QUALITY CONTROL OF AUDIT WORK

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QUALITY CONTROL OF AUDIT WORK

• Slovenian case
• REPARIS Project in Macedonia

Meta Duhovnik, Ph.D., SLOVENIAN INSTITUTE OF
AUDITORS
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Basic regulation

• EU basis
• Directive 2006/43/ES on statutory audits of
  annual accounts and consolidated accounts
  (Official Journal of the EU, No. L 157 - 9. 6.
  2006)
• Regulation enforced in Slovenia
• Auditing Act (Official Journal of the Republic of
  Slovenia, No. 65/2008 30. 6. 2008 hereinafter
  Zrev-2)
• ISQC 1 Quality Control for Firms that Perform
  Audits and Reviews of Historical Financial
  Information, and other Assurance and Related
  Services Engagements

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Basic regulation

• Regulation enforced in Slovenia (continuation)
• ISA 220 Quality Control for an Audit of
  Financial Statements
• Code of Ethics for Professional Accountants
  (IFAC)
• Code of Professional Conduct (Slovenian)

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(No Transcript)
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Quality control of audit work

• Quality control system of the audit company
• External quality control

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Quality control system of the audit company in
Slovenia

• Auditing rules
• ISQC 1 Quality Control for Firms that Perform
  Audits and Reviews of Financial Statements, and
  other Assurance and Related Services Engagements
• ISA 220 Quality Control for an Audit of
  Financial Statements

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Definitions

• Engagement partner
• The partner or other person in the firm who is
  responsible for the engagement and its
  performance, and for the report that is issued on
  behalf of the firm, and who, where required, has
  the appropriate authority from a professional,
  legal or regulatory body.
• Engagement quality control review
• A process designed to provide an objective
  evaluation, on or before the date of the report,
  of the significant judgments the engagement team
  made and the conclusions it reached in
  formulating the report.

8
Definitions

• Engagement quality control reviewer
• A partner, other person in the firm, suitably
  qualified external person, or a team made up of
  such individuals, none of whom is part of the
  engagement team, with sufficient and appropriate
  experience and authority to objectively evaluate
  the significant judgments the engagement team
  made and the conclusions it reached in
  formulating the report.

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Definitions

• Engagement team
• All partners and staff performing the engagement,
  and any individuals engaged by the firm or a
  network firm who perform procedures on the
  engagement. This excludes external experts
  engaged by the firm or a network firm.
• Firm
• A sole practitioner, partnership or corporation
  or other entity of professional accountants.

10
Definitions

• Inspection
• In relation to completed engagements, procedures
  designed to provide evidence of compliance by
  engagement teams with the firms quality control
  policies and procedures.
• Listed entity
• An entity whose shares, stock or debt are quoted
  or listed on a recognized stock exchange, or are
  marketed under the regulations of a recognized
  stock exchange or other equivalent body.

11
Definitions

• Monitoring
• A process comprising an ongoing consideration and
  evaluation of the firms system of quality
  control, including a periodic inspection of a
  selection of completed engagements, designed to
  provide the firm with reasonable assurance that
  its system of quality control is operating
  effectively.
• Network firm
• A firm or entity that belongs to a network.

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Definitions

• Network
• A larger structure
• that is aimed at cooperation, and
• that is clearly aimed at profit or cost-sharing
  or shares common ownership, control or
  management, common quality control policies and
  procedures, common business strategy, the use of
  a common brand name, or a significant part of
  professional resources.

13
Definitions

• Partner
• Any individual with authority to bind the firm
  with respect to the performance of a professional
  services engagement.
• Personnel
• Partners and staff.

14
Definitions

• Professional standards
• IAASB Engagement Standards, as defined in the
  IAASBs Preface to the International Standards on
  Quality Control, Auditing, Review, Other
  Assurance and Related Services, and relevant
  ethical requirements.
• Relevant ethical requirements
• Ethical requirements to which the engagement team
  and engagement quality control reviewer are
  subject, which ordinarily comprise Parts A and B
  of the International Federation of Accountants
  Code of Ethics for Professional Accountants (IFAC
  Code) together with national requirements that
  are more restrictive.

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Definitions

• Reasonable assurance
• In the context of ISQC, a high, but not absolute,
  level of assurance.
• Staff
• Professionals, other than partners, including any
  experts the firm employs.

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Definitions

• Suitably qualified external person
• An individual outside the firm with the
  competence and capabilities to act as an
  engagement partner, for example a partner of
  another firm, or an employee (with appropriate
  experience) of either a professional accountancy
  body whose members may perform audits and reviews
  of historical financial information, or other
  assurance or related services engagements, or of
  an organization that provides relevant quality
  control services.

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ISQC 1 compared with ISA 220

• ISQC 1
• The quality control policies and procedures which
  are documented and communicated to the firms
  personnel.

