Globally Directed Internal Inspection Programs-Final 2 · • Develop and deliver review team...

Good Practice GuidanceRevised 2004

Transnational Auditors Committee

Globally Directed Internal Inspection Programs

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Transnational Auditors Committee International Federation of Accountants

545 Fifth Avenue, 14th Floor New York, New York 10017 USA

The mission of IFAC is to serve the public interest, strengthen the worldwide accountancy profession and contribute to the development of strong international economies by establishing and promoting adherence to high quality professional standards, furthering the international convergence of such standards and speaking out on public interest issues where the profession’s expertise is most relevant.

This publication may be downloaded free of charge from the IFAC website: http://www.ifac.org. The approved text is published in the English language. Copyright © January 2009 by the International Federation of Accountants (IFAC). All rights reserved. Permission is granted to make copies of this work provided that such copies are for use in academic classrooms or for personal use and are not sold or disseminated and provided that each copy bears the following credit line: “Copyright © January 2009 by the International Federation of Accountants (IFAC). All rights reserved. Used with permission of IFAC. Contact [email protected] for permission to reproduce, store or transmit this document.” Otherwise, written permission from IFAC is required to reproduce, store or transmit, or to make other similar uses of, this document, except as permitted by law. Contact [email protected].

ISBN: 978-1-934779-87-3

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TRANSNATIONAL AUDITORS COMMITTEE

GLOBALLY DIRECTED INTERNAL INSPECTION PROGRAMS

CONTENTS Page

Introduction .............................................................................................................................. 5

Relevant Professional Standards ........................................................................................ 5

Additional Objectives ........................................................................................................ 5

Other Background .............................................................................................................. 5

Globally Directed Internal Inspections .............................................................................. 5

Governance .............................................................................................................................. 6

Governance Arrangements ................................................................................................. 6

Tone at the Top ......................................................................................................................... 7

Management Support ......................................................................................................... 7

Resources ................................................................................................................................. 7

Central Resources .............................................................................................................. 7

Regional Resources ............................................................................................................ 8

Costs .................................................................................................................................... 8

Overall Approach to Inspections .............................................................................................. 9

General Approach .............................................................................................................. 9

Other Approaches ............................................................................................................... 9

Review Teams .......................................................................................................................... 10

Qualifications ..................................................................................................................... 10

Independence ..................................................................................................................... 10

Identification ...................................................................................................................... 10

Evaluation .......................................................................................................................... 11

Internal Inspection ................................................................................................................... 11

Instructions ......................................................................................................................... 11

Timing ................................................................................................................................. 12

Scope of the Inspection ...................................................................................................... 12

The Internal Inspection Process ......................................................................................... 12

Testing the System of Quality Control ............................................................................... 13


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Engagement Reviews ......................................................................................................... 16

Tools .................................................................................................................................... 17

Use of Technology ............................................................................................................. 19

Other Inspection Procedures .............................................................................................. 20

Reporting and Action Plans ............................................................................................... 20

Sanctions ............................................................................................................................ 20

Linkage of Results with Performance Evaluations ............................................................ 21

Confidentiality and Document Retention .......................................................................... 21

External inspection ................................................................................................................. 21

Coordination with External Inspection Processes .............................................................. 21

Obstacles ................................................................................................................................ 22

Language ............................................................................................................................ 22

Technology ......................................................................................................................... 22

Coordinated Reviews of Multinational Engagements ....................................................... 22

Benefits .................................................................................................................................. 22

Consistency ........................................................................................................................ 22

Risk Management .............................................................................................................. 22

Reliance on the Work Performed by Member Firms ......................................................... 23

Expansion to Other Disciplines and Functional Areas ...................................................... 23


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Introduction Relevant Professional Standards

Professional standards relating to quality control for audit engagements (International Standard on Auditing (ISA) 220 and International Standard on Quality Control (ISQC) 1) require a firm to establish a system of quality control to provide it with reasonable assurance that the firm and its personnel comply with professional standards and regulatory and legal requirements, and that reports issued by the firm or engagement partners are appropriate in the circumstances. The system of quality control includes procedures necessary to implement and monitor compliance with the policies established. This element of a system of quality control is often referred to as “Monitoring.”

The organization and implementation of the Monitoring function will vary from firm to firm depending on the size and nature of the firm’s practice.

Additional Objectives

In addition to complying with relevant professional standards, the Monitoring function will also provide the firm with an indication of the quality of its audit practices and application of accounting principles, thereby serving an essential risk management tool.

