CA Final Class Notes By Neeraj Arora

Chapter 1 - Quality Control

SQC 1 - Quality Control for Firms that Perform

Audits and Reviews of Historical Financial

Information, and Other Assurance and Related

Services Engagements

Introduction

●​ Every CA Firm must have a system of quality control

(SOQC) for audits and reviews of historical financial

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information, and for other assurance and related
services engagements.

or
●​ The firm should establish a SOQC designed to provide it
with
Firms should encourage personnel to give feedback on
quality control. Feedback should be an integral part of the

1.
quality control system.

Leadership responsibilities
u9 Leadership responsibilities for quality within the firm
●​ SQC 1 requires firms to promote an internal culture
recognizing quality as essential in engagements.
●​ A system of quality control consists of policies
○​ designed to achieve the objectives. ●​ CEO or Managing Partner - Hold ultimate responsibility
●​ SQC 1 applies to all firms irrespective of their for the firm’s system of quality control
constitution. ●​ Leaders must set examples to encourage high quality
ed
work
●​ CEO , MP - may assign operational responsibility of QC
to any person
●​ That person should have sufficient/appropriate
experience, ability and necessary authority.
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Key elements that highlight the importance of quality in a

firm's business strategy

Leadership must ensure quality overrides business strategy.

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Accordingly:
a.​ Management responsibilities must not compromise work
quality.
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b.​ Performance evaluation, compensation, and promotion

policies must reflect commitment to quality; and
c.​ Sufficient resources must support quality control
policies and procedures.

Ethical Requirements

●​ The firm should establish policies and procedures

designed to provide it with reasonable assurance that

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 CA Final Class Notes By Neeraj Arora

the firm and its personnel comply with relevant ethical Safeguards for Familiarity Threats

requirements. ●​ Firms should set criteria for safeguards against

●​ Ethical requirements are contained in the Code. familiarity threats.
●​ The Code establishes the fundamental principles of ●​ Consider public interest and senior personnel’s tenure.
professional ethics, which include: ●​ Safeguards: Rotation of senior personnel or
a.​ Integrity; engagement quality control review.
b.​ Objectivity; ●​ Familiarity threat is significant in FS audits of listed
c.​ Professional competence and due care; entities.
d.​ Confidentiality; and ●​ Listed Entity Audits
e.​ Professional behavior ○​ EP rotation within 7 years (except sole

g
●​ Fundamental principles should be emphasized by practitioners).
○​ Actions of the leadership of the firm ○​ Sole practitioners undergo mandatory peer review.

or
○​ Spreading awareness and training
○​ Monitoring Acceptance and Continuance of Client Relationships and

○​ A process for dealing with non-compliance.

Specific Engagements

●​ The firm should establish policies and procedures for

1.
Independence
the acceptance and continuance of client relationships
and specific engagements,
●​ designed to provide it with reasonable assurance that it
u9 will undertake or continue relationships and
engagements only where:
a.​ Client’s integrity is considered, and no concerns
exist;
b.​ Firm is competent and has required capabilities,
time, and resources.
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c.​ Can comply with the ethical requirements.
●​ If issues arise but firm decides to accept or continue,
document how they were resolved

Role of such policies and procedures w.r.t breaches

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The policies and procedures should include requirements

Matters to be considered with regard to integrity of the

client

●​ Reputation of principal owners, key MGT, related

parties, TCWG
Notification of Breaches:

●​ All subject to independence requirements must report

●​ Attitude towards matters such as aggressive
breaches promptly to the firm (All to Firm - Breaches)
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interpretation of accounting standards and IC

Firm’s Response:
environment.
●​ Firms must inform the Engagement Partner (EP) and
●​ Nature of the operations and business practices
Other Relevant Personnel (ORP). (Identified Breaches -
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●​ Whether client is aggressively concerned with

Firm to EP & ORP)
maintaining fees as low as possible
●​ EP & ORP must report actions taken to the firm. (EP &
●​ Indication of an Inappropriate limitation in scope of
ORP to Firm - Actions)
Annual Compliance:
work.
●​ Money laundering and criminal activities
●​ Written confirmation of compliance with firm’s policies
and procedures on independence from personnel at ●​ Reasons for proposed appointment &
non-reappointment of previous firm
least annually.

A firm's knowledge of a client’s integrity grows over time.

