A system of quality control is critical for ensuring public accounting firms meet appropriate levels of professional quality in their auditing practices. The purpose of such a system is to provide reasonable assurance that firms and their personnel comply with professional standards, regulatory requirements, and issue appropriate reports.
The AICPA has established six elements integral to a robust quality control system, which have been adopted by the PCAOB for audits of issuers. These elements include:
Leadership sets the tone at the top, emphasizing the importance of quality over commercial considerations. This involves assigning management roles, evaluating personnel performance based on quality, and dedicating resources to develop and maintain quality control policies.
Auditors must ensure compliance with ethical standards, particularly independence. Firms should identify threats to independence, take actions to mitigate them, and require personnel to confirm their adherence to these standards regularly.
Before engaging or continuing work with a client, firms assess their ability to perform the audit while adhering to legal and ethical requirements. They also evaluate the client's integrity and business reputation.
The quality of audits depends significantly on hiring and retaining competent personnel. Firms invest in professional development, staff evaluations, and appropriate staffing assignments to ensure high-quality outcomes.
Policies ensure audits are conducted following the performance principles, with particular attention to complex or high-risk engagements. Engagement reviews are conducted to assess the judgments and conclusions of audit teams.
Monitoring provides assurance that quality control policies are effective. Methods include reviewing administrative records, discussing quality issues with personnel, and assessing compliance with independence policies and professional education requirements.
To enhance accountability, public accounting firms are subject to external monitoring efforts:
- PCAOB Inspections: The PCAOB inspects audit firms' engagements and evaluates their quality control systems. Firms auditing more than 100 issuers undergo annual inspections, while others are inspected triennially.
- Peer Reviews: Nonissuer-focused firms undergo peer reviews through the AICPA, evaluating compliance with auditing standards.