Other Background

The program established by a firm to fulfill the Monitoring requirement may be referred to as internal inspection, quality assurance reviews, internal monitoring, etc. For purposes of this paper, these programs will be referred to as internal inspections.

An internal inspection program has two main elements: 1) engagement reviews, and 2) testing the system of quality control.

Over the past several years, several networks of accounting firms have moved towards greater centralization of their internal inspections with respect to their audit and assurance practices. For many networks, the internal inspection program is now organized and directed on a global basis.

The purpose of this paper is to describe how networks generally conduct their global inspection programs as well as identify current good practices with respect to such programs. This paper has been prepared by the TAC Staff with the cooperation of several firms represented on the Transnational Auditors Committee.

Globally directed internal inspections

As mentioned above, firms are required to have an internal inspection program in order to comply with International Standards on Auditing. However, there is currently no requirement in relevant professional standards that these programs be globally directed. For example, a network which has 75 member firms in as many countries may allow each of their member firms to design and implement their own internal inspection programs. Assuming that each program is appropriately designed and implemented, the network, as a whole, could be seen as complying with the Monitoring element of its system of quality control.


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As noted above, many firms have elected to implement globally directed internal inspection programs. Reasons cited by firms for this approach include:

• Supports and reinforces a firm’s global audit methodology as well as other global firm policies and procedures;

• Encourages consistency of approach and rigor of internal inspection process in each member firm;

• Supports global risk management processes through identification and feedback of issues or matters requiring attention of the management of the global firm; and

• Provides a basis for the reliance by a member firm on the work performed by another member of the network.

In January 2003, the Forum of Firms approved a requirement for FoF member firms which requires them to “conduct regular globally directed internal quality assurance reviews to monitor compliance with the Member Firm's policies and methodologies for conducting transnational audits.” The TAC has considered a draft TAC Practice Alert to establish minimum requirements for such programs. The TAC has deferred approval of the Practice Alert until this study of global inspection programs has been completed.

The execution of a global inspection program within a network is greatly facilitated by the presence of a global audit methodology and other promulgated global policies and procedures. It is noted, however, that many networks do not have such global methodologies and policies and instead permit each member firm to maintain its own methodologies and policies. A network which does not operate with global methodologies or policies can still execute an effective global inspection program. By issuing appropriately tailored instructions (i.e., establishing inspection program minimums), providing suggested inspection materials (for example based on ISA and ISQC requirements), and requiring reporting of results back to the international network, the network can obtain information about the quality of services within its network and obtain reasonable assurance that member firms are complying with relevant professional standards.

Governance Governance arrangements

Appropriate governance arrangements are a fundamental element of an effective global inspection program. Those responsible for the global inspection program should report to the most senior management board or committee within the network (i.e., those charged with overall operational management of the network). Firms report such arrangements are essential in order to:

• Communicate the firm’s commitment to quality (i.e., tone at the top)

• Establish credibility and authority for the program

• Provide leverage on members firms to take necessary corrective actions

• Deliver appropriate enforcement action (e.g., sanctions or expulsions)


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In addition to reporting to the senior management board, some firms indicate that the results of the global inspection program are reported to their global leadership team and/or those responsible for global audit and assurance services.

Reporting to the governance group typically, at a minimum, takes the form of an annual report on the results of the global inspection program, including analysis of issues identified, recommended corrective actions, follow up reports on corrective actions identified in prior inspections and emerging trends.

Several firms noted that the global inspection program is often part of the Global Risk Management function.

Tone at the Top Management Support

Substantially all firms indicate that management support, at the international and national levels, for the global inspection program is a critical success factor for an effective program. Such support can be demonstrated in a number of ways e.g., management including the program and its results as part of his/her personal agenda, initiating and supporting follow up on agreed actions, supporting the program with personal messages about quality in general as well as stressing the importance of the program, etc.

Resources Central Resources

Participating firms report between 1-4 full time equivalents dedicated to support the global inspection program (referred to hereafter as “central support team”). The central support team is generally located either in the firm’s international offices or in the national offices of a large member firm. In some firms the central support team is supplemented by resources located at the regional level. Costs for the central support team are most often paid from the firm’s international budget.

