Chapter 3 – Practice Management

System of Quality Management (SQM) is a system designed and operated by audit

firms to ensure that the firm is fulfilling their responsibility to conduct audit as per the
legal and professional standards.
Key areas of quality management:
- The overall quality management systems that must be implemented by the audit
firm.
- The system of quality management on the individual audit.
ISQM 1 – International standard for Quality Management
Elements of QMS
1. Firm’s risk assessment process
It explains the risk assessment process undertaken by the firm for managing quality
which is broadly similar to the way that risk is assessed and managed within an
entity:
- Quality objectives are established in relation to each of the components in the
system of quality management.
- Quality risks that jeopardise the achievements of these objectives are then
identified and assessed.
Risks- either relating to the nature and circumstances of the firm or of the
engagements performed by the firm.
- Responses are developed based on each risk and suitable policies and
procedures are implemented.

2. Governance & leadership

Firms should create an environment which demonstrates a commitment to quality
through its culture and recognizes its role in serving the public interest. This
responsibility is firm wide rather than at the individual audit level, with the chief
executive or managing partner assigned the responsibility and accountability for the
SoQM.

The firm must establish the following objectives:

1. The firm demonstrates a commitment to quality through firm culture.
2. Leadership is responsible/accountable for quality.

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3. Leadership demonstrates a commitment to quality.
4. The org. structure supports quality management.
5. Resources are allocated in the way that supports quality management.

*Key audit partner is used to indicate the individual assigned overall responsibility for
carrying out the statutory audit on behalf of the firm. It is a term that is defined by the
UK legislation and so is separate from engagement partners of other non-audit
engagements.

3. Ethical requirements
The firm and its personnel understand the relevant ethical requirement and fulfil them.
The firm must ensure that any party working on behalf of the firm towards the audit
conclusion understands the relevant ethical requirements and fulfils them.

Exam focus
Candidates may be asked to appraise ethical threats arising in the scenario, whilst also
considering whether the firm is compliant with the firm’s SoQM. The issues of quality
management and ethical issues are inherently interlinked and as such, they may need
to consider the significance of such threats and the availability of suitable safeguards
within the context of the engagement, the firm and the SoQM as well as other available
information. This enables candidates to obtain professional skills marks in addition to
the technical marks as they are recognising the inherent ethical requirements regarding
quality management on a firm wide basis. Candidates may be asked to identify
breaches of the SoQM which may not breach the Code but are relevant to the given
scenario addressing any resulting implications for the engagement, the firm or making
recommendations to prevent future breaches.

4. Acceptance and continuance of client relationships

Quality objectives should consider the following:
Information obtained about the integrity and ethical values of the client, their
management and TCWG (wherever appropriate), nature & circumstances of the
engagement.
The firm is able to perform the engagement in accordance with applicable laws,
regulations and professional standards
The financial and operational priorities of the firm do not lead to inappropriate decisions
about acceptance and retention of clients.

Exam focus
Candidates may have to discuss the importance of acceptance and continuation
assessments or to apply the requirements of ISQM 1 in this regard when evaluating
whether to accept a new client, undertake additional work for existing clients or accept
reappointment for the audit of a continuing client. The ISQM 1 framework provides a

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starting point for evaluating the scenario and this may be extended into other
professional and commercial considerations. Candidates should consider legal,
regulatory, and ethical considerations as well as professional and availability of
resources when considering a new client engagement.
Candidates should be aware that the ability to perform the engagement within legal and
professional requirements will incorporate legal, regulatory, and ethical considerations,
including the availability of resources when considering a new client engagement. and
requirements covering acceptance may be extended into other professional and
commercial considerations. The cyclical nature of continuation considerations means
that this aspect of quality management may impact questions at all stages of the audit
process and the considerations regarding client acceptance are likely to apply to audit
and non-audit assignments.
5. Engagement Performance
The firm should establish the below quality objectives to assess its performance:
1. All members of the engagement team understand and fulfil their responsibilities
for managing and achieving quality on engagement.
2. Direction, supervision and review responsibilities are allocated and performed
appropriate to the engagement & the resources made available.
3. Appropriate levels of professional judgement & scepticism are displayed.
4. Consultation on difficult matters is undertaken & suitable responses
implemented.
5. Differences of opinion between engagement team members and any others
involved in the engagement are addressed satisfactorily by the firm.
6. Engagement documentation is promptly assembled, maintained and retained in
line with laws, regulations, professional & ethical requirements.
ISQM 2 Engagement Quality Review