• ISA 220
• Quality control procedures that are applicable to
  the individual audit engagement.

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Elements of a system of quality control

• ISQC 1
• Leadership responsibilities for quality within
  the firm
• Relevant ethical requirements
• Acceptance and continuance of client
  relationships and specific engagements
• Human resources
• Engagement performance
• Monitoring

• ISA 220
• Leadership responsibilities for quality on audits
• Relevant ethical requirements
• Acceptance and continuance of client
  relationships and audit engagements
• Assignment of engagement teams
• Engagement performance
• Monitoring

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Leadership responsibilities

• ISQC 1
• The firms chief executive officer (or
  equivalent), or, if appropriate, the firms
  managing board of partners (or equivalent) should
  assume ultimate responsibility for the firms
  system of quality control.

• ISA 220
• The engagement partner is responsible for the
  overall quality on each audit engagement to which
  that partner is assigned.

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Leadership responsibilities

• ISQC 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 firms overriding commitment to quality.
• Assignment of management responsibilities so that
  commercial considerations do not override the
  quality of work performed.
• Provision of sufficient resources for the
  development, documentation and support of quality
  control policies and procedures.

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Leadership responsibilities

• ISA 220
• Engagement partner is taking care of importance
  to audit quality of
• performing work that complies with professional
  standards and applicable legal and regulatory
  requirements
• complying with the firms quality control
  policies and procedures as applicable
• issuing auditors reports that are appropriate in
  the circumstances and
• the engagement teams ability to raise concerns
  without fear of reprisals.

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Leadership responsibilities

• ISQC 1
• Any person assigned operational responsibility
  for the firms system of quality control by the
  firms chief executive officer or managing board
  of partners should have sufficient and
  appropriate experience and ability, and the
  necessary authority, to assume that
  responsibility.

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Ethical requirements

• ISQC 1

• ISA 220

• Ethical requirements ordinarily comprise Parts A
  and B of the IFAC Code together with national
  requirements that are more restrictive.

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Ethical requirements

• The fundamental principles of professional
  ethics, which include
• Integrity
• Objectivity
• Professional competence and due care
• Confidentiality
• Professional behavior

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ISQC 1 Ethical requirements

• The firm shall establish policies and procedures
  designed to provide it with reasonable assurance
  that the firm and its personnel comply with
  relevant ethical requirements.

ISA 220 Ethical requirements

• Throughout the audit engagement, the engagement
  partner shall remain alert, through observation
  and making inquiries as necessary, for evidence
  of non-compliance with relevant ethical
  requirements by members of the engagement team.

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ISQC 1 Ethical requirements independence

• The firm establishes policies and procedures
  designed to provide it with reasonable assurance
  that the firm, its personnel and, where
  applicable, others subject to independence
  requirements (including network firm personnel)
  maintain independence where required by relevant
  ethical requirements.
• Such policies and procedures shall enable the
  firm to
• communicate its independence requirements to its
  personnel and, where applicable, others subject
  to them
• identify and evaluate circumstances and
  relationships that create threats to
  independence, and to take appropriate action to
  eliminate those threats or reduce them to an
  acceptable level by applying safeguards, or, if
  considered appropriate, to withdraw from the
  engagement, where withdrawal is permitted by law
  or regulation.

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ISQC 1 Ethical requirements independence

• At least annually, the firm obtains written
  confirmation of compliance with its policies and
  procedures on independence from all firm
  personnel required to be independent by relevant
  ethical requirements.
• Relevant policies and procedures to assure
  independence are
• setting out criteria for determining the need for
  safeguards to reduce the familiarity threat to an
  acceptable level when using the same senior
  personnel on an assurance engagement over a long
  period of time and
• requiring, for audits of financial statements of
  listed entities, the rotation of the engagement
  partner and the individuals responsible for
  engagement quality control review, and where
  applicable, others subject to rotation
  requirements, after a specified period in
  compliance with relevant ethical requirements.

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ISA 220 Ethical requirements independence

• The engagement partner has to
• obtain relevant information from the firm and,
  where applicable, network firms, to identify and
  evaluate circumstances and relationships that
  create threats to independence
• evaluate information on identified breaches, if
  any, of the firms independence policies and
  procedures to determine whether they create a
  threat to independence for the audit engagement
• take appropriate action to eliminate such threats
  or reduce them to an acceptable level by applying
  safeguards, or, if considered appropriate, to
  withdraw from the audit engagement, where
  withdrawal is possible under applicable law or
  regulation.
• The engagement partner shall promptly report to
  the firm any inability to resolve the matter for
  appropriate action.