Responsibilities of the central support team typically include:

• Develop and disseminate policies, procedures and instructions to member firms with regards to the internal inspection processes

• Develop and deliver review team training

• Organize international inspections

• Review results of internal inspections and resulting action plans from each member firm

• Follow up on implantation of action plans

• Prepare annual report on results of internal inspections for reporting to relevant governance group

• Recommend disciplinary actions or other sanctions to the appropriate governance body


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An important contribution from the central support team to an effective global inspection program is excellent communication. Global inspection programs in an international network are not only an important professional function, but also a substantial logistical challenge. An emphasis on clear instructions, timely and effective inspection team training and facilitating prompt communication and logistical planning between inspection teams and member firms enables all participants in the inspection program to focus on the important professional aspects of the inspection. Clear written instructions on the administrative aspects of the program, including advance planning requirements, travel policies, accommodation, cost reimbursement, etc., assist to minimize confusion and set the tone for a professional and efficient inspection program.

At some firms, the central support team also attends one or more inspections each year. This is seen as useful as it allows the team to drive consistency of inspections, to more closely assess performance of inspection teams and to more closely assess performance of member firms. Additionally, attendance at the inspection is often a useful input into the design of the subsequent year’s instructions and inspection tools.

Regional Resources

Participating firms report between 1-4 additional full time equivalents dedicated to the supporting the global inspection at a regional level.

Several firms report recent efforts to regionalize their inspections processes and add resources at the regional level. Reasons cited for these efforts include:

• Regionalization of inspection programs permits smaller individual member firms to exchange reviewers with other countries in the area as opposed to conducting their own program or having international teams conduct the inspection. This approach promotes greater reviewer independence and has the benefit of being cost effective.

• Resources located closer to the member firms generally have better knowledge of the member firms operations, operating environments and risk profiles. Additionally, regional resources can often more easily monitor the implementation of action plans.

Several firms report that at least one or more physical meetings are held each year between the central support team, regional resources and other key individuals or groups involved in the inspection program. Such meetings provide an opportunity to discuss issues associated with the program, suggested improvements to the program approach or tools, specific member firm issues and other related matters.

Costs

For most firms surveyed, the costs for the central resource and the out of pocket expenses for international reviewers are met from the budget of the international organization. Regional resources are typically met from either international or regional budgets.

Most participating firms do not reimburse the national firms for the time costs of international reviewers. These costs are most typically absorbed by the reviewer’s national firms. One firm calculates the aggregate time and out of pocket costs for its program and levies each national member firm a proportion of these costs relative to their revenues. The national member firm


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then can contribute either reviewer time and/or a cash contribution equal to the amount of their assessment.

Overall Approach to Inspections General approach

For purposes of this paper:

International inspection means an internal inspection performed on a member firm of a network by one or more reviewers from outside the country of the reviewed member firm

National inspection means an internal inspection performed by a member firm of a network by reviewers from within the firm conducting the inspection.

There are a variety of approaches used to conduct inspections throughout a network. From the network’s perspective, large member firms (e.g., U.S., U.K.) are often permitted to conduct a national inspection program according to the instructions issued by the network. Larger member firms have sufficient internal resources to permit an adequate level of independence of the reviewers. Medium and smaller member firms may be required to participate in regional programs as noted above or may be subject to an international inspection organized by the central resources.

Other approaches

Some firms conduct higher level international inspections of certain of their member firms. For example, a particular member firm may be instructed to carry out its own national inspection program. In addition, the network may require one or more international reviewers to either participate as part of the national team or perform an “oversight” inspection after the completion of the national inspection. This approach may be particularly useful for medium to larger member firms which are large enough to implement a national inspection program but whose program are newly developed and still maturing. Many firms report having effectively used both approaches, however most participating firms indicated a preference for having international reviewers participate as part of the team. Having direct participation in the inspection permits the international reviewer the ability to better judge: 1) the quality of the planning and execution of the inspection; 2) the quality of the inspections of engagements; 3) the quality of the inspection of the elements of the system of quality control; and 4) the results of the inspection and the resulting action plan. Additionally, the firms being inspected benefit from the real time input and recommendations of the international reviewers.

One firm specifies a minimum percentage of international reviewer participation for each of its member firms. This percentage varies from 15% to 100% depending on the size and risk profile of the practice. In this approach, although the firm’s larger member firms do not necessarily need the international participation to achieve an acceptable level of reviewer independence, it is seen as beneficial as an education and development opportunity to expose international reviewers to the inspection program and processes in these larger member firms. It also contributes to enhanced global consistency.


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Review Teams Qualifications

Firms primarily rely on partners as both team leaders and team members. Managers or senior managers are generally used as team members.

Qualifications for reviewers most often cited by participating firms include prior inspection program experience or experience in a technical department or role. One firm further defines requisite skills of team leaders as:

• Partner currently involved in delivering audit services

• Excellent knowledge of audit methodology and professional standards (national and international)

• Appropriate experience

• Satisfactory results on any engagements subject to internal inspection

Most firms indicate that professionals selected to serve as team leaders and review team members receive training with respect to the inspection program. In some firms, this includes eight hours of classroom instruction or distance learning programs. Self-study of instructions and other inspection materials is also a key aspect of reviewer training.

