Audit and Assurance

How to Pass the ACA Audit and Assurance Module: Understanding Quality Management

Paradigm Shift

— 3 min read

Quality management is fundamental to the ACA Audit and Assurance module. This overview will guide you through the key elements and concepts of quality management, preparing you for success.

The Need for Quality Management

Assurance Report

  • Prepared to mitigate the risk of incorrect decision-making.
  • Ensures professional standards are upheld.

Quality Management

  • Linked to the public interest in audit and accountancy.
  • Aims to maintain high standards in engagements.
  • Emphasises continuous improvement through engagement quality reviews.

What Could Go Wrong?

Client Risks

  • Incompetence
  • Negligence
  • Misleading the audit team

Individual Auditor Risks

  • Lack of understanding of the client’s business
  • Inadequate work performance
  • Insufficient documentation

Supervisor Risks

  • Insufficient understanding and briefing
  • Inadequate supervision and communication

Engagement Partner Risks

  • Insufficient knowledge and team selection
  • Poor supervision and consultation
  • Inadequate review and conclusions

The Consequences of Quality Failure

Assurance Engagements

  • Provide reasonable, not absolute, assurance.
  • Require quality systems to prevent failures.

Regulatory Inspections

  • Conducted by ICAEW for non-listed companies.
  • Audit Quality Review team oversees listed companies.

Practice Assurance

  • Periodic reviews by ICAEW consultants.
  • Focus on constructive feedback and consultancy.

Consequences of Failure

  • Disciplinary actions, fines, and suspension of authorisation.
  • Potential catastrophic outcomes, including firm collapse.

Approach to Quality Management

Quality Management Standards

  • ISQM (UK) 1: Quality Management for Firms.
  • ISQM (UK) 2: Engagement Quality Reviews.
  • ISA (UK) 220 (Revised): Quality Management for Audits.

Applicability

  • ISQMs apply at the firm level to all engagements.
  • ISA (UK) 220 (Revised) applies to audits at the engagement level.

Objective of Quality Management

Risk-Based Approach

  • Requires assessment of specific quality risks.
  • Emphasises the System of Quality Management (SOQM).

Quality Objectives

  • Ensure compliance with professional standards and regulations.
  • Deliver appropriate engagement reports.

System of Quality Management (SOQM)

Definition

  • Designed to ensure firm and personnel responsibilities are met.
  • Operational responsibility may be delegated within the firm.

Components

  • Overlaps with ordinary ICAEW firm structure.
  • Focuses on the risk assessment process.

Component 1: The Firm’s Risk Assessment Process

Risk Assessment Structure

  • Establish Quality Objectives.
  • Identify Risks.
  • Respond to Risks.

Quality Objectives Elements

  • Governance and leadership.
  • Ethical requirements.
  • Acceptance and continuance.
  • Engagement performance.
  • Resources.
  • Information and communication.

Component 2: Governance and Leadership

Quality Objectives

  • Firm’s culture supports public interest and ethics.
  • Leadership accountability and commitment to quality.
  • Organisational structure supports SOQM.
  • Proper resource planning and provision.

Culture and Quality

  • Emphasises quality in strategic decisions.
  • Risks include multiple office firms or auditors of listed companies.

Component 3: Relevant Ethical Requirements

Ethics in Assurance Services

  • Essential for maintaining public trust.
  • Firm ensures compliance with ethical standards.

Quality Objectives

  • Personnel understand relevant ethical requirements.
  • Fulfilment of ethical responsibilities.

Sub-Objectives

  • Regular ethical update training for audit staff.
  • Prohibition on accepting gifts from clients.

Component 4: Acceptance and Continuance of Client Relationships and Specific Engagements

Importance of Acceptance Decisions

  • Balancing quality and ethics with commercial considerations.

Quality Objectives

  • Evaluate the client’s integrity and ethical values.
  • Ensure the firm can perform the engagement to required standards.
  • Avoid prioritising financial gain over ethical compliance.

Key Risks

  • Accepting clients or engagements without proper assessment.
  • Accepting engagements with insufficient expertise or inadequate fees.

Component 5: Engagement Performance

Focus on Engagement Teams

  • Ensures compliance with technical standards through organisation and performance.

Quality Objectives

  • Teams understand and fulfil responsibilities.
  • Apply professional judgement and scepticism.
  • Ensure appropriate consultation and review.

Engagement Partner’s Role

  • Directs the overall strategy, delegating to senior team members as needed.
  • Tracks engagement progress and ensures the plan is followed.

Component 6: Resources

Resource Allocation

  • Ensure sufficient resources for engagements and SOQM.

Types of Resources

  • Human, technological, intellectual, and service provider resources.

Component 7: Information and Communication

Information System Requirements

  • Supports SOQM operation by identifying, capturing, processing, and maintaining relevant and reliable information.

Communication Culture

  • Encourages the exchange of relevant information internally and externally.

Component 8: Monitoring and Remediation Process

Monitoring and Remediation

  • Monitor completed engagements and address deficiencies.

Annual Evaluation

  • Evaluate SOQM at least annually.
  • Conclude on SOQM effectiveness.

Evaluation Forms

  • Form A: SOQM provides reasonable assurance.
  • Form B: SOQM provides reasonable assurance except for specific matters.
  • Form C: SOQM does not provide reasonable assurance.

Next Steps

Mastering the principles of quality management is essential for the ACA Audit and Assurance module. For more resources and expert guidance, explore our subscription plans here and strengthen your preparation for exam success.

Read more