(Ref: Para. 14)

Considerations Specific to Smaller Firms

This Standard does not call for compliance with requirements that are not relevant, for example, in the circumstances of a sole practitioner with no staff. Requirements in this Standard such as those for policies and procedures for the assignment of appropriate personnel to the engagement team (see paragraph 31), for review responsibilities (see paragraph 33), and for the annual communication of the results of monitoring to assurance practitioners within the firm (see paragraph 53) are not relevant in the case of a sole practitioner where no staff are employed.

Considerations specific to Public Sector Entities

For assurance engagements conducted in the public sector by Auditors‑General pursuant to legislation, public sector auditors should have regard to the relevant public sector mandate and address any threats in that context. Requirements relating to independence (paragraphs 21‑25), acceptance and continuance of client relationships and specific engagements (paragraphs 26‑28), and complaints and allegations (paragraphs 55‑56) may not be consistent with the Auditors‑General legislative mandate in all circumstances.

(Ref: Para. 17)

In general, communication of quality control policies and procedures to firm personnel includes a description of the quality control policies and procedures and the objectives they are designed to achieve, and the message that each individual has a personal responsibility for quality and is expected to comply with these policies and procedures.  Encouraging firm personnel to communicate their views or concerns on quality control matters recognises the importance of obtaining feedback on the firm’s system of quality control.

Considerations Specific to Smaller Firms

Documentation and communication of policies and procedures for smaller firms may be less formal and less extensive than for larger firms.

Promoting an Internal Culture of Quality (Ref: Para. 18)

The firm’s leadership and the examples it sets significantly influence the internal culture of the firm.  The promotion of a quality‑oriented internal culture depends on clear, consistent and frequent actions and messages from all levels of the firm’s management that emphasise the firm’s quality control policies and procedures, and the requirement to:

1. perform work that complies with AUASB Standards, relevant ethical requirements, and applicable legal and regulatory requirements; and
2. issue reports that are appropriate in the circumstances.

Such actions and messages encourage a culture that recognises and rewards high quality work.  These actions and messages may be communicated by, but are not limited to, training seminars, meetings, formal or informal dialogue, mission statements, newsletters, or briefing memoranda.  They may be incorporated in the firm’s internal documentation and training materials, and in partner and staff appraisal procedures such that they will support and reinforce the firm’s view on the importance of quality and how, practically, it is to be achieved.

Of particular importance in promoting an internal culture based on quality is the need for the firm’s leadership to recognise that the firm’s business strategy is subject to the overriding requirement for the firm to achieve quality in all the engagements that the firm performs.  Promoting such an internal culture includes:

1. Establishment of policies and procedures that address performance evaluation, compensation, and promotion (including incentive systems) with regard to its personnel, in order to demonstrate the firm’s overriding commitment to quality;
2. Assignment of management responsibilities so that commercial considerations do not override the quality of work performed; and
3. Provision of sufficient resources for the development, documentation and support of its quality control policies and procedures.

Assigning Operational Responsibility for the Firm’s System of Quality Control (Ref: Para. 19)

Sufficient and appropriate experience and ability enables the person or persons responsible for the firm’s system of quality control to identify and understand quality control issues, and to develop appropriate policies and procedures.  Necessary authority enables the person or persons to implement those policies and procedures.

Compliance with Relevant Ethical Requirements (Ref: Para. 20)

[Deleted by the AUASB.  Refer Aus A7.1]

The firm is required to comply with relevant ethical requirements, including those pertaining to independence, when performing audits and reviews, other assurance engagements and related services engagements, as defined in ASA 102.