Who can be engagement quality reviewer -Individual should possess competence and
capabilities, including sufficient time and the appropriate authority to perform the

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engagement quality review but that they shall also comply with relevant ethical
requirements.
6.Resources
The resources to be considered that address appropriate obtaining, developing, using,
maintaining, allocating and assigning resources in a timely manner to enable the
design, implementation and operation of system of quality management include –
Human, technological, intellectual resources & service providers.
7.Information & communication
Quality objectives should address obtaining, generating or using information regarding
the system of quality management and communicating information within the firm and to
external parties on a timely basis.

8.Monitoring & remediation

The firm shall establish monitoring & remediation process to:
- Provide relevant, reliable & timely information about the design, implementation
and operation of the system of quality management
- Take appropriate actions to respond to identified deficiencies such that
deficiencies are remediated on timely basis.
The monitoring process should identify deficiencies in the system such that it facilitates
the proactive & continual improvement of engagement quality & the system of
quality management. Individuals performing monitoring activity should have
competence, capability & time to perform effectively.
Where the monitoring process identifies deficiencies in the engagement, the firm needs
to understand their severity and pervasiveness. This will require investigation of the
frequency of any deficiencies, any root causes and their effect on the firm’s system of
quality management.

Ways of obtaining a new client:

Tendering : A firm puts together a tender either in response to an open invitation to
tender or if it has been approached by a prospective client and the partners have
decided that they are capable of doing the work for a reasonable fee. When an audit

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firm is approached by a prospective client, the first question it has to ask itself is
whether or not it wants the work.

CONTENTS OF A TENDER DOCUMENT / MATTERS TO BE INCLUDED IN THE

TENDER DOCUMENT
▪ Audit firm background
▪ Audit approach and methodologies
▪ Fee and calculation of fee
▪ Any specialist skills available [ scenario specific]
▪ Resources
▪ Ability to provide other services [ jurisdiction wise / are there requirements from the
client ]
▪ Assessment of client needs

Lowballing: This refers to the practice of setting the initial audit fee low to win the client.
The ACCA’s guidance on quotations states that it is not improper to secure work by
quoting a lower fee, so long as the client has not been misled about the level of work
that the fee represents, and as long as audit quality is not compromised
The ethical implications of this practice are:
(a) Because the fee is set low, the audit firm needs to retain the client for a number of
years in order to recover its initial losses; therefore, independence will be impaired via a
self-interest threat as the audit firm will not wish to lose the client in the short term.
(b) Professional competence and due care may not be applied if the fee is so low that
adequate levels of quality management cannot be displayed on the engagement.
(c) This can be seen as unprofessional because it means that smaller practices cannot
compete

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ISA 210 Agreeing the terms of audit engagements
Auditors are required, prior to establishing a client relationship or accepting an
engagement, to have controls in place to address the risks arising from it.
The risk profile of the business should show where particular risks are likely to arise,
and so where certain procedures will be needed to tackle them.
These procedures should be easy to understand and easy to use for all relevant
employees who will need them. Sufficient flexibility should be built in to allow the
procedures to identify, and adapt to, unusual situations.
Different clients will have different levels of risk and the level of risk should dictate the
level of client due diligence performed.
When determining whether to enter a professional relationship with a new client, an
assurance firm is required to assess whether this would be possible under the criteria of
ISQM1 Quality Management for Firms that Perform Audits or Reviews of Financial
Statements or Other Assurance or Related Service Engagements.
Audit firm shall make professional judgements based on the following quality objectives
regarding whether to accept the engagement:
▪ Information obtained about the nature and circumstances of the engagement;
▪ Consideration of the integrity and ethical values of the client; and ▪
The firm’s ability to perform the engagement in accordance with professional standards
and applicable legal and regulatory requirements.
Matters to be considered before accepting an engagement
▪ Professional Clearance
If offered an audit role, the prospective audit firm must:
Obtain permission from the client to contact the existing auditors asking for all
information relevant to the decision whether or not to accept the appointment for
example; seeking reason for not continuing as auditors. Also the prospective auditors
can request access to the working papers of this client from the outgoing auditors to get
a better understanding about the client.
▪ Independence – scenario application !
Prior to acceptance of the audit engagement, if the auditor is aware that the ethical
threats cannot be reduced to an acceptable level by putting in the relevant safeguards
then the audit should not be accepted.

