ISA/ASA 220 Quality Control on Audits EXPLAINED

Summary

This video delves into the importance of ISA 220, a standard that ensures a minimum level of quality in audits. It discusses the impact of industry specialists and larger firms on audit quality, emphasizing the need for ethical requirements and independence. The script outlines the responsibilities of audit firms at both the firm and engagement levels, highlighting the importance of leadership, team assignment, and performance. It also stresses the necessity of documentation to support audit decisions and judgments, with a focus on the role of quality control reviews in maintaining audit standards.

Takeaways

• 📊 ISA 220 is crucial for understanding quality control in auditing, ensuring minimum standards for audit quality.
• 🌍 Australian auditing standards are internationally harmonized, so international students using ISAs can apply these standards as well.
• ✅ Auditing standards like SQCs and ISAs set a minimum level of quality for all audits, ensuring consistency across the board.
• 🏢 Audit quality can be influenced by factors such as using industry specialists or large audit firms like the Big Four, which tend to provide higher quality audits.
• 👨‍💼 The engagement partner is responsible for the overall audit quality, and if anything goes wrong, they are held legally accountable.
• ⚖️ Ethical requirements, particularly regarding auditor independence, are emphasized, with compliance to standards like APES 110 and the Corporations Act in Australia.
• 📝 Teamwork is essential in auditing, with each level (junior, senior, manager, partner) reviewing and supervising the work of the others to maintain quality.
• 🔍 Quality control reviews are conducted by a second partner to ensure that audit judgments and conclusions are appropriate.
• 🧾 Proper documentation is critical in auditing as it serves as proof of the audit work performed and supports the decisions made during the audit.
• 🔒 Regular monitoring and inspections by the audit firm or external bodies ensure that policies and procedures are followed effectively over time.

Q & A

What is the primary focus of ISA 220?

ISA 220 focuses on quality control in audits, ensuring that a minimum level of quality is maintained across all audits, which is crucial for the reliability of audit outcomes.

Why are international standards important for audits?

International standards, like those mentioned in the script, are important because they harmonize audit practices globally, ensuring consistency and comparability of audit quality regardless of the location.

What does the term 'audit quality' refer to in the context of ISA 220?

In the context of ISA 220, 'audit quality' refers to the level of excellence an audit achieves, which is influenced by factors such as the auditor's expertise, adherence to auditing standards, and the effectiveness of the audit firm's quality control systems.

How does the involvement of industry specialists impact audit quality?

Industry specialists can enhance audit quality by bringing specific knowledge and insights about the industry, which can lead to a more thorough and accurate audit.

What role does the audit partner play in ensuring audit quality?

The audit partner is crucial for ensuring audit quality as they are legally responsible for the overall audit quality. They supervise, direct, and review the audit work, ensuring it meets the required standards.

Why is ethical compliance a requirement in the audit process?

Ethical compliance is a requirement in the audit process to maintain the integrity and objectivity of the audit, which is fundamental to the credibility of the audit outcomes and the auditor's independence.

What is the significance of the quality control review mentioned in the script?

The quality control review is significant as it provides an additional layer of assurance that the audit has been conducted in accordance with the relevant standards and that the audit conclusions are appropriate.

How does the assignment of engagement teams contribute to audit quality?

The assignment of engagement teams contributes to audit quality by ensuring that the team has the appropriate mix of skills, industry knowledge, and experience necessary to perform the audit effectively.

What is the purpose of the monitoring process in an audit firm?

The purpose of the monitoring process in an audit firm is to regularly assess the effectiveness of the firm's quality control policies and procedures, ensuring continuous improvement and adherence to audit standards.

Why is documentation so critical in the audit process?

Documentation is critical in the audit process as it serves as evidence of the work performed, the decisions made, and the conclusions reached by the audit team. It provides a record that supports the audit findings and judgments.

What is the relationship between ISA 220 and other standards like ISA 210 and ISA 230?

ISA 220 sets the framework for quality control, while ISA 210 and ISA 230 provide more specific guidance on establishing audit relationships and audit documentation, respectively. They work in conjunction to ensure the overall quality of the audit process.