[Deleted by the AUASB.  Refer ASA 102]

[Deleted by the AUASB.  Refer ASA 102]

Definition of “Firm,” “Network” and “Network Firm” (Ref: Para. 20‑25)

[Deleted by the AUASB.  Refer ASA 102]^[4]

Independence (Ref: Para. 21)

Examples of independence requirements that may be applicable are addressed in the Corporations Act 2001 Part 2M.3 Division 3, and relevant ethical requirements.^[*]

Written Confirmation (Ref: Para. Aus 24.1)

Written confirmation may be in paper or electronic form.  By obtaining confirmation and taking appropriate action on information indicating a breach, the firm demonstrates the importance that it attaches to independence and makes the issue current for, and visible to, its personnel.

Long Association with an Entity (Ref: Para. 25)

[Deleted by the AUASB.  Refer Aus A12.1]

A threat may be created as a result of an individual’s long association with:

• The entity and its operations;
• The entity’s senior management; or
• The underlying subject matter and subject matter information of the assurance engagement.

[Deleted by the AUASB.  Refer Aus A13.1]

Relevant ethical requirements include examples of factors that are relevant to evaluating the level of a threat that may arise when an individual is involved in an assurance engagement over a long period of time. Relevant ethical requirements also provide examples of actions to address threats, including:

• Eliminating the threat by rotating the individual off the engagement team; or
• Applying safeguards to reduce the threat to an acceptable level, for example by performing regular independent internal or external quality reviews of the engagement.

[Deleted by the AUASB.  Refer Aus A14.1].

Relevant ethical requirements and the Corporations Act 2001 require the rotation of the engagement partner, the engagement quality control reviewer, and other key audit partners in respect of certain engagements.

Considerations specific to public sector audit organisations

Statutory measures may provide safeguards for the independence of public sector auditors.  However, threats to independence may still exist regardless of any statutory measures designed to protect it.  Therefore, in establishing the policies and procedures required by paragraphs 20‑25, the public sector auditor may have regard to the public sector mandate and address any threats to independence in that context.

Listed entities as referred to in paragraphs 25 and A14 are not common in the public sector.  However, there may be other public sector entities that are significant due to size, complexity or public interest aspects, and which consequently have a wide range of stakeholders.  Therefore, there may be instances when a firm determines, based on its quality control policies and procedures, that a public sector entity is significant for the purposes of expanded quality control procedures.

In the public sector, legislation may establish the appointments and terms of office of the auditor with engagement partner responsibility.  As a result, it may not be possible to comply strictly with the engagement partner rotation requirements envisaged for listed entities.  Nonetheless, for public sector entities considered significant, as noted in paragraph A16, it may be in the public interest for public sector audit organisations to establish policies and procedures to promote compliance with the spirit of rotation of engagement partner responsibility.

Competence, Capabilities, and Resources (Ref: Para. 26(a))

Consideration of whether the firm has the competence, capabilities, and resources to undertake a new engagement from a new or an existing client involves reviewing the specific requirements of the engagement and the existing partner and staff profiles at all relevant levels, and including whether:

• Firm personnel have knowledge of relevant industries or subject matters;
• Firm personnel have experience with relevant regulatory or reporting requirements, or the ability to gain the necessary skills and knowledge effectively;
• The firm has sufficient personnel with the necessary competence and capabilities;
• Experts are available, if needed;
• Individuals meeting the criteria and eligibility requirements to perform engagement quality control review are available, where applicable; and
• The firm is able to complete the engagement within the reporting deadline.

Integrity of Client (Ref: Para. 26(c))

With regard to the integrity of a client, matters to consider include, for example:

• The identity and business reputation of the client’s principal owners, key management, and those charged with its governance. 
• The nature of the client’s operations, including its business practices. 
• Information concerning the attitude of the client’s principal owners, key management and those charged with its governance towards such matters as aggressive interpretation of Australian Accounting Standards and the internal control environment.
• Whether the client is aggressively concerned with maintaining the firm’s fees as low as possible. 
• Indications of an inappropriate limitation in the scope of work.
• Indications that the client might be involved in money laundering or other criminal activities.
• The reasons for the proposed appointment of the firm and non‑reappointment of the previous firm. 
• The identity and business reputation of related parties.