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Independence requires
IFAC Code

• independence of mind
• The state of mind that permits the expression of
  a conclusion without being affected by influences
  that compromise professional judgment.
• independence of appearance
• The avoidance of facts and circumstances that are
  so significant that a reasonable and informed
  third party , having knowledge of all relevant
  information, including safeguards applied, would
  reasonably conclude a firms or auditors
  independence had been compromised.

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Possible threats to independence
IFAC Code

• Self-interest threat
• Self-review threat
• Advocacy threat
• Familiarity threat
• Intimidation threat

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Self-interest threat
IFAC Code

• Self-interest threat may occur as a result of the
  financial or other interests of a professional
  accountant or of an immediate or close family
  member.

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Self-review threat
IFAC Code

• Self-review threat may occur when a previous
  judgment needs to be re-evaluated by the
  professional accountant responsible for that
  judgment.

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Advocacy threat
IFAC Code

• Advocacy threat may occur when a professional
  accountant promotes a position or opinion to the
  point that subsequent objectivity may be
  compromised.

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Familiarity threat
IFAC Code

• Familiarity threats may occur when, because of a
  close relationship, a professional accountant
  becomes too sympathetic to the interests of
  others.

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Intimidation threat
IFAC Code

• Intimidation threat may occur when a professional
  accountant may be deterred from acting
  objectively by threats, actual or perceived.

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Safeguards
IFAC Code

• Two broad categories
• Safeguards created by the profession, legislation
  or regulation.
• Safeguards in the work environment.

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Safeguards created by the profession, legislation
or regulation include
IFAC Code

• Educational, training and experience requirements
  for entry into the profession.
• Continuing professional development requirements.
• Corporate governance regulations.
• Professional standards.
• Professional or regulatory monitoring and
  disciplinary procedures.
• External review by a legally empowered third
  party of the reports, returns, communications and
  information produced by a professional
  accountant.

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Safeguards in the work environment include
IFAC Code

• Depending on the circumstances
• Firm wide safeguards
• Engagement specific safeguards

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Firm-wide safeguards in the work environment may
include
IFAC Code

• Leadership of the firm that stresses the
  importance of compliance with the fundamental
  principles
• Leadership of the firm that establishes the
  expectation that members of an assurance team
  will act in the public interest
• Policies and procedures to implement and monitor
  quality control of engagements

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Firm-wide safeguards (continuation 1)
IFAC Code

• Documented policies regarding
• the identification of threats to compliance with
  the fundamental principles,
• the evaluation of the significance of these
  threats and
• the identification and the application of
  safeguards to eliminate or reduce the threats to
  an acceptable level
• For firms that perform assurance engagements,
  documented independence policies regarding
• the identification of threats to independence,
• the evaluation of the significance of these
  threats and
• the evaluation and application of safeguards to
  eliminate or reduce the threats to an acceptable
  level

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Firm-wide safeguards (continuation 2)
IFAC Code

• Documented internal policies and procedures
  requiring compliance with the fundamental
  principles
• Policies and procedures that will enable the
  identification of interests or relationships
  between the firm or members of engagement teams
  and clients
• Policies and procedures to monitor and, if
  necessary, manage the reliance on revenue
  received from a single client
• Using different partners and engagement teams
  with separate reporting lines for the provision
  of non-assurance services to an assurance client

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Firm-wide safeguards (continuation 3)
IFAC Code

• Policies and procedures to prohibit individuals
  who are not members of an engagement team from
  inappropriately influencing the outcome of the
  engagement
• Timely communication of a firms policies and
  procedures, including any changes to them, to all
  partners and professional staff, and appropriate
  training and education on such policies and
  procedures
• Designating a member of senior management to be
  responsible for overseeing the adequate
  functioning of the firms quality control system

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Firm-wide safeguards (continuation 4)
IFAC Code

• Advising partners and professional staff of those
  assurance clients and related entities from which
  they must be independent
• A disciplinary mechanism to promote compliance
  with policies and procedures
• Published policies and procedures to encourage
  and empower staff to communicate to senior levels
  within the firm any issue relating to compliance
  with the fundamental principles that concerns
  them.

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Engagement-specific safeguards in the work
environment may include
IFAC Code

• Involving an additional professional accountant
  to review the work done or otherwise advise as
  necessary
• Consulting an independent third party, such as a
  committee of independent directors, a
  professional regulatory body or another
  professional accountant
• Discussing ethical issues with those charged with
  governance of the client

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Engagement-specific safeguards (continuation 1)
IFAC Code

• Disclosing to those charged with governance of
  the client the nature of services provided and
  extent of fees charged
• Involving another firm to perform or re-perform
  part of the engagement
• Rotating senior assurance team personnel.