Outlines

00:00

📚 Introduction to Audit Quality Control

The video begins by emphasizing the importance of quality control in audits, particularly in light of recent press coverage about order quality. It mentions that Australian standards are internationally harmonized, making the content relevant for international students as well. The presenter introduces the standards for quality control, specifically ISA 220, and explains that these standards aim to ensure a minimum level of quality across all audits. The video also touches on how certain factors, such as industry specialists or larger firms, can contribute to higher quality audits. The main objective of the standard is to promote audit quality, with a focus on legally enforceable requirements and explanatory material that aids in interpretation.

05:02

👥 Key Responsibilities and Ethical Standards in Auditing

Paragraph 2 delves into the specific responsibilities of auditors regarding quality control procedures for financial reporting audits. It highlights the importance of leadership, with the engagement partner being accountable for the overall audit quality. Ethical requirements, including independence, are discussed, with references to APS 110 and the Corporations Act. The paragraph also covers the assignment of engagement teams, emphasizing the need for appropriate personnel with the right skills and industry knowledge. The process of audit execution, including supervision, review, and consultation, is outlined. The role of the engagement control quality reviewer is introduced, who is responsible for an objective evaluation of the team's judgments and conclusions. The paragraph concludes by mentioning the firm's monitoring process to ensure the effectiveness of their quality control policies and procedures.

10:03

🔍 The Importance of Documentation and Quality Control Review

Paragraph 3 focuses on the critical role of documentation in auditing, serving as proof of work and supporting decisions or judgments. It mentions that there is a whole audit standard dedicated to documentation (ISA 230), which will be covered in a subsequent video. The paragraph underscores the need for auditors to document their conclusions, the evidence supporting them, and the process by which they were reached. Additionally, it discusses the quality control reviewer's responsibility to document their work. The video concludes with an invitation for viewers to engage with the content by asking questions or providing feedback and encourages viewers to subscribe for more content on auditing standards.

Keywords

💡ISA 220

ISA 220 refers to the International Standard on Auditing related to quality control for audits of financial statements. It ensures that all audits meet a minimum level of quality. In the video, it is emphasized as a critical standard for ensuring that audit firms follow proper procedures to maintain consistency and high-quality auditing across engagements.

💡Quality Control

Quality control in auditing refers to the procedures and policies that ensure an audit meets the necessary standards. The video highlights that ISA 220 focuses heavily on audit quality, requiring firms to follow certain steps to maintain this control, such as supervision, team competency, and documentation.

💡Engagement Partner

The engagement partner is the lead auditor responsible for the quality of the entire audit. They sign off on the audit and are held legally responsible for any mistakes. In the video, this role is described as critical, as the partner must ensure that ethical requirements are followed and the audit is completed correctly.

💡Ethical Requirements

Ethical requirements are the standards of conduct that auditors must follow, particularly around independence and objectivity. In the video, the speaker references APES 110 and the Corporations Act as key frameworks for auditors in Australia, ensuring they remain impartial and free from conflicts of interest.

💡Independence

Independence in auditing is the requirement that auditors remain unbiased and not influenced by relationships with the client. The video stresses that maintaining independence is crucial for audit quality and that breaches must be mitigated by safeguards, according to APES 110 and ISA 220.

💡Engagement Quality Control Reviewer

The engagement quality control reviewer is a second partner who checks the audit for compliance with standards. This review process is critical, as the reviewer evaluates the key judgments made during the audit to ensure that they meet the required standards. This role is part of maintaining audit quality by providing a second layer of oversight.

💡Documentation

Documentation in auditing refers to the written evidence that supports the auditor’s work and decisions. The video underlines that without documentation, there's no proof of the audit's work. Auditors must document their conclusions, the evidence collected, and how they reached their judgments. ISA 230 focuses specifically on this.

💡Monitoring Process

The monitoring process is the ongoing evaluation of an audit firm's internal policies and procedures to ensure they remain effective. The video explains that firms should conduct regular inspections or peer reviews to verify that quality control measures are properly implemented across all audits.

💡Supervision

Supervision refers to the responsibility of the audit partner and senior auditors to oversee the work of junior team members. In the video, it is mentioned that partners must ensure that the audit is properly planned, and all team members are following correct procedures to maintain quality control.

💡Audit Team Competence

Audit team competence is the assurance that the individuals performing the audit have the necessary skills, experience, and industry knowledge. The video discusses the importance of having the right personnel on an audit team, emphasizing that firms should not accept engagements unless they are confident the team can meet the required standards.

Highlights

ISA 220 is crucial for quality control in audits, with international relevance including for Australian standards.