The extent of knowledge a firm will have regarding the integrity of a client will generally grow within the context of an ongoing relationship with that client. 

Sources of information on such matters obtained by the firm may include the following:

• Communications with existing or previous providers of professional accountancy services to the client in accordance with relevant ethical requirements, and discussions with other third parties. 
• Enquiry of other firm personnel or third parties such as bankers, legal counsel and industry peers. 
• Background searches of relevant databases. 

Continuance of Client Relationship (Ref: Para. 27(a))

Deciding whether to continue a client relationship includes consideration of significant matters that have arisen during the current or previous engagements, and their implications for continuing the relationship.  For example, a client may have started to expand its business operations into an area where the firm does not possess the necessary expertise.

Withdrawal (Ref: Para. 28)

Policies and procedures on withdrawal from an engagement or from both the engagement and the client relationship address issues that include the following:

• Discussing with the appropriate level of the client’s management and those charged with its governance the appropriate action that the firm might take based on the relevant facts and circumstances.
• If the firm determines that it is appropriate to withdraw, discussing with the appropriate level of the client’s management and those charged with its governance withdrawal from the engagement or from both the engagement and the client relationship, and the reasons for the withdrawal.
• Considering whether there is a professional, legal or regulatory requirement for the firm to remain in place, or for the firm to report the withdrawal from the engagement, or from both the engagement and the client relationship, together with the reasons for the withdrawal, to regulatory authorities.
  • Aus A22.1   For example, the firm may be required to obtain consent from the Australian Securities and Investments Commission (ASIC) prior to resigning from certain audits.^[†]
• Documenting significant matters, consultations, conclusions and the basis for the conclusions.

Considerations Specific to Public Sector Audit Organisations (Ref: Para. 26‑28)

In the public sector, auditors may be appointed in accordance with statutory procedures.  Accordingly, certain of the requirements and considerations regarding the acceptance and continuance of client relationships and specific engagements as set out paragraphs 26‑28 and A18‑A22 may not be relevant.  Nonetheless, establishing policies and procedures as described may provide valuable information to public sector auditors in performing risk assessments and in carrying out reporting responsibilities.

(Ref: Para. 29)

Personnel issues relevant to the firm’s policies and procedures related to human resources include, for example:

• Recruitment.
• Performance evaluation.
• Capabilities, including time to perform assignments.
• Competence.
• Career development.
• Promotion.
• Compensation.
• The estimation of personnel needs.

Effective recruitment processes and procedures help the firm select individuals of integrity who have the capacity to develop the competence and capabilities necessary to perform the firm’s work and possess the appropriate characteristics to enable them to perform competently.

Competence can be developed through a variety of methods, including the following:

• Professional education. 
• Continuing professional development, including training.
• Work experience. 
• Coaching by more experienced staff, for example, other members of the engagement team.
• Independence education for personnel who are required to be independent.

The continuing competence of the firm’s personnel depends to a significant extent on an appropriate level of continuing professional development so that personnel maintain their knowledge and capabilities.  Effective policies and procedures emphasise the need for continuing training for all levels of firm personnel, and provide the necessary training resources and assistance to enable personnel to develop and maintain the required competence and capabilities. 

The firm may use a suitably qualified external person, for example, when internal technical and training resources are unavailable.

Performance evaluation, compensation and promotion procedures give due recognition and reward to the development and maintenance of competence and commitment to ethical principles.  Steps a firm may take in developing and maintaining competence and commitment to ethical principles include:

• Making personnel aware of the firm’s expectations regarding performance and ethical principles;
• Providing personnel with evaluation of, and counselling on, performance, progress and career development; and
• Helping personnel understand that advancement to positions of greater responsibility depends, among other things, upon performance quality and adherence to ethical principles, and that failure to comply with the firm’s policies and procedures may result in disciplinary action. 