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 CA Final Class Notes By Neeraj Arora

DPQ 📌✍️ MB & Associates is a partnership firm of

Chartered Accountants which was established seven years

commenced providing software solutions in the area of

"e-commerce" in India as well as in certain European

back. The firm is getting new clients and has also been countries. AP & Associates, while carrying out the audit for

offered new engagement services with existing clients. The the current financial year, came to know that the company

firm is concerned about obtaining such information as it has expanded its operations into a new segment as well as

considers necessary in the circumstances before accepting new geography. AP & Associates does not possess necessary

an engagement with a new client and acceptance of a new expertise and infrastructure to carry out the audit of this

engagement with an existing client. The firm is looking to diversified business activities and accordingly wishes to

work with only select clients to adhere to the Quality withdraw from the engagement and client relationship.

Control Standards. Guide MB & Associates about the matters Discuss the issues that need to be addressed before deciding

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to be considered with regard to the integrity of a client, as to withdraw. (SA, Nov 2022, 5 marks) (MTP1, Nov 2024, 5

per the requirements of SQC 1 marks) (ICAI Study Material - Test Your Knowledge)

or
Matters the firm considers while evaluating capabilities, Human Resources

competence, time and resources to undertake a new ●​ The firm should establish policies and procedures
engagement from a new or an existing client. designed to provide it with
●​ Knowledge of relevant industries or subject matter. ○​ reasonable assurance that it has sufficient
●​ Experience with regulatory or reporting requirements personnel with

1.
or ability to gain skills. ■​ capabilities,
●​ Sufficient personnel with required competence. ■​ competence, and
●​ Availability of experts if needed.
u9 ■​ commitment to ethical principles
●​ Eligible individuals for engagement quality control ○​ necessary to perform its engagements in
review, if applicable; and accordance with
●​ Ability to complete engagement within the deadline. ■​ professional standards and
■​ regulatory and legal requirements
○​ to enable the firm or engagement partners
ed
■​ to issue reports that are appropriate in the
circumstances
●​ Such policies and procedures should address relevant HR
issues including
○​ Recruitment,
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○​ compensation,
​ ○​ training,
Issues that need to be addressed before deciding to withdraw ○​ career development,
Policies and procedures on withdrawal from an engagement ○​ performance evaluation etc.
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or client relationship must address these issues:

●​ Discuss actions with client management and TCWG. Assignment of Engagement Teams

●​ If withdrawing, inform them and provide reasons. The firm should assign responsibility for each engagement
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●​ Check professional, regulatory or legal obligations to to an engagement partner. Policies should ensure
stay or report withdrawal. a.​ Engagement Partner’s identity and role are
●​ Documenting significant issues, consultations, communicated to client management and TCWG
conclusions and the basis for the conclusions. b.​ The engagement partner has required capabilities,
competence, authority, and time.; and
AP & Associates, Chartered Accountants, are Statutory c.​ The responsibilities of the engagement partner are
Auditors of XP Limited for the last four years. XP Limited is
clearly defined and communicated to that partner.
engaged in the manufacture and marketing of FMCG Goods in

India. During 2023-24, the Company diversified and

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Monitoring Engagement Performance

●​ The firm should ensure that policies and procedures

relating to the system of quality control
○​ are relevant, adequate, operating effectively and
compiled within practice.
●​ Policies should include ongoing evaluation and periodic
inspection of completed engagements.

Factors need to be considered in monitoring the quality

control of engagements within a firm

g
●​ Deciding whether the quality control system of the firm
has been appropriately designed and effectively
implemented.

or
●​ Ensure policies reflect new professional, legal, and
regulatory changes.
●​ Assign monitoring to experienced and authorized

1.
personnel Matters to be considered to ensure the achievement of

●​ Address complaints or allegations of non-compliance by objective of Engagement Performance

a person within or outside the firm. Matters addressed include the following-
●​ Take remedial action against personnel violating
u9 1.​ How engagement teams are briefed on the engagement
policies.. to obtain an understanding of the objectives of their
●​ Correct deficiencies in design, operation, or compliance work.
of quality control policies 2.​ Processes for complying with applicable engagement
standards.

STA and Associates, Chartered Accountants, is an upcoming 3.​ Processes of engagement supervision, staff training and
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firm and its good professional services are hired by diverse coaching.
clients for assurance services. With a standing of seven
4.​ Methods of reviewing the work performed, the
years in practice, the firm has clients in various industries
significant judgments made and the form of report
like health care, education, hospitality, manufacturing and
being issued.
many more. With the increasing assignments, changes in
5.​ Appropriate documentation of the work performed and
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regulatory compliances and appointment of new personnel,

the senior partner CA T is concerned with the proper

of the timing and extent of the review.
functioning of the system of Quality control within the firm. 6.​ Processes to keep all policies and procedures current
He wants to ensure that policies and procedures relating to

the system of quality control of the firm are complied with Consultation
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properly. CA T suggests that a proper monitoring of quality The firm should establish policies and procedures designed to
control will be the right approach. Discuss the factors that provide it with reasonable assurance that:
are to be considered by CA T for monitoring the quality
a.​ Appropriate consultation takes place on difficult or
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control of engagements to ensure that they comply with

contentious matters;
SQC. - 5 Marks - Nov 2024 ICAI CA Final.
b.​ Sufficient resources are available to enable appropriate
consultation to take place;
c.​ The nature and scope of such consultations are
documented; and
d.​ Conclusions resulting from consultations are
documented and implemented.