Quality control standards are harmonized globally, affecting international students and professionals alike.

Audit standards aim to ensure a minimum level of quality across all audits for consistency.

Higher quality audits may involve industry specialists or larger firms, indicating a potential for variable quality.

ISA 220, along with other standards like ISA 210, sets the minimum requirements for quality control in audits.

The objective of ISA 220 is to promote audit quality through enforceable requirements and explanatory material.

Leadership and responsibility are key, with the audit partner being accountable for the overall audit quality.

Ethical requirements, including independence, are cornerstones of audits and must be strictly followed.

Engagement teams must be appropriately staffed with individuals having the right skills and industry knowledge.

The audit process involves supervision at all levels, from partners overseeing managers to managers overseeing junior auditors.

Review processes are critical in audits, with senior staff reviewing the work of junior staff to ensure quality.

Communication within the audit team is essential for sharing insights and maintaining audit quality.

A quality control review by a second partner ensures that the audit was conducted in accordance with standards.

Disagreements between partners must be resolved following firm policies and procedures.

Firms must have a monitoring process in place to ensure their quality control policies are effective.

Documentation is vital in audits, serving as proof of work and supporting decisions and judgments made.

The explanatory material provides additional guidance on interpreting and applying the requirements of ISA 220.

Transcripts

[Music]