Considerations Specific to Smaller Firms

The size and circumstances of the firm will influence the structure of the firm’s performance evaluation process.  Smaller firms, in particular, may employ less formal methods of evaluating the performance of their personnel.

Assignment of Engagement Teams

Engagement Partners (Ref: Para. 30)

Policies and procedures may include systems to monitor the workload and availability of engagement partners so as to enable these individuals to have sufficient time to adequately discharge their responsibilities.

Engagement Teams (Ref: Para. 31)

The firm’s assignment of engagement teams and the determination of the level of supervision required, include for example, consideration of the engagement team’s:

• Understanding of, and practical experience with, engagements of a similar nature and complexity through appropriate training and participation;
• Understanding of AUASB Standards, relevant ethical requirements, and applicable legal and regulatory requirements;
• Technical knowledge and expertise, including knowledge of relevant information technology;
• Knowledge of relevant industries in which the clients operate;
• Ability to apply professional judgement; and
• Understanding of the firm’s quality control policies and procedures.

Consistency in the Quality of Engagement Performance (Ref: Para. 32(a))

The firm promotes consistency in the quality of engagement performance through its policies and procedures.  This is often accomplished through written or electronic manuals, software tools or other forms of standardised documentation, and industry or subject matter‑specific guidance materials.  Matters addressed may include:

• How engagement teams are briefed on the engagement to obtain an understanding of the objectives of their work.
• Processes for complying with applicable engagement standards.
• Processes of engagement supervision, staff training and coaching.
• Methods of reviewing the work performed, the significant judgements made and the form of report being issued. 
• Appropriate documentation of the work performed and of the timing and extent of the review.
• Processes to keep all policies and procedures current. 

Appropriate teamwork and training assist less experienced members of the engagement team to clearly understand the objectives of the assigned work.

Supervision (Ref: Para. 32(b))

Engagement supervision includes the following:

• Tracking the progress of the engagement;
• Considering the competence and capabilities of individual members of the engagement team, whether they have sufficient time to carry out their work, whether they understand their instructions and whether the work is being carried out in accordance with the planned approach to the engagement;
• Addressing significant matters arising during the engagement, considering their significance and modifying the planned approach appropriately; and
• Identifying matters for consultation or consideration by more experienced engagement team members during the engagement.

Review (Ref: Para. 32(c))

A review consists of consideration of whether:

• The work has been performed in accordance with AUASB Standards, relevant ethical requirements, and applicable legal and regulatory requirements;
• Significant matters have been raised for further consideration;
• Appropriate consultations have taken place and the resulting conclusions have been documented and implemented;
• There is a need to revise the nature, timing and extent of work performed;
• The work performed supports the conclusions reached and is appropriately documented;
• The evidence obtained is sufficient and appropriate to support the report; and
• The objectives of the engagement procedures have been achieved.

Consultation (Ref: Para. 34‑Aus 34.1)

Consultation includes discussion at the appropriate professional level, with individuals within or outside the firm who have specialised expertise. 

Consultation uses appropriate research resources as well as the collective experience and technical expertise of the firm.  Consultation helps promote quality and improves the application of professional judgement.  Appropriate recognition of consultation in the firm’s policies and procedures helps promote a culture in which consultation is recognised as a strength and encourages personnel to consult on difficult or contentious matters.

Effective consultation on significant technical, ethical and other matters within the firm, or where applicable, outside the firm can be achieved when those consulted:

• are given all the relevant facts that will enable them to provide informed advice; and
• have appropriate knowledge, seniority and experience,
• and when conclusions resulting from consultations are appropriately documented and implemented.

Documentation of consultations with other professionals that involve difficult or contentious matters that is sufficiently complete and detailed contributes to an understanding of:

• The issue on which consultation was sought; and
• The results of the consultation, including any decisions taken, the basis for those decisions and how they were implemented.