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National regulation

• Auditing Act
• Code of Professional Conduct
• Basic Auditing Principles
• Guidelines for setting the fees
• Guidelines for the Operation of the Audit
  Companies

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More restrictive national requirements Auditing
Act (Article 45(1))

• An audit company is not allowed to audit an
  individual legal person if (1)
• it holds investments in that legal person
• that legal person holds investments in the audit
  company
• the persons related to the legal person are
• close family members of the members of the
  management or supervisory board or the certified
  auditors of an audit company,
• joint indirect or direct holders of a qualifying
  (10) holding in the audit company

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More restrictive national requirements Auditing
Act (Article 45(1))

• An audit company is not allowed to audit an
  individual legal person if (2)
• the audit company or any organizational unit in
  the network it belongs to, or person connected
  with the audit company performs or has performed
  in the two years prior to concluding an agreement
  on the auditing of a legal person's financial
  statements
• any type of accounting or bookkeeping services,
• valuation services for the purpose of financial
  reporting that could affect the items in the
  financial statements,

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More restrictive national requirements Auditing
Act (Article 45(1))

• An audit company is not allowed to audit an
  individual legal person if (3)
• tax consultation services that could affect items
  in the financial statements,
• agency services in tax and judicial procedures
  regarding tax matters,
• internal auditing services,
• services involving the set-up or introduction of
  an information system that includes the area of
  accounting or the generation of information
  included in the financial statements of a legal
  person,

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More restrictive national requirements Auditing
Act (Article 45(1))

• An audit company is not allowed to audit an
  individual legal person if (4)
• business and financial services that affect items
  in the financial statements and business and
  financial services that include advertising,
  trading or guarantees for the equity and debt
  securities of a legal person,
• legal services,
• any other services that could affect the items in
  the financial statements
• it is connected with a legal person in some other
  way and doubt regarding the independence and
  objectivity of auditing may exist due to this
  connection.

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More restrictive national requirements Auditing
Act (Article 45(2))

• A certified auditor is not allowed to audit an
  individual legal person if (1)
• he/she has, as key audit partner, audited the
  financial statements of a legal person for seven
  consecutive years following the date of his/her
  first appointment, and if following the last
  audit, two years have not passed for which
  another key audit partner audited the financial
  statements
• he/she holds investments in that legal person

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More restrictive national requirements Auditing
Act (Article 45(2))

• A certified auditor is not allowed to audit an
  individual legal person if (2)
• he/she is connected with a legal person in some
  other way, and doubt regarding the independence
  and objectivity of auditing may exist due to this
  connection
• he/she performs or has performed services
  affecting the financial statements in the two
  years prior to carrying out auditing tasks.

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More restrictive national requirements
Auditing Act (Article 46)

• A certified auditor or key audit partner that
  audits financial statements may not assume the
  function of member or consultant of a management
  body or head of an accounting and/or financial
  department at the legal person being audited
  until at least two years have passed following
  the cessation of audit work as a certified
  auditor or key audit partner.

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More restrictive national requirements
Auditing Act (Article 47(4))

• The price for auditing services shall not
• be conditional on the provision of additional
  services for the audited legal person or
• dependent on any other conditions.

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More restrictive national requirements
Auditing Act (Article 9(2))

• One of the tasks and competencies of the
  Institute in the field of auditing and other
  specialist fields related to auditing
• defining guidelines for setting the fees for
  auditing services and corporate, real estate,
  machines and equipment valuation services.

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More restrictive national recommendations
Guidelines for Setting the Fees

• Guidelines
• The fee has to be adequate to the nature, timing
  and extent of the work performed.
• The recommended prices
• assistant between 34,92 and 43,65
• auditor between 56,74 and 69,84
• manager between 78,57 and 104,76
• certified auditor between 104,76 and 126,58
  
• engagement partner between 135,31 and 161,50
• The invoice has to be paid within 8 days after
  receipt.
• No more than 60 can be required in advance.
  

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More restrictive national requirements Code
of Professional Conduct

• Rule 1 (Independence)
• The audit firm is not allowed to gain the
  majority of the revenue from only one source.

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More restrictive national requirements
Guidelines for the Operation of the Audit
Companies

• Any action that could threaten the independence
  of personnel
• for example employment offering, or
• service offering,
• is forbidden.

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Acceptance and continuance of client
relationships and specific engagements

• ISQC 1

• The firm has to establish policies and procedures
  for the acceptance and continuance of client
  relationships and specific engagements, designed
  to provide the firm with reasonable assurance
  that it will only undertake or continue
  relationships and engagements where the firm
• is competent to perform the engagement and has
  the capabilities, including time and resources,
  to do so
• can comply with relevant ethical requirements
  and
• has considered the integrity of the client, and
  does not have information that would lead it to
  conclude that the client lacks integrity.

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Client relationships

• ISQC 1

• The firm has to obtain such information as it
  considers necessary in the circumstances before
  accepting an engagement with a new client, when
  deciding whether to continue an existing
  engagement, and when considering acceptance of a
  new engagement with an existing client.

