How ACCA assesses compliance with auditing standards

Pass or fail?

Assessment of firm’s quality control and procedures Assessment of individual audit files Overall assessment of QA review, based on above Three stage assessment

Substantial compliance with ISQC1 required Some allowances made for documentation in small firms Major deficiencies in ISQC1 (e.g. ethical considerations) will result in unsatisfactory outcome Assessment of firm’s quality control procedures

“Perfect” audit files do not exist Always some deficiencies How is an audit file judged to be satisfactory? Basis of audit file assessment

Tidy cross referenced file? No Marks out of 100? No Compliance officer’s professional judgement? Yes, but using defined methodology Basis of audit file assessment

Concept of “reasonable assurance” (ISA 200) Auditor must conclude no material misstatements before issuing clean audit report Conclusion based on accumulation of necessary evidence – as required by ISA Basis of audit file assessment

Identify deficiencies in audit work Evaluate deficiencies Possibility of material misstatement remaining undetected? Basis of audit file assessment

Client has material inventory No continuous stock records Auditors fail to attend inventory count No alternative procedures on quantities possible Audit report unqualified Significant possibility of material misstatement remaining undetected Basis of audit file assessment: example 1

Client is trading at a loss and has substantial borrowings Inadequate compliance with ISA570 No consideration of disclosures Significant possibility of material misstatement remaining undetected (disclosures) and inappropriate audit report Basis of audit file assessment: example 2

Client is trading at a profit, generating cash and has no borrowings Cursory compliance with ISA570 Little possibility of material misstatement remaining undetected Basis of audit file assessment: example 3

Number of deficiencies not normally relevant A single deficiency can make the file unsatisfactory Audit file assessment: conclusion

All audit files examined must be assessed as satisfactory A single deficient file also suggests ISQC1 compliance may be unsatisfactory Major deficiencies in ISQC1 (e.g. ethical considerations) will result in unsatisfactory outcome Overall outcome of QA review

Essential role in improving audit quality, especially in smaller firms Reliance placed by regulators on training providers’ reviews Need to work more closely with regulators in future The role of training providers