Considerations Specific to Smaller Firms

A firm needing to consult externally, for example, a firm without appropriate internal resources, may take advantage of advisory services provided by:

• Other firms;
• Professional and regulatory bodies; or
• Commercial organisations that provide relevant quality control services. 
• Before contracting for such services, consideration of the competence and capabilities of the external provider helps the firm to determine whether the external provider is suitably qualified for that purpose.

Engagement Quality Control Review

Criteria for an Engagement Quality Control Review (Ref: Para. 35(b))

Criteria for determining which engagements other than audits of financial reports of listed entities are to be subject to an engagement quality control review may include, for example:

• The nature of the engagement, including the extent to which it involves a matter of public interest.
• The identification of unusual circumstances or risks in an engagement or class of engagements.
• Whether laws or regulations require an engagement quality control review.

Nature, Timing and Extent of the Engagement Quality Control Review (Ref: Para. 36‑37)

The date of the engagement report cannot be earlier than the date on which the engagement quality control review is completed.  However, documentation of the engagement quality control review may be completed after the date of the report. 

Conducting the engagement quality control review in a timely manner at appropriate stages during the engagement allows significant matters to be promptly resolved to the engagement quality control reviewer’s satisfaction on or before the date of the report.

The extent of the engagement quality control review may depend, among other things, on the complexity of the engagement, whether the entity is a listed entity, and the risk that the report might not be appropriate in the circumstances.  The performance of an engagement quality control review does not reduce the responsibilities of the engagement partner.

Engagement Quality Control Review of a Listed Entity (Ref: Para. 38)

Other matters relevant to evaluating the significant judgements made by the engagement team that may be considered in an engagement quality control review of an audit of a financial report of a listed entity include:

• Significant risks identified during the engagement and the responses to those risks. 
• Judgements made, particularly with respect to materiality and significant risks. 
• The significance and disposition of corrected and uncorrected misstatements identified during the engagement. 
• The matters to be communicated to management and those charged with governance and, where applicable, other parties such as regulatory bodies.

These other matters, depending on the circumstances, may also be applicable for engagement quality control reviews for audits of the financial reports of other entities, as well as reviews of financial reports, audits and reviews of other financial information, other assurance engagements and related services engagements.

Considerations specific to public sector audit organisations

Although not referred to as listed entities, as described in paragraph A16, certain public sector entities may be of sufficient significance to warrant performance of an engagement quality control review. 

Criteria for the Eligibility of Engagement Quality Control Reviewers

Sufficient and Appropriate Technical Expertise, Experience and Authority (Ref: Para. 39(a))

What constitutes sufficient and appropriate technical expertise, experience and authority depends on the circumstances of the engagement.  For example, the engagement quality control reviewer for an audit of a financial report of a listed entity is likely to be an individual with sufficient and appropriate experience and authority to act as an audit engagement partner on audits of financial reports of listed entities. 

Consultation with the Engagement Quality Control Reviewer (Ref: Para. 39(b))

The engagement partner may consult the engagement quality control reviewer during the engagement, for example, to establish that a judgement made by the engagement partner will be acceptable to the engagement quality control reviewer.  Such consultation avoids identification of differences of opinion at a late stage of the engagement and need not compromise the engagement quality control reviewer’s eligibility to perform the role.  Where the nature and extent of the consultations become significant, the reviewer’s objectivity may be compromised unless care is taken by both the engagement team and the reviewer to maintain the reviewer’s objectivity.  Where this is not possible, another individual within the firm or a suitably qualified external person may be appointed to take on the role of either the engagement quality control reviewer or the person to be consulted on the engagement.

Objectivity of the Engagement Quality Control Reviewer (Ref: Para. 40)

The firm is required to establish policies and procedures designed to maintain objectivity of the engagement quality control reviewer.  Accordingly, such policies and procedures provide that the engagement quality control reviewer:

• Where practicable, is not selected by the engagement partner;
• Does not otherwise participate in the engagement during the period of review;
• Does not make decisions for the engagement team; and
• Is not subject to other considerations that would threaten the reviewer’s objectivity.