As a trend, firms have been investing more time and resource into reviewer training over the past several years. In addition to the importance of meeting professional standards with respect to training, reviewer training assists firms in achieving greater consistency. This can be particularly important from the perspective of the network in order to achieve an objective view of the quality of audit services being delivered by member firms.

Independence

Firms generally require that reviewers are independent with respect to any engagements which they will review.

Additionally, firm generally require that team leaders and team members may not have any family or other relationships with partners, directors or managers of the office or national practice being reviewed.

Identification

Generally, each member firm in a network has a partner responsible for their firm’s inspection program, referred to hereafter as the “National Quality Partner.” This partner is responsible for selecting reviewers to perform inspection procedures. Additionally, this partner is often responsible to identify and nominate reviewers to participate in any international inspections organized by the central support team.

In most firms, the central support team maintains a database of international reviewers which would include the reviewer’s technical skills (e.g., industry specialization) and language skills. Some firms also request information from potential reviewers on their availability throughout the inspection cycle to facilitate the planning of international inspections.


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Evaluation

One area being explored by a few firms is creating a better linkage between the participation by a reviewer in the internal inspection process and their performance evaluation within the firm. One firm requires that a performance evaluation be completed for the reviewer for his/her participation in the inspection as would be done for a client engagement. This evaluation is then considered along with other evaluations in the individual’s annual evaluation. This approach is seen to be beneficial as it recognizes the important professional contribution of the individual and also demonstrates that the firm rewards efforts to improve audit quality.

Reviewers are evaluated in the following areas:

• Technical competence

• Judgment

• Written expression

• Teamwork

• Dealing with others

• Bearing and conduct

Internal Inspection Instructions

A well designed global inspection program begins with a comprehensive set of instructions to the network’s member firms. These instructions have the objectives of:

• Setting minimum requirements for inspections programs for all member firms

• Establishing responsibilities and providing instructions to all individuals participating the inspection process

• Providing members firms and/or review teams with the tools to run an effective program

Where a global inspection program establishes minimum standards for inspection programs, most firms provide some additional instructions to national firms instructing them to consider national professional standards and to determine whether any additional material (i.e., procedures, questionnaires, extended scope) should be added to the international materials to satisfy national professional standards and related national external monitoring requirements.

The format and content of instructions prepared by participating firms varies according to the structure of the network and the manner in which network or firm policies are established within the network. In general, instructions for a global program may include:

• Background

○ Governance

○ Objectives of program (including statement that program is designed to meet the requirements of ISQC 1 with respect to the Monitoring element of the firm’s system of quality control)


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• Minimum inspection program requirements, including an indication for each member firm as to the approach to be taken for their internal inspection:

○ National inspection program (with or without international reviewer participation)

○ International inspection

• Overall timeline for global inspection program

• Responsibilities and instructions for all individuals participating the inspection process

• Guidance for inspection planning and logistics

• Required tests of the elements of the system of quality control

• Engagement review questionnaires

• Templates

○ Planning meeting agenda

○ Closing meeting agenda

○ Report and Action Plan

Timing

All participating firms run their internal inspection programs from approximately May until October each year and aim to produce their global report by 31 December.

Scope of the inspection

Generally firms include all services delivered by their assurance practice in the scope of the inspection. Examples of the types of engagements included in the scope are as follows:

• Financial statement audit

• Attestation engagements (ISA 910)

• Agreed upon procedures (ISA 920)

• Transaction services/due diligence

It should be noted that ISQC 1 requires that a firm’s monitoring process covers audits and reviews of historical financial information, and other assurance and related services engagements.

The internal inspection process

Regardless of whether the national inspection or international inspection approach is used, the inspection process is generally organized in a similar fashion. This section describes the overall process for an inspection. Further discussion of some of the detailed aspects of the inspection process follows in the subsequent sections.

Team leaders generally have a planning meeting with members of the team prior to the commencement of the inspection to review objectives, practice background, team assignments, etc.


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On the first day of the inspection, the team leader and in some cases, members of the review team, meet with the management and other individuals of the firm to review the objectives and scope of the inspection. This is also an opportunity for management to update the review team on developments within the firm and/or report on progress against previous year’s action plan.

The inspection itself comprises the review team performing a review of the descriptions and documentation of the firm’s system of quality control and performing compliance tests of such controls to obtain evidence that such controls are operating as designed. The engagement team will also select a number of engagements and perform a review of the working papers and applicable report.

