The Auditing Standards Board has issued a new standard on quality control that sets new criteria for quality reviews and supercedes all existing standards applying to firm quality control.
Departing from common practice and from an exposure draft that was issued last year, Statement on Quality Control Standard No. 7, A Firm's System of Quality Control, brings the American Institute of CPAs' quality control standards close to an international standard that has been proposed by the International Audit and Assurance Standards Board.
Ahava Goldman, a technical manager in audit and attestation at the AICPA, highlighted the introduction of the concept of leadership into quality control. "The single most important requirement in this standard, in my opinion, is for firms to establish an internal culture based on the recognition that quality is essential in performing engagements," Goldman said. "Setting a strong tone on the importance of quality at the top of any CPA firm is critical and 'Job One.'"
Goldman said that the most substantive change from the exposure draft regarded engagement quality control review. The standard defines the quality control review and requires that all firms establish criteria for determining which engagements need to have a quality control review. The standard also spells out the nature, timing and extent of those reviews.
The statement adds a certain flexibility to the current standard that requires firms to document quality control policies and procedures. The extent of documentation will now be based on the size, structure and nature of the firm's practice.
Harold Monk, chairman of the Auditing Standards Board and a partner with Davis, Monk & Co. in Gainesville, Fla., expressed satisfaction with the improvement that the standard brings to the profession.
"I think the standard will enhance quality control in firms as a result of having to document their systems," Monk said. "One of the main things it does that's a little different from current practice is focus on the importance of quality control concurring reviews as part of the quality control process. It tells firms they need to adopt a policy and then follow it."
At its mid-August meeting, the board also continued work on an exposure draft of a Statement on Auditing Standards on quality control, which is being written to revise existing standards to converge with International Standard on Auditing 220, Quality Control for Audits of Historical Financial Information.
The board recently revised its tentative decisions to address concerns that auditors could be accused of failing to adhere to generally accepted auditing standards if a quality control procedure happened to be overlooked. That eventual auditing standard will reference the SQCS 7.
Unable to reach a final decision to issue the exposure draft, and because of the timing of a project on clarification, the board decided to continue discussions at its next meeting.
The project on clarification is now considering comments that were received on a discussion memorandum on that topic. The IAASB is working on a similar project. As the ASB works on converging its new and future standards with those of the IAASB, both boards are fashioning a new, clearer way to format standards.
The objective of both boards is to clarify standards and put them in a format that's easier for people to follow and understand, and that aids in their consistent application. Changing the auditing standards themselves, however, is decidedly not an objective.
"This is not a bottom-up approach that will rewrite whole standards without looking at what's there, taking a clean piece of paper and revising everything," Goldman said. "That is not what we are doing at all. It's not a fundamental shift in what you're doing. It's a change in how we are describing it."
The ASB and IAASB have agreed to establish a common format that states the objectives of each standard. The current proposed IAASB format, however, lists requirements separately from guidance, with cross-references linking them. The ASB, in response to comments on the discussion paper, has tentatively decided to distribute requirements throughout the guidance to facilitate understanding.
The board also discussed "standards overload," because the revision of all standards for the sake of clarity will require a certain amount of re-education among auditors.
"If we go through and revise all of our standards ... that's a lot for people to take in," Goldman said.
Both boards hope to resolve that issue by putting the effective dates for any revised standards far enough in the future for firms to revise their materials, training and audit programs.
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