Considerations specific to smaller firms

It may not be practicable, in the case of firms with few partners, for the engagement partner not to be involved in selecting the engagement quality control reviewer.  Suitably qualified external persons may be contracted where sole practitioners or small firms identify engagements requiring engagement quality control reviews.  Alternatively, some sole practitioners or small firms may wish to use other firms to facilitate engagement quality control reviews.  Where the firm contracts suitably qualified external persons, the requirements in paragraphs 39‑41 and guidance in paragraphs A47‑A48 apply.

Considerations specific to public sector audit organisations

In the public sector, a statutorily appointed auditor (for example, an Auditor‑General, or other suitably qualified person appointed on behalf of the Auditor‑General) may act in a role equivalent to that of engagement partner with overall responsibility for public sector audits.  In such circumstances, where applicable, the selection of the engagement quality control reviewer includes consideration of the need for independence from the audited entity and the ability of the engagement quality control reviewer to provide an objective evaluation.

Differences of Opinion (Ref: Para. 43)

Effective procedures encourage identification of differences of opinion at an early stage, provide clear guidelines as to the successive steps to be taken thereafter, and require documentation regarding the resolution of the differences and the implementation of the conclusions reached.

Procedures to resolve such differences may include consulting with another practitioner or firm, or a professional^[§] or regulatory body.

Engagement Documentation

Completion of the Assembly of Final Engagement Files (Ref: Para. 45)

Law or regulation may prescribe the time limits by which the assembly of final engagement files for specific types of engagement is to be completed.  Where no such time limits are prescribed in law or regulation, paragraph 45 requires the firm to establish time limits that reflect the need to complete the assembly of final engagement files on a timely basis.  In the case of an audit, for example, such a time limit would ordinarily not be more than 60 days after the date of the auditor’s report.

Where two or more different reports are issued in respect of the same subject matter information of an entity, the firm’s policies and procedures relating to time limits for the assembly of final engagement files address each report as if it were for a separate engagement.  This may, for example, be the case when the firm issues an auditor’s report on a component’s financial information for group consolidation purposes and, at a subsequent date, an auditor’s report on the same financial information for statutory purposes.

Confidentiality, Safe Custody, Integrity, Accessibility and Retrievability of Engagement Documentation (Ref: Para. 46)

Relevant ethical requirements establish an obligation for the firm’s personnel to observe at all times the confidentiality of information contained in engagement documentation, unless specific client authority has been given to disclose information, or there are responsibilities under law, regulation or relevant ethical requirements to do so.^[5]  Specific laws or regulations may impose additional obligations on the firm’s personnel to maintain client confidentiality, particularly where data of a personal nature are concerned.

Whether engagement documentation is in paper, electronic or other media, the integrity, accessibility or retrievability of the underlying data may be compromised if the documentation could be altered, added to or deleted without the firm’s knowledge, or if it could be permanently lost or damaged.  Accordingly, controls that the firm designs and implements to avoid unauthorised alteration or loss of engagement documentation may include those that:

• Enable the determination of when and by whom engagement documentation was created, changed or reviewed;
• Protect the integrity of the information at all stages of the engagement, especially when the information is shared within the engagement team or transmitted to other parties via the Internet;
• Prevent unauthorised changes to the engagement documentation; and
• Allow access to the engagement documentation by the engagement team and other authorised parties as necessary to properly discharge their responsibilities. 

Controls that the firm designs and implements to maintain the confidentiality, safe custody, integrity, accessibility and retrievability of engagement documentation may include the following:

• The use of a password among engagement team members to restrict access to electronic engagement documentation to authorised users.
• Appropriate back‑up routines for electronic engagement documentation at appropriate stages during the engagement.
• Procedures for properly distributing engagement documentation to the engagement team members at the start of the engagement, processing it during engagement, and collating it at the end of the engagement.
• Procedures for restricting access to, and enabling proper distribution and confidential storage of, hardcopy engagement documentation.

