SAFA-IFAC SMP Forum
New Delhi, India
October 10, 2014
Quality Control and Efficient Auditing
CA.Narendra Bhattarai
President, ICA Nepal
Contents
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What is Quality and Quality Audit ?
Quality Control
Objectives of Quality Control
Levels of Quality Control
Ethical Requirements
Quality Assurance
Peer Review
Cost of Quality
Tools for Quality assurance and testing
Quality Control Review Procedures: 2 stages
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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:
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Audit plan properly address all issues needed
Reliability: 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
Process
Output
• 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
• Audit Practices and Procedures (compliance with standard, manual)
• Audit Planning and Execution complying Audit Process as per Standards
• Supervision, Monitoring and Quality Review
• Audit Report with Recommendations and Information
• Propriety of use of resources, 3Es, Compliance as sought by relevant Acts
• Audit Result and Impact
• Consideration on Audit Report by Stakeholders – public, shareholders
Outcome • Contribution to improve corporate governance
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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 followup) 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
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 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
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and Specific Engagements
Human Resources
Engagement Performance (Planning - Follow up)
Monitoring
Documentation
(These elements should be defined, documented and
communicated to all level)
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 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 is the cost of
conformance plus the cost of
nonconformance.
 Conformance means delivering
products that meet requirements and
fitness for use.
 Cost of nonconformance means taking
responsibility for failures or not meeting
quality expectations.
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 Prevention cost: Cost of planning and executing audit
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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: Cost incurred to correct an
identified errors before the audit reports are issued and
gone to public.
External failure cost: Cost that relates to all errors not
detected and corrected before issuance of the report.
Measurement and test equipment costs: Capital cost
of equipment used to perform prevention and appraisal
activities.
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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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