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Client relationships

• ISQC 1

• If issues have been identified, and the firm
  decides to accept or continue the client
  relationship or a specific engagement, the firm
  has to document how the issues were resolved.

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Client relationships

• ISQC 1

• The firm has to establish policies and procedures
  on continuing an engagement and the client
  relationship, addressing the circumstances where
  the firm obtains information that would have
  caused it to decline the engagement had that
  information been available earlier. Such policies
  and procedures shall include consideration of
• the professional and legal responsibilities that
  apply to the circumstances, including whether
  there is a requirement for the firm to report to
  the person or persons who made the appointment
  or, in some cases, to regulatory authorities and
• the possibility of withdrawing from the
  engagement or from both the engagement and the
  client relationship.

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Client relationships

• ISA 220

• The engagement partner has to
• assure that appropriate procedures regarding the
  acceptance and continuance of client
  relationships and audit engagements have been
  followed, and
• determine that conclusions reached in this regard
  are appropriate.

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Client relationships

• ISA 220

• If the engagement partner obtains information
  that would have caused the firm to decline the
  audit engagement had that information been
  available earlier, the engagement partner has to
  communicate that information promptly to the
  firm, so that the firm and the engagement partner
  can take the necessary action.

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Human resources

• ISQC 1

• The firm has to establish policies and procedures
  designed to provide it with reasonable assurance
  that it has sufficient personnel with the
  competence, capabilities, and commitment to
  ethical principles necessary to
• perform engagements in accordance with
  professional standards and applicable legal and
  regulatory requirements and
• enable the firm or engagement partners to issue
  reports that are appropriate in the
  circumstances.

66
Human resources

• ISQC 1

• Personnel issues relevant to the firms 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

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Human resources

• ISQC 1

Competence is the knowledge and skills necessary
to accomplish tasks that define the individuals
job.

• 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

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Assignment of engagement teams

• MSR 220

• The engagement partner has to assure that the
  engagement team, and any auditors experts who
  are not part of the engagement team, collectively
  have the appropriate competence and capabilities
  to
• perform the audit engagement in accordance with
  professional standards and applicable legal and
  regulatory requirements and
• enable an auditor to issue a report that is
  appropriate in the circumstances.

69
Engagement teams

• MSR 220

• The engagement partner may take into
  consideration such matters as the teams
• understanding of, and practical experience with,
  audit engagements of a similar nature and
  complexity through appropriate training and
  participation
• understanding of professional standards and legal
  and regulatory requirements
• technical expertise, including expertise with
  relevant information technology and specialized
  areas of accounting or auditing
• knowledge of relevant industries in which the
  client operates
• ability to apply professional judgment
• understanding of the firms quality control
  policies and procedures.

70
Engagement performance

• ISQC 1

• The firm has to establish policies and procedures
  designed to provide it with reasonable assurance
  that
• engagements are performed in accordance with
  professional standards and applicable legal and
  regulatory requirements, and
• the firm or the engagement partner issue reports
  that are appropriate in the circumstances.

71
Engagement performance

• ISQC 1

• Such policies and procedures have to include
• matters relevant to promoting consistency in the
  quality of engagement performance
• supervision responsibilities
• review responsibilities.
• The firms review responsibility policies and
  procedures have to be determined on the basis
  that work of less experienced team members is
  reviewed by more experienced engagement team
  members.

72
Engagement performance - consultation

• ISQC 1

• The policies and procedures of the firm have to
  assure that
• appropriate consultation takes place on difficult
  or contentious matters
• sufficient resources are available to enable
  appropriate consultation to take place
• the nature and scope of, and conclusions
  resulting from, such consultations are documented
  and are agreed by both the individual seeking
  consultation and the individual consulted and
• conclusions resulting from consultations are
  implemented.

73
Engagement performance Engagement quality
control review

• ISQC 1

• The firm has to establish policies and procedures
  requiring, for appropriate engagements, an
  engagement quality control review that provides
  an objective evaluation of the significant
  judgments made by the engagement team and the
  conclusions reached in formulating the report.

74
Engagement performance Engagement quality
control review

• ISQC 1

• Policies and procedures have to
• require an engagement quality control review for
  all audits of financial statements of listed
  entities
• set out criteria against which all other audits
  and reviews of historical financial information
  and other assurance and related services
  engagements shall be evaluated to determine
  whether an engagement quality control review
  should be performed and
• require an engagement quality control review for
  all engagements, if any, meeting the criteria
  established.

75
Engagement performance Engagement quality
control review

• ISQC 1

• The firm has to establish policies and
  procedures setting out the
• nature,
• timing and
• extent
• of an engagement quality control review. Such
  policies and procedures require that the
  engagement report not be dated until the
  completion of the engagement quality control
  review.