For practical reasons, original paper documentation may be electronically scanned for inclusion in engagement files.  In such cases, the firm’s procedures designed to maintain the integrity, accessibility, and retrievability of the documentation may include requiring the engagement teams to:

• Generate scanned copies that reflect the entire content of the original paper documentation, including manual signatures, cross‑references and annotations;
• Integrate the scanned copies into the engagement files, including indexing and signing off on the scanned copies as necessary; and
• Enable the scanned copies to be retrieved and printed as necessary.
• There may be legal, regulatory or other reasons for a firm to retain original paper documentation that has been scanned.

Retention of Engagement Documentation (Ref: Para. 47)

The needs of the firm for retention of engagement documentation, and the period of such retention, will vary with the nature of the engagement and the firm’s circumstances, for example, whether the engagement documentation is needed to provide a record of matters of continuing significance to future engagements.  The retention period may also depend on other factors, such as whether local law or regulation prescribes specific retention periods for certain types of engagements, or whether there are generally accepted retention periods in the jurisdiction in the absence of specific legal or regulatory requirements.

In the specific case of audit engagements, the retention period would ordinarily be no shorter than five years from the date of the auditor’s report, or, if later, the date of the group auditor’s report.

For audits or reviews of financial reports conducted under the Corporations Act 2001 (the Act), section 307B of that Act requires an auditor or member of an audit firm to retain all audit working papers prepared by or for, or considered or used by, the auditor in accordance with the requirements of the Australian Auditing Standards until:

1. The end of seven years after the date of the audit report prepared in relation to the audit or review to which the audit working papers relate; or
2. An earlier date determined by the Australian Securities and Investments Commission for the audit working papers.

Relevant law or regulation, other than the Corporations Act 2001, may require the retention of audit working papers for specified periods.

Procedures that the firm adopts for retention of engagement documentation include those that enable the requirements of paragraph 47 to be met during the retention period, for example to:

• Enable the retrieval of, and access to, the engagement documentation during the retention period, particularly in the case of electronic documentation since the underlying technology may be upgraded or changed over time;
• Provide, where necessary, a record of changes made to engagement documentation after the engagement files have been completed; and
• Enable authorised external parties to access and review specific engagement documentation for quality control or other purposes.

Ownership of engagement documentation

[Deleted by the AUASB.  Refer Aus A63.1]

Unless otherwise specified by law or regulation, engagement documentation remains the property of the firm.  The firm may, at its discretion, make portions of, or extracts from, engagement documentation available to clients, provided such disclosure does not undermine the validity of the work performed or the independence of the firm or its personnel.

Monitoring the Firm’s Quality Control Policies and Procedures (Ref: Para. 48)

The purpose of monitoring compliance with quality control policies and procedures is to provide an evaluation of:

• Adherence to AUASB Standards, relevant ethical requirements, and applicable legal and regulatory requirements;
• Whether the system of quality control has been appropriately designed and effectively implemented; and
• Whether the firm’s quality control policies and procedures have been appropriately applied, so that reports that are issued by the firm or engagement partners are appropriate in the circumstances.

Ongoing consideration and evaluation of the system of quality control include matters such as the following:

• Analysis of:
  • New developments in AUASB Standards, relevant ethical requirements, and applicable legal and regulatory requirements, and how they are reflected in the firm’s policies and procedures where appropriate;
  • Written confirmation of compliance with policies and procedures on independence;
  • Continuing professional development, including training; and
  • Decisions related to acceptance and continuance of client relationships and specific engagements. 
• Determination of corrective actions to be taken and improvements to be made in the system, including the provision of feedback into the firm’s policies and procedures relating to education and training. 
• Communication to appropriate firm personnel of weaknesses identified in the system, in the level of understanding of the system, or compliance with it. 
• Follow‑up by appropriate firm personnel so that necessary modifications are promptly made to the quality control policies and procedures.