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 CA Final Class Notes By Neeraj Arora

Engagement Quality Control Review Control Review for audit of financial statements of ABC

●​ Engagement Quality Control Review (EQCR) ensures Limited? (SA, May 2022, 5 Marks)

significant judgments are reviewed objectively before

issuing the report. ​Engagement quality control reviewer

●​ Reviewed by the engagement quality control reviewer A partner or other qualified person (who should be a member
●​ Extent of review depends on engagement complexity of ICAI) , not part of the engagement team, who objectively
and risk of inappropriate reporting. evaluates significant judgments made by the engagement
●​ Does not reduce EP’s responsibilities. team can be from another firm with similar background.
●​ Mandatory for audits of listed entities.
●​ For other engagements, firms must set criteria for
Objectivity of reviewer

g
●​ Reviewers must remain objective and avoid engagement
EQCR requirements.
participation or decision-making.
●​ EP can consult the reviewer without compromising

or
Considerations in case of EQCR of Listed Entities

An engagement quality control review for audits of FS of objectivity.

listed entities includes considering the following: ●​ Significant consultations require caution to maintain
1.​ The engagement team’s evaluation of the firm’s objectivity.
●​ If objectivity is compromised, another qualified person

1.
independence in relation to the specific engagement.

2.​ Significant risks identified during the engagement and is appointed.

the responses to those risks. ●​ Firm policies should allow reviewer replacement if
3.​ Judgments made, particularly with respect to
u9 objectivity is affected.
materiality and significant risks.
4.​ Whether appropriate consultation has taken place on
matters involving differences of opinion or other
difficult or contentious matters, and the conclusions
arising from those consultations.
ed
5.​ The significance and disposition of corrected and
uncorrected misstatements identified during the
engagement.
6.​ The matters to be communicated to management and
TCWG and, where applicable, other parties such as
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regulatory bodies.
7.​ Whether working papers selected support the
Engagement Documentation

●​ Engagement files should be completed in not more than

conclusions reached.
60 days after the date of the auditor's report.
8.​ The appropriateness of the report to be issued.
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●​ For multiple reports on same subject matter, treat each

DPQ 📌✍️ PQR & Associates, Chartered Accountants, is a

partnership firm having 3 partners CA P, CA Q and CA R.

as separate engagement with own timeframe
●​ The firm should establish policies and procedures
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PQR & Associates are appointed as Statutory Auditors of

designed to maintain the confidentiality, safe custody,
integrity, accessibility and retrievability of engagement
ABC Limited, a listed entity for the financial year 2023-24

and CA P is appointed as Engagement Partner for the audit documentation.

of ABC Limited. Before issuing the Audit Report of ABC ●​ Establish retention policies meeting firm's needs and
Limited, CA P asked CA R to perform Engagement Quality legal requirements
Control Review and is of the view that his responsibility will
●​ In the specific case of audit engagements, the retention
be reduced after review by CA R. Whether the contention of
period ordinarily is no shorter than 7 years from the
CA P is correct? What are the aspects that need to be
date of the auditor's report, or, if later, the date of the
considered by CA R while performing Engagement Quality
group auditor's report.

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 CA Final Class Notes By Neeraj Arora

●​ Engagement documentation is firm's property unless ○​ ET’s ability to raise concerns without fear of
otherwise specified by law reprisals.

●​ Firm may share portions of documentation with clients ●​ Fact that quality is essential in performing audit
if this doesn't undermine work validity or independence engagements.