in this video I'm going to look at a si

slash is a 220 and 220 is quite

important because it looks at quality

control and there's certainly been a lot

in the press recently about the quality

of orders so remember that our

Australian standards are internationally

harmonized so if you're an international

student and you're using ISAs then this

video will apply to you just as well now

remember we also have standards on

quality control

so a sqc or is QCs on quality control

and a PE s110 also has specific

requirements about quality they actually

refer you back to is a a si 220

now why is auto quality important well

the idea of an audit and audit standards

is that everybody is supposed to be

doing the same minimum level of an audit

so if we have auto quality I'll draw

this on a scale order quality okay and

here at different companies or what the

standards are supposed to do is that the

is a si si s are meant to give us a

minimum basic level of quality so all

audit should be at least at this level

sometimes you might have audits that are

of a slightly higher quality the

research shows us a couple of different

things the sorts of things that might

lead to higher quality audits could be

industry specialists so if you're using

an industry specialist that could lead

to a higher quality audit or if you're

using a big full firm quite often their

audits are of higher quality so a SQ c

and a sa is a 210 are here to make sure

that we know what is the minimum level

of things we should be doing for quality

control as well as following generally a

say so this is especially about quality

control within the audit firms and on

the specific audit engagement so let's

skip through to our content so we'll

have a quick overview of our contents

nothing really unusual here the

objective of the standard is to promote

audit quality

some requirements remember these are the

legally enforceable components that we

have to do and then our explanatory

material is just that other stuff that

will help us interpret what's up here in

the requirements in my videos I don't go

into the explanatory material I just go

into their requirements there's our

conformity with international standards

so you'll see here we are compliant with

is a 220 on quality control so let's

jump into the introduction so the

introduction is very clear this standard

deals with specific responsibilities of

the audit of regarding quality control

procedures for the audit of a financial

report so what sort of quality control

does the firm need to have at their firm

level at the individual engagement and

it also I mentioned is QC one as well

now our objective of our standard is

always really critical go back if you're

wondering what a standard is about the

objective is always critical implement

quality control procedures for the

engagement that provide the auditor with

reasonable assurance that we are

following the auditing standards and

then we're issuing the report in

appropriate stance our circumstances now

this is because audits are done by teams

of people now lots of people working

together we need to make sure that we

have good policies and procedures to

make sure that everybody in that team is

doing the right thing we have some

definitions you can read through those

definitions yourself within the standard

there's lots of information on the

definitions but let's jump into the

requirements

remember the requirements here in

Australia are the parts that are legally

enforceable so there has to be

leadership we have an engagement partner

a partner who is responsible for signing

the audit and they are responsible for

the overall audit quality so if

something goes wrong on the audit that

partner is going to be legally

responsible okay

so it's really important there's a lot

of pressure on that audit partner to get

it right the second area is ethical

requirement so it says we have to comply

with our ethical requirements and those

ethical requirements for us are going to

be a PE s110 so they have to make sure

that they follow the ethical

requirements now it goes into some

detail here specifically about

independence because remember

independence is the cornerstone of an

audit so we should as the partner look

at independence and make sure that we

follow the requirements in a PS 110 and

in Australia also our Corporations Act

all right so we have to follow all of

those particular requirements now we

have to check that everybody is

independent even if you're using our

other firms that if we have a breach we

know what to do and if we have threats

to independence then we have to reduce

them by applying safeguards those

safeguards of course come from a PS 110

and I'll make another video on ApS 110

it's a mega huge standard now what if we

have client engagements well if we

accept or continue an existing

engagement then we need to make sure

that we've followed all of the

requirements from a sa is a 210 about

establishing our relation now if we

scroll up I'm not going to go through

every single paragraph but I'm gonna go

through key ones so here assignment of

engagement teams is really important

about making sure that we have the right

personnel they

appropriately confident they've got the

right industry knowledge so that skill

could be related to a particular

industry they might need to have a

certain amount of audit experience in

general to meet those requirements so we

have to have the right people on the

team which wouldn't accept a job if we

can't then when we do the audit we have

to make sure that when we have the

performance of the audit or the

execution when we're executing the audit

or we're going out and we're collecting

evidence we do a few specific things

number one the partner is responsible

for supervising directing supervising

and performance of the audits and they

have to make sure that the right plan is

put in place they supervise managers

managers supervisors senior auditors

supervise junior auditors and of course

I mentioned they give the right report

there has to be a process of review all

right so this is a really important

process where someone senior checks a

junior staff members work oops I can't

spell member there so this is really

important because of the teamwork aspect

all right so that means junior auditors

work is checked by the senior senior

ordered as well as checked by the

manager managers work might be checked

by the partner now those reviews could

be looking at specific documents and

saying okay what sort of work is this

person doing are they doing the right

thing yep they're doing the right thing

or it could even be an interview where

two people sit down perhaps with a

little beverage each hot cup of tea and

they talk about what has been going on

in the audit one thing that was common

popular at PwC where I was was this

review by interview approach and we

should also have consultation so if

there is something that needs to be

talked about with the team we should be

communicating with that team this is

really important so communication

between all of the team members about

the audit the partner just doesn't

leave them to it they actually have to

go and set a plan check in regularly

about how things are going what work is

being done now once we've done the audit

there needs to be a quality control

review all right so somebody should

check that there is an engagement

control quality reviewer now this is a

second partner different partner who

checks that everything has been done in

accordance with the ISA ASAS so their

job is to perform an objective

evaluation of the judgments made by the

team and their conclusions to make sure

that they're appropriate alright so what

they're going to do is they're going to

do a few different things they're going

to talk with the partner they're going

to look at documents including audit

documentation to make sure it's all done

correctly in accordance with policy and

with the standards all right to make

sure that there are no loopholes this is

like a second check now this is my very

poor attempt at a magnifying glass but

that's what that is right there so we

have to have this second pair of eyes to

check now if there are differences what

happens if two partners disagree well

then they might need to follow the

firm's policies and procedures to figure

out and resolve that difference of

opinion so we have all of these

procedures and there's quality checking

now what the firm should also do is a

monitoring process so they need to check

that their own policies and procedures

are operating effectively all the time

so that might be some form of we just

change my color pin here audit firm

regular inspections all right so that

could be regular inspections by some

sort of quality control unit it could be

peer review of audits by another firm

it could even be inspection by a

professional association now the next

section I want to talk about is really

really critical because order to spend a

lot of time doing this and this is

documentation now without documentation

there's no proof that we did anything so

for the auditor documentation is proof

of our work and supporting our decisions

or our judgments so if I don't have this

documentation in place there's no proof

that we actually did anything so what

sort of things should we document and

there is actually a whole audit standard

on this a si 2:30 which is the next

video in this series we'll talk about

documentation but important things are

like we have to say why we've made our

conclusions um how did we make those

conclusions how did we come about with

our evidence for that and the Quality

Control reviewer should actually

document their work as well so now we

move on to the explanatory material

which I'm not going to get into but you

can certainly look at the explanatory

material I've got a link in the comments

to where you can see the standards I

hope you found this useful if you have

any questions about quality control

please pop them in the comments

otherwise we'd really appreciate a like

of the video if you found it useful

click to subscribe and certainly check

out the other videos in our auditing

standards series thanks for watching and

I'll see you in the next video

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