76
Engagement performance Engagement quality
control review

• ISQC 1

• The firm has to establish policies and procedures
  on documentation of the engagement quality
  control review which require documentation that
• the procedures required by the firms policies on
  engagement quality control review have been
  performed
• the engagement quality control review has been
  completed on or before the date of the report
  and
• the reviewer is not aware of any unresolved
  matters that would cause the reviewer to believe
  that the significant judgments the engagement
  team made and the conclusions it reached were not
  appropriate.

77
Engagement performance Differences of opinion

• ISQC 1

• The firm has to establish policies and procedures
  for dealing with and resolving differences of
  opinion within the engagement team, with those
  consulted and, where applicable, between the
  engagement partner and the engagement quality
  control reviewer.
• Conclusions reached have to be documented and
  implemented.
• The report must not be dated until the matter is
  resolved.

78
Engagement performance Engagement documentation

• ISQC 1

• The firm has to establish policies and procedures
  for
• engagement teams to complete the assembly of
  final engagement files on a timely basis after
  the engagement reports have been finalized
• In the case of an audit such a time limit would
  ordinarily not be more than 60 days after the
  date of the auditors report.
• the retention of engagement documentation for a
  period sufficient to meet the needs of the firm
  or as required by law or regulation.
• In the specific case of audit engagements, the
  retention period would ordinarily be no shorter
  than five years from the date of the auditors
  report, or, if later, the date of the group
  auditors report.

79
More restrictive national requirements
Auditing Act (Article 39 (2))

• When auditing financial statements, the audit
  company must ensure that
• the certified auditor who signs the audit report
  on financial statements, participates in at least
  15 of total audit time
• the total number of working hours of the
  assistants of the certified auditor with more
  than two years of audit experience account for at
  least 60 of total audit time
• the total number of working hours of other
  persons in the audit group account for a maximum
  of 25 of total audit time.

80
National requirements Auditing Act (Article
39 (5))

• The audit company shall store the audit
  documentation for six years following the
  completion of an audit.

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Engagement performance

• ISA 220

• The engagement partner has to take responsibility
  for
• the direction, supervision and performance of the
  audit engagement in compliance with professional
  standards and applicable legal and regulatory
  requirements
• the auditors report being appropriate in the
  circumstances
• reviews being performed in accordance with the
  firms review policies and procedures
• the engagement team undertaking appropriate
  consultation on difficult or contentious matters
• not dating the auditors report until the
  completion of the engagement quality control
  review (where applicable)
• following the firms policies and procedures for
  dealing with and resolving differences of opinion
  within the engagement team, with those consulted
  or, where applicable, between the engagement
  partner and the engagement quality control
  reviewer.
• determine that conclusions reached in this regard
  are appropriate.

82
National requirements Auditing Act (Article 37
(3))

• Engagement performance consultation
• Whenever the testing and assessment of individual
  items in the financial statements require
  professional knowledge not available to a
  certified auditor, the legal person has to, at
  the request of the audit company, obtain an
  expert opinion or appraisal from a certified
  appraiser.

83
Monitoring
ISQC 1

• The firm has to establish a monitoring process
  designed to provide it with reasonable assurance
  that the policies and procedures relating to the
  system of quality control are relevant, adequate,
  and operating effectively.

84
Monitoring
ISQC 1

• The monitoring process has to
• include an ongoing consideration and evaluation
  of the firms system of quality control
  including, on a cyclical basis, inspection of at
  least one completed engagement for each
  engagement partner
• require responsibility for the monitoring process
  to be assigned to a partner or partners or other
  persons with sufficient and appropriate
  experience and authority in the firm to assume
  that responsibility
• require that those performing the engagement or
  the engagement quality control review are not
  involved in inspecting the engagements.

85
Monitoring
ISQC 1

• The firm has to evaluate the effect of
  deficiencies noted as a result of the monitoring
  process and determine whether they are either
• instances that do not necessarily indicate that
  the firms system of quality control is
  insufficient to provide it with reasonable
  assurance that it complies with professional
  standards and applicable legal and regulatory
  requirements, and that the reports issued by the
  firm or engagement partners are appropriate in
  the circumstances
• systemic, repetitive or other significant
  deficiencies that require prompt corrective
  action.

86
Monitoring Documentation of the System of
Quality Control
ISQC 1

• The firm has to establish policies and procedures
  requiring
• appropriate documentation to provide evidence of
  the operation of each element of its system of
  quality control,
• retention of documentation for a period of time
  sufficient to permit those performing monitoring
  procedures to evaluate the firms compliance with
  its system of quality control, or for a longer
  period if required by law or regulation,
• documentation of complaints and allegations and
  the responses to them.