Inspection cycle policies and procedures may, for example, specify a cycle that spans three years.  The manner in which the inspection cycle is organised, including the timing of selection of individual engagements, depends on many factors, such as the following:

• The size of the firm. 
• The number and geographical location of offices. 
• The results of previous monitoring procedures. 
• The degree of authority both personnel and offices have (for example, whether individual offices are authorised to conduct their own inspections or whether only the head office may conduct them). 
• The nature and complexity of the firm’s practice and organisation. 
• The risks associated with the firm’s clients and specific engagements.

The inspection process includes the selection of individual engagements, some of which may be selected without prior notification to the engagement team.  In determining the scope of the inspections, the firm may take into account the scope or conclusions of an independent external inspection program.  However, an independent external inspection program does not act as a substitute for the firm’s own internal monitoring program.

Considerations Specific to Smaller Firms

In the case of small firms, monitoring procedures may need to be performed by individuals who are responsible for the design and implementation of the firm’s quality control policies and procedures, or who may be involved in performing the engagement quality control review.  A firm with a limited number of persons may choose to use a suitably qualified external person or another firm to carry out engagement inspections and other monitoring procedures.  Alternatively, the firm may establish arrangements to share resources with other appropriate organisations to facilitate monitoring activities.

Considerations Specific to Public Sector Organisations

In the public sector, an auditor appointed under statute (for example, an Auditor‑General) may delegate responsibility for an engagement.  The monitoring process needs to include, on a cyclical basis, inspection of at least one completed engagement of each person with delegated responsibility for an engagement and its performance.  This includes an external person engaged as the person responsible for an engagement.

Communicating Deficiencies (Ref: Para. 50)

The reporting of identified deficiencies to individuals other than the relevant engagement partners need not include an identification of the specific engagements concerned, although there may be cases where such identification may be necessary for the proper discharge of the responsibilities of the individuals other than the engagement partners.

Complaints and Allegations

Source of Complaints and Allegations (Ref: Para. 55)

Complaints and allegations (which do not include those that are clearly frivolous) may originate from within or outside the firm.  They may be made by firm personnel, clients or other third parties.  They may be received by engagement team members or other firm personnel.

Investigation Policies and Procedures (Ref: Para. 56)

Policies and procedures established for the investigation of complaints and allegations may include for example, that the partner supervising the investigation:

• Has sufficient and appropriate experience;
• Has authority within the firm; and
• Is otherwise not involved in the engagement.

The partner supervising the investigation may involve legal counsel as necessary.

Considerations specific to smaller firms

It may not be practicable, in the case of firms with few partners, for the partner supervising the investigation not to be involved in the engagement.  These small firms and sole practitioners may use the services of a suitably qualified external person or another firm to carry out the investigation into complaints and allegations.

(Ref: Para. 57)

The form and content of documentation evidencing the operation of each of the elements of the system of quality control is a matter of judgement and depends on a number of factors, including the following:

• The size of the firm and the number of offices.
• The nature and complexity of the firm’s practice and organisation. 

For example, large firms may use electronic databases to document matters such as independence confirmations, performance evaluations and the results of monitoring inspections.

Appropriate documentation relating to monitoring includes, for example:

• Monitoring procedures, including the procedure for selecting completed engagements to be inspected.
• A record of the evaluation of:
  • Adherence to AUASB Standards, relevant ethical requirements, and applicable legal and regulatory requirements;
  • Whether the system of quality control has been appropriately designed and effectively implemented; and
  • Whether the firm’s quality control policies and procedures have been appropriately applied, so that reports that are issued by the firm or engagement partners are appropriate in the circumstances.
• Identification of the deficiencies noted, an evaluation of their effect, and the basis for determining whether and what further action is necessary.

Considerations Specific to Smaller Firms

Smaller firms may use more informal methods in the documentation of their systems of quality control such as manual notes, checklists and forms.