Documentation by Engagement Quality Control Reviewer Relevant Ethical Requirement

●​ required by the firm’s policies on EQCR have

Procedures EP's responsibilities are as under
been performed. ●​ Identifying threats to independence.
●​ EQCR completed before report issuance and ○​ That safeguards may not be able to eliminate or
●​ Reviewer not aware of any unresolved matters reduce to an acceptable level. (Financial Interest –

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suggesting inappropriate judgments or conclusions. If the auditor owns shares in the client company,

even safeguards like disclosure cannot eliminate

or
the conflict.)
SA 220 - Quality Control for an Audit of
●​ Reporting by EP
Financial Statements
○​ to relevant persons in firm
Objectives of Auditor
○​ to determine appropriate action, which may include
■​ Eliminate the threat

1.
The objectives of the auditor is to implement quality control
procedures at the engagement level that provide the auditor ■​ Withdrawing from the audit engagement
with reasonable assurance that: -
a.​ The audit complies with professional standards and
u9 Acceptance and Continuance of Client Relationships and

regulatory and legal requirements and

Audit Engagements

b.​ The auditor’s report issued is appropriate in the ●​ SA 220 requires firms to gather information before
circumstances. accepting an audit engagement.
●​ Helps the engagement partner assess the
Basics
appropriateness of acceptance/continuance.
ed
SA 220 is modelled on lines of SQC 1. It describes ●​ Key considerations:
responsibilities of engagement partner in relation to ○​ Integrity of principal owners, key management,
following matters: - and TCWG.
●​ Leadership responsibilities for quality on audits ○​ Competence of the engagement team (skills, time,
●​ Relevant ethical requirements and resources).
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●​ Acceptance and continuance of client relationships and ○​ Whether the firm and the engagement team can
audit engagements comply with relevant ethical requirements

○​ Significant matters from past or current audits

●​ Assignment of engagement teams
affecting continuation.
●​ Engagement performance ●​ If new information arises that would have led to
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●​ Monitoring rejection earlier, the engagement partner must

🔥
Leadership responsibilities for quality of audits
promptly inform the firm for necessary action.
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EP must take responsibility for overall quality of audit Assignment of Engagement Teams

engagement. The engagement partner shall be satisfied that the

His action and message should emphasise - engagement team, and any auditor’s experts who are not
●​ Importance of the following for audit quality part of the engagement team, have the appropriate
○​ Work that complies with professional standards competence and capabilities to:
and regulatory and legal requirements; a.​ Perform the audit engagement in accordance with
○​ Complying with the firm’s SOQC policies and professional standards and regulatory and legal
procedures requirements; and
○​ Reports are appropriate in the circumstances

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 CA Final Class Notes By Neeraj Arora

b.​ Enable an auditor’s report that is appropriate in the ●​ Not date the auditor’s report until the completion of
circumstances to be issued. EQCR

Engagement Performance Matters to be evaluated by EQC Reviewer

Topics to covered The engagement quality control reviewer shall objectively

●​ Direction, Supervision and Performance evaluate significant judgments and conclusions in the
●​ Reviews auditor's report, including:
●​ Engagement Quality Control Review ●​ Discussion of significant matters with the engagement
●​ Consultation partner;
●​ Differences of Opinion ●​ Review of FS and the proposed auditor’s report;

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●​ Reviewing select audit documentation on significant
Direction, Supervision and Performance judgments and conclusions; and

or
The engagement partner shall take responsibility for: ●​ Evaluating conclusions and considering appropriateness
●​ The direction, supervision and performance of the audit of proposed report
engagement in compliance with professional standards
and regulatory and legal requirements; and Engagement Quality Control Review for Listed Entities

1.
●​ The auditor’s report is appropriate in the The EQC reviewer shall consider:
circumstances. ●​ Engagement team’s evaluation of firm’s independence
for the audit.
u9
Reviews (By EP)
●​ Whether appropriate consultations occurred on
●​ Engagement partner ensures reviews follow the firm's contentious matters & conclusions documented.
policies and procedures. ●​ Whether selected audit documentation reflects work
●​ Before issuing the auditor’s report, they review audit performed & supports conclusions.
documentation and discuss with the team.
●​ Must ensure sufficient appropriate audit evidence DPQ 📌✍️ - CA Giri is a senior partner of M/s TSV
ed
supports the conclusions. Associates. M/s TSV Associates is a reputed firm of

Chartered Accountants which has been in practice for more

than five decades. The firm undertakes statutory audits of

Consultation
large listed companies across various industry sectors and
●​ Engagement partner ensures the team consults on has more than fifty qualified experienced professionals. CA

difficult matters.
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Giri has been assigned as an Engagement Quality Control

●​ Verifies appropriate internal and external consultations Reviewer for an audit engagement of a listed company. What

during the engagement. are the aspects, which would be looked into by CA Giri as an

●​ Ensures agreement on conclusions from consultations. EQC Reviewer in relation to the engagement? Upon