87
Monitoring
ISA 220

• The engagement partner has to consider
• the results of the firms monitoring process as
  evidenced in the latest information circulated by
  the firm and, if applicable, other network firms
  and
• whether deficiencies noted in that information
  may affect the audit engagement.
• A deficiency in the firms system of quality
  control does not necessarily indicate that a
  particular audit engagement was not performed in
  accordance with professional standards and
  applicable legal and regulatory requirements, or
  that the auditors report was not appropriate.

88
External quality control

• Main objectives
• to ensure auditors meet their obligation to
  society to provide work of the highest quality
• to fulfill the need to sustain public confidence
  in the profession by demonstrating a concern for
  maintaining high standards of professional work
• to avoid the adverse consequences of sub-standard
  work and loss of public confidence
• to encourage, educate and assist members and
  member audit firms in achieving the highest
  standards of professional work, consistently
  throughout the profession.

89
Legal basis

• Auditing Act
• IFAC pronouncements
• Institutes auditing rules

90
The basis for disciplinary procedure

• Zrev-2
• Act on general administrative procedure

91
Competence for external quality control

• Institute Auditing Council
• The president of the Auditing Council represents
  the Institute in the procedures to be performed
  by the Auditing Council under public
  authorization given to the Auditing Council by
  the Auditing Act.
• Agency for the Public Oversight of Auditing
  (hereinafter Agency) Expert Council

92
Auditing Council

• decides about the issue of licences for auditing
  firms and certified auditors
• supervises the auditing
• adopts the auditing rules
• defines the criteria for obtaining the
  certificate of a certified auditor
• performs other professional tasks related to the
  development of the auditing profession.

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Auditing Council

• Seven members
• the director of the Institute
• four members with the license of a certified
  auditor
• two representatives of the interested public with
  appropriate knowledge and experience in the field
  of accountancy and finance.
• Appointed for a term of four years.

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94
Quality control

• Audit companies
• Certified auditors

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Monitoring

• Carried out by experts
• authorized by the Director of the Institute and
  employed at the Institute
• 3 certified auditors and 1 lawyer
• authorized by the Agency.

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Quality control Audit companies

• verification of whether individual entities meet
  the conditions for the issue of a license to
  provide auditing services
• Institute directly, Agency indirectly
• continuous verification of whether certified
  auditors and audit companies meet the conditions
  for entry in the appropriate register
• Institute directly, Agency indirectly

97
Quality control Audit companies (continuation)

• monitoring, collection and verification of
  reports and notifications of audit companies and
  other persons that are obliged to report to or
  notify the Institute with regard to individual
  facts and circumstances in accordance with the
  provisions of Zrev-2 and other acts
• Institute and Agency
• examinations of the operations of audit
  companies
• Institute and Agency
• imposing measures of supervision in accordance
  with ZRev-2
• Agency.

98
Quality control Audit companies

• Examinations of the operations of audit companies
  have to be carried out
• at least every three years for audit companies
  carrying out statutory audits of entities whose
  securities are traded on the regulated securities
  market of any Member State
• at least every six years for other audit
  companies.

99
Quality control Audit companies

• The supervision of an audit company includes
• an examination of the quality control system at
  the audit company
• verification of the independence of the certified
  auditors from the audit clients
• verification of the compliance of auditing
  procedures with auditing rules
• an assessment of the quality and quantity of
  factors used (composition of the auditing team
  and working hours)
• an examination of the auditing services charged
• direct supervision of certified auditors.

100
Quality control Certified auditors

• Direct supervision of certified auditors is
  carried out in a way that the quality of their
  work is verified (during the supervision of the
  audit company) with an examination of the
  complete audit documentation related to the audit
  of at least one client in the period since the
  last supervision was carried out.

101
Quality control Supervisors

• A person carrying out the supervision of audit
  companies and the tasks performed by a certified
  auditor has to
• be a certified auditor
• possess a high level of active knowledge of the
  Slovenian language
• fulfill the special ethical requirements (no
  conviction of a crime against property or an
  economic crime that has yet to expunged from the
  record).
• A supervisor has to prepare a written report on
  the examination of the quality of auditing that
  shall contain the main findings of the review.

102
Disciplinary sanctions for certified auditors

• withdrawal of the licence
• public warning.

103
Withdrawal of the licence

• the license was obtained by stating false data
• the conditions required (Article 48 of Zrev-2)
  were not fulfilled upon acquisition of the
  license
• certified auditor has been convicted of a
  commercial or property crime
• certified auditor holds investments in the
  client
• certified auditor is connected with the client in
  another manner that could give rise to a doubt as
  to the independence and objectivity of auditing
• certified auditor violates the auditing rules,
  which results in a deficient and misleading audit
  report
• certified auditor violates the duty to protect
  confidential data
• certified auditor repeatedly violates other
  provisions of auditing rules.

