es, Compliance as sought by relevant Acts Outcome • Audit Result and Impact • Consideration on Audit Report by Stakeholders – public, shareholders • Contribution to improve corporate governance 8

Quality Control

 Quality control (QC) is a procedure or set of procedures intended to ensure that a manufactured product or performed service adheres to a defined set of quality criteria or meets the requirements of the client or customer. QC is similar to, but not identical with, quality assurance (QA).

 The quality control process consists of the systems and practices designed to ensure that all phases of an audit (planning, execution, reporting, and follow up) are carried out in compliance with the ISA's rules, practices, and procedures.  A quality control system should ensure that audits are timely, comprehensive, adequately documented, and performed and reviewed by qualified staff.

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Audit Firm establishes and maintains a system of quality control:  To ensure compliance with the professional standards, rules, and procedures  To ensure that the audit reports and

other products

are of a high standard and meet the requirements of the stakeholders 11



Office wide quality control requirements – Firm Level



Quality control of individual audit engagement level

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    Elements of QC:    Leadership Responsibilities for Quality Within the Firm Relevant Ethical Requirements Acceptance and Continuance of Client Relationships and Specific Engagements Human Resources Engagement Performance (Planning - Follow up) Monitoring Documentation (These elements should be defined, documented and communicated to all level) 13

 Quality Control should be implemented with respect to day-to-day operations in the following aspects of the audit process:   selecting matters for audit; deciding the timing of the audit;   planning the audit; executing the audit;   evaluating audit findings; reporting audit results, including conclusions and recommendations; and  following up audit reports to ensure that appropriate action is taken .

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Hot review

 Hot review is conducted during the audit work is conducted but before the auditor’s report is issued with a prime objective to ensure compliance with relevant auditing standards and achieving engagement’s objectives

Cold Review

 Cold review is conducted with a view to check for the weaknesses in the firm’s quality control procedures and system, proficiency of audit team members and how they can be improved to make later audit assignment more effective and efficient.

Code of Ethics: Values and Principle of Auditing

1.Trust, Confidence and Credibility 2.Integrity; Objectivity; and Professional behavior.



3.Independence, Objectivity and Impartiality

Financial, business, employment and personal relationships   Employment with audit assurance clients Long Association of Senior Personnel with Assurance Clients   Gifts and hospitality Activities Incompatible with the Practice of Public sector audit 4.Professional Secrecy and

Confidentiality; 5.

Professional competence and due care;

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Quality Assurance

 QA is defined as a procedure or set of procedures intended to ensure that a product or service under development (before work is complete, as opposed to afterwards) meets specified requirements. QA is sometimes expressed together with QC as a single expression, quality assurance and control (QA/QC).

 Quality assurance is an assessment process focusing on the establishment and operation of the quality control system. It is a review completed after the audit by persons who are independent of the audit under review. Quality assurance necessarily involves the examination of specific audits . However, the purpose of the review is not to criticize specific audits. Rather, it is to determine what controls were intended to be applied to those audits, how those controls were implemented , any gaps in the controls , and other ways of improving the audit quality system.

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Quality Assurance is the process established by a firm to ensure that:  the firm and its personnel have adhered to professional standards and applicable legal and statutory requirements;  necessary quality controls are in place;  quality controls are being properly implemented; and  potential ways of strengthening or improving quality controls are identified.

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Peer Review

Peer as per dictionary meaning:- A person who is of equal

standing with another in a group

   

Peer Review?

Peer review refers to a review of a firm by one or several other firms. They volunteer to conduct or undergo such a review exercise.

Reviewer Firm do not have any power of enforcing the results of the peer review rather it is reported to Institute (ICAN).

The Reviewer Firm are free to decide on the contents and exercise of the peer review as well as on the use of the findings generated based on the guidelines given by ICAN.

The result of Peer Review is not that encouraging and therefore ICAN is moving towards forming AQA Board.

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 The

cost of quality

conformance plus the cost of nonconformance.

is the cost of 

Conformance

products that meet requirements and fitness for use.

means delivering 

Cost of nonconformance

responsibility for failures or not meeting quality expectations.

means taking 22



Prevention cost

: Cost of planning and executing audit so it is error-free or within an acceptable error range.



Appraisal cost

: Cost of evaluating audit processes and their result to ensure quality.



Internal failure cost

gone to public.

: Cost incurred to correct an identified errors before the audit reports are issued and 

External failure cost

: Cost that relates to all errors not detected and corrected before issuance of the report. 

Measurement and test equipment costs

activities.

: Capital cost of equipment used to perform prevention and appraisal 23

Maturity Model

 Maturity Model is used to benchmark the capability of an organization in terms of People, Processes and Technology to effectively produce high quality product and services.

 The maturity model is focused on understanding current challenges and introducing efficiencies pertaining to People, Process and Technology to maximize on investments made into quality assurance and testing to achieve high capability to produce high quality product and services.



Maturity models

are the frameworks for helping organizations improve their processes and systems.

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 Excellence Model is a practical tool to help organizations do this by measuring where they are on the path to excellence; helping them understand the gaps; and then stimulating solutions.

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Quality Control System in SMP

 The nature, extent, and documentation of the quality control policies and procedures that firms develop will vary and depend on many factors, including the size and nature of the firm and its operating characteristics.  Effective policies and procedures do not need to be time-consuming or complex. In a small firm, one person may have to perform most of the functions necessary to implement a quality control system, or a firm may decide to retain the services of a qualified person outside the firm to provide this service.

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