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▪ Management Integrity If the firm believes that the client lacks integrity, there exists a
greater risk of fraud and fraud and intimidation which will increase and the risk for the
firm to perform the audit
▪ Money Laundering The firm is required to carry out client due diligence to comply with
money laundering regulations.
If there any suspicion or actual money laundering is been committed, then the firm
cannot accept the engagement
▪ Resources
The firm should assess whether there is adequate resources – time, staff etc. to perform
the audit. If not, it will impact the quality of work being performed + also checking
whether accepting this client will disrupt the existing client base.
▪ Risks
Any risks identified with the prospective client will need to be assessed to evaluate
whether it will have an impact on the opinion to be made
▪ Fees
The firm should consider the acceptability of the fees. The firms should consider the risk
involved in performing the audit.
▪ Professional Competence
An engagement should only be accepted if the firm has the necessary skill and
experience to perform the audit with due care. + industry experience !!
▪ Reputation of Client
The firm should consider the reputation of the client for example adverse media
attention and assess whether the engagement should be accepted or not.
▪ Preconditions to Audit
Determine whether the financial reporting framework used in the financial statements is
acceptable,
Obtain agreement from the management that it acknowledges and understands its
responsibility for the following;
• Preparing the financial statements in line with the financial reporting framework,
• Internal controls to be free from material misstatements,
• Providing the auditor with access to information relevant for the audit and access to
information relevant for the audit and access to staff

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If pre conditions do not exist – audit cannot be accepted unless there is a legal
requirement to do so.

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Questions

1.

Explain quality management issues in line with ISQM 1 & 2

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2. EMU GYM
You are a manager in the audit department of Huntsman & Co, a firm of Chartered Certified
Accountants, responsible for the audit of several companies and tor evaluating the acceptance decisions
in respect of potential new audit clients.

One of your audit clients is Redback Sports Co, which operates a chain of sport and leisure centres across
the country. The company has a financial year ending 28 February 20X9, and you are about to start
planning the audit. Stella Cross, the audit engagement partner, met with the company's finance director
last week to discuss business developments in the year and recent financial performance.

In addition, Stella has been approached by Mick Emu, the managing director of Emu Gyms Co. Mick has
enquired regarding whether Huntsman & Co can provide the company with an audit or limited assurance
review, and Stella would like you to evaluate this request. Huntsman & Co already provides a payroll
service to Emu Gyms Co.

Business background

Redback Sports Co operates 20 sport and leisure centres around the country, Each centre has a large gym
and a swimming pool, and many also have tennis and badminton courts. Given the nature of the
company's operations, it has 10 comply with health and safety regulations set by the national regulatory
body, and its facilities are inspected regularly to ensure that all regulations am being followed, and for
the company to retain its operating licence.

Mick Emu phoned me this morning to discuss developments at Emu Gyms Co and to enquire whether
our firm could carry out either an audit of the company's financial statements, or a limited assurance
review of them. This would be the first time that the financial statements have been subject to audit or
limited assurance review.

Loan application

Mick thinks that it will be difficult to attract more members for his gyms in existing locations and would
like the company to expand by constructing a new gym. He has discussed a loan of $4 million with the
company's bank to fund the necessary capital expenditure. The bank manager has asked for the
company's financial statements for the year to 30 September 20X8 and comparative information and has
also requested a cash flow and profit forecast for the next three years in order to make a lending
decision within the next two months.

Mick has asked whether a representative of the firm can attend a meeting with Mick and the company's
bank manager, to support the loan application and answer questions from the bank manager, assuming
that we are engaged to perform either an audit or a limited assurance review on the financial
statements.

Evaluate the matters to be considered in deciding whether to accept an engagement to provide Emu
Gyms Co with an audit or limited assurance review. (8 marks)

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3.

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