104
Conditional withdrawal of the licence

• The Agency may provide that the withdrawal will
  not be implemented if within the time limit set
  by the Agency of no less that six months and not
  exceeding two years, the certified auditor
  refrains from committing another violation giving
  rise to the withdrawal of the license or a public
  warning.

105
Public warning

• violation of the auditing rules
• no grounds for withdrawal or conditional
  withdrawal of the licence.

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Disciplinary sanctions for auditing firms

• order for elimination of violation
• imposition of additional measures
• withdrawal of the licence.

107
Order for elimination of violation

• The audit company
• violates the prohibition connected with the
  investments
• carries out the activities prohibited under
  Zrev-2
• is organized as a joint-stock company but it has
  not issued registered shares
• violates the duty of reporting and notification
• fails to publish transparency report (if
  applicable) on its website within three months of
  the conclusion of each financial year
• fails to meet any of the conditions for the issue
  of a license to provide auditing services
• violates other auditing rules.

108
Imposition of additional measures

• Serious violation of auditing rules.
• Measures
• the improvement of procedures of internal
  supervision of auditing
• the improvement of procedures of internal
  supervision concerning the flow of confidential
  data
• the change of internal structure of the auditing
  firm
• other measures required for implementation of the
  auditing rules.

109
Withdrawal of the licence

• the licence was obtained by stating false data
• additional measure was imposed on the auditing
  firm, and the competent body (old or newly
  appointed) failed to eliminate the violations
  and/or to take additional measures.

110
Quality control

• Financial resources
• Institute
• tariff (fee for the supervisory function)
• Agency
• main source state budget
• sanctions and offences tariff

111
Reporting under Zrev-2 (Article 77)

• An audit company has to
• notify the Institute of all changes regarding all
  facts and circumstances, based on which it
  obtained a license to provide auditing services,
  within ten days
• once a year until the end of May of the current
  year, report data regarding the following to the
  Institute and Agency
• holders of the audit company's shares and the
  acquisition of or changes to qualifying holdings
• investments based on which the audit company has
  indirectly or directly acquired a qualifying
  holding in another legal person, and any
  subsequent investments in that legal person
• changes to the articles of association or
  memorandum of association and all other acts of
  the audit company

112
Reporting under Zrev-2 (Article 77)

• reporting once a year (continuation)
• changes to a cooperation agreement with another
  audit company or the conclusion of a new
  cooperation agreement with another audit company
• the method of calculating the amount of auditor's
  liability insurance and the method of insuring
  the auditor's liability
• employees
• all contracts on the auditing of financial
  statements that the audit company concluded with
  clients from the previous accounting period and
  all contracts that the audit company concluded
  for other assurance engagements and agreed-upon
  procedures engagements
• number of planned and actual hours for each
  member of the audit team for each individual
  audit of financial statements
• number of audit reports signed by an individual
  certified auditor.

113
Reporting under Zrev-2 (Article 77)

• The audit company is obliged to report to the
  Agency and Institute the number of audit reports
  an individual certified auditor employed or in a
  contractual relationship with the audit company
  signed in connection with audits performed of
  individual and consolidated financial statements
  and the contents of concluded contracts on the
  auditing of financial statements in the manner,
  to the extent and by deadlines defined by the
  Agency in special regulations.

114
Reporting under Zrev-2 (Article 77)

• An audit company has to inform the Institute and
  Agency in writing about the dismissal or
  resignation of an audit company during a period
  for which it has been appointed, and
  appropriately explain the reasons for dismissal
  or resignation.
• If requested by the Institute or Agency, an audit
  company has to submit reports and information on
  all issues relevant to supervision or to carrying
  out other competencies and tasks of the Institute
  or Agency.

115
Rules of the Auditing Council

• Internal (more detailed) rules regarding the
  procedure of supervision.
• Written statement regarding independence and
  objectivity of the members.

116
Auditing of the financial statements

• Commercial sector
• statutory audit according to the Companies Act
  and Auditing Act
• Public sector
• statutory audit according to the Accounting Act
  and Public Finance Act
• internal audit according to the Public Finance
  Act
• supervision of the Court of Audit

117
Commercial Sector
The Accounting Profession

• Statutory audit
• large and medium-sized companies
• dual companies
• small listed companies
• companies obliged to draw up consolidated
  financial statements
• banks
• insurance companies

118
Public Sector
The Accounting Profession

• Audit under the Accounting Act
• mandatory for large legal entities that provide
  public services
• possible (ministers or mayors requirement)
• for the financial statements of the legal
  entities with at least 15 state or municipality
  ownership
• Internal audit under the Public Finance Act
• mandatory for all direct and indirect Budget
  users

119
The Auditing Profession

• The period 1996 - 2001
• the first Slovenian Auditing Act
• the Institute is responsible for the monitoring
  of statutory audits