●​ Confirms implementation of consultation conclusions. completion of the review, CA Giri has identified certain
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issues, with respect to revenue recognition and adequacy of

provisions relating to onerous contracts. The views of CA

Engagement Quality Control Review
Giri are not accepted by the Engagement Partner. Suggest
For audits of financial statements of listed entities and
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the ways of resolving the differences of opinion between CA

those other audit engagements, if any, for which the firm has Giri and the engagement partner. (SA, May 2024, 5 marks)

determined that EQCR is required, the engagement partner (ICAI Study Material - Test Your Knowledge)

shall:
●​ Ensures an EQCR reviewer is appointed.;
●​ Discusses significant audit matters, including those
arising from EQCR with the engagement quality control
reviewer; and

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As Per Code of Ethics:

●​ Auditor remains responsible for opinion when delegating
work
●​ May rely on others' work if adequate skill & care is
exercised
●​ Must direct, supervise, review delegated work
●​ Should obtain reasonable assurance that work by others
is adequate

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or
SQC 1 vs SA 220

[Link] SQC1 SA 220

1.
1 Applies to entire firm; Applies to specific audit
CEO/managing partners engagement;
u9responsible engagement partner
responsible
2 Applicable to audits, reviews of It is applicable to audit
historical financial information, engagements only
and other assurance/related
services
ed
3 Setting up quality control Implementing quality
system (policies/procedures) control procedures for
for whole firm audit engagements
4 Establishes system providing Operates within SQC 1
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reasonable assurance of framework; SQC 1 is

compliance with standards and prerequisite for SA 220
requirements
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Relying on Work Performed by Another Auditor

As Per SA 220 "Quality Control for an Audit of Financial

Statements", an engagement partner taking over an audit
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may review:
●​ Compliance with professional standards & regulations
●​ Significant matters raised for further consideration
●​ Consultations documented and implemented
●​ Need to revise nature, timing, extent of work
●​ the work performed supports the conclusions reached
and is appropriately documented;
●​ SAAE for the auditor’s report
●​ Engagement objectives achieved

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Mechanisms for Review of Quality Control The statutory auditors in respect of the companies are
​ identified for their audit quality review based upon
Peer Review Board risk-based approach. The review is carried out by technical
The Peer review Board is constituted by the Council of ICAI. reviewers who are empanelled by QRB on an engagement
The main objective of Peer review Board is to ensure that, in basis from across the country.
carrying out assurance assignments: -
●​ Technical, professional and ethical standards including National Financial Reporting Authority (NFRA)

regulatory requirements are complied with by members ●​ NFRA has been constituted in terms of Section 132(1) of
of ICAI. Companies Act,2013. Duties of NFRA also include the
●​ Proper systems are in place including documentation following:

g
thereof which amply demonstrate quality of assurance ○​ Monitor and enforce compliance with ASs and
services provided by members auditing standards

or
○​ Oversee the quality of service of the professions
Peer Review associated with ensuring compliance with such
●​ Peer review involves examining and assessing a Practice standards and suggest measures for improvement
Unit's systems and procedures to ensure they align with in the quality of service

1.
the quality standards expected by technical, ●​ It has power to monitor and enforce compliance with
professional, and ethical guidelines or regulatory ASs and auditing standards and oversee the quality of
mandates. service under section 132(2) or undertake investigation
●​ Peer review is meant for the purpose of enhancing the under section 132(4) of the auditors of certain classes
u9
quality of professional work resulting in more reliable
and useful audit reports.
of companies. Such companies include listed companies,
insurance companies, banking companies and other
●​ Once a Practice Unit is subjected to Peer review, its companies as provided for in rule 3 of NFRA Rules,2018.
assurance engagement records pertaining to the Peer ●​ Therefore, overseeing quality of audit services of listed
review period are subject to examination and review by companies falls under the purview of NFRA. QRB can
ed
the Peer Reviewer. On completion of this exercise, a review quality of audit services provided by the
“peer review certificate” is issued in case of unqualified members of the Institute only in respect of entities
report issued by Peer Reviewer. In case of a qualified other than those specified under Rule 3 of NFRA Rules,
report, it is informed to the Practice Unit that the 2018 and those referred to QRB by NFRA under relevant
same cannot be issued along with the reasons therefore rules
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as well as inform about the due date for conducting a

follow-on review as may be decided by the Board.
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Quality Review Board

The Quality Review Board has been set up by the Central

government. It consists of members nominated by CG and
Council of ICAI. The functions of QRB are: -
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a.​ To make recommendations to the Council regarding the

quality of services provided by the members of the
Institute;
b.​ To review the quality of services provided by the
members of the Institute including audit services and
c.​ To guide the members of the Institute to improve the
quality of services and adherence to the various
statutory and other regulatory requirements;

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