Throughout the inspection, the engagement team will normally have discussions with firm management and others with responsibility for areas included in the scope of the inspection. The review team may also interview partners, managers and staff to evaluate their awareness of firm policy and resources. With respect to engagement reviews, the review team will have specific technical discussions with individuals on the engagement team with regards to the work performed on a particular engagement.

Closing meetings (at the engagement, office and firm levels) are an important element of an effective inspection program. This is the opportunity for the review team to communicate its findings and recommendations to the appropriate management of the office or firm. As part of the instruction process, many networks specify those individuals who should attend the closing meeting (e.g., managing partner, head of assurance, head of technical department, etc.)

Some firms have found it beneficial to specify those individuals who should attend the closing meeting. Examples of such individuals for an international review include:

• National managing partner

• National head of assurance

• National risk management partner

• National head of technical department

The closing meeting is typically, where the applicable reporting and action plan are agreed. In some cases, actions plans may be finalized a few weeks after the completion of the inspection. In these cases, networks have provided instructions for further communication and agreement between the review team and the firm.

Testing the System of Quality Control

Most networks require each member to maintain documentation of their policies and procedures with respect to each element of a system of quality control. Member firms are typically instructed to have this documentation available for the review team at the commencement of the inspection. As noted in the Instructions section above, inspection instructions include suggested compliance tests of systems of quality control.

An effective approach for the testing the elements of the system of quality control requires a good understanding of the organization of practice and responsibilities have been assigned within the firm. For example, in recent years many firms have centralized certain functions such as


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Human Resources and Ethics and Independence functions. Prior to this, certain aspects of the quality control system, such as hiring and training of professional staff or procedures to confirm independence for engagement teams, had to be tested at the individual office level. As firms have centralized these functions, compliance tests in these areas at the office level have been greatly reduced or eliminated. Instead firms report sending specialized teams to a firm’s national Human Resources offices to conduct the inspection of the controls in this area. Where implemented, firms report significant satisfaction with this approach where possible as it is not only cost effective it also permits the use of specialized teams and greater focus to the inspection procedures in this area. Additionally, it is generally seen to benefit the office level inspections as it permits more time for engagement reviews and compliance testing of other engagement level control such as client acceptance procedures.

When performing tests of the system of quality control, many firms report using interviews or focus groups. Generally, review team members meet with one or more members of the professional staff to inquire about a variety of topics, including, but not limited to:

• Knowledge of firm policy and professional standards

○ Independence

○ Client and engagement acceptance procedures

• Access firm and professional resources

• Attitude of firm leadership to quality

• Consultation and dispute resolution processes

• Training opportunities

• Work pressures

• Appraisal processes

• Assignment

Firms using focus groups report positively on this approach as it provides the review team an additional depth of understanding about the attitude and knowledge of the partners and professional staff with regards to firm and professional standards. This process can either corroborate other compliance tests of the system of quality control or identify certain areas where the review team may want to perform additional procedures

Some firms include, as part of their global inspection program instructions, suggested interview questions for specific personnel within the firms. For example:

• Managing Partner

○ Tone at the top

○ PII/Litigation

○ Firm structure, growth, new services, client development

○ Partner evaluation and remuneration

○ Professional matters including, legal and regulatory environment, licensing


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• Head of Audit and Assurance

○ Tone at the top

○ Quality, risk policies and procedures

○ Training

○ Partner/Manager appraisal

○ Independence

• Head of Technical Department

○ Tone at the top

○ Consultation system

○ Updates of manuals, technical bulletins, practice aids

○ Guidance materials and libraries

• Professional staff

○ Tone at the top

○ Risk management procedures

○ Independence

○ Recruitment and advancement

○ Professional development

○ Assignment to engagements

○ Consultation

○ Supervision of engagements

Two firms provide guidance to review teams on the number of professional staff to interview. In general these guidelines suggest interviews as follows:

Staff size # of interviews < 25 4 26-50 5 > 50 Between 6 -8

In general, the system of quality control is subjected to inspection procedures at the same frequency as that selected for engagement review procedures as discussed below.


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Engagement Reviews

Generally, firms establish the frequency of engagement reviews based on the desired coverage of individual partners. Most firms require each partner to be reviewed at least once every three years. One firm requires each partner to be reviewed at least once within a three cycle. Some firms also require that partner candidates be selected for review in the year prior to their possible admission to the firm partnership.

The combination of the frequency of partner review and the size of the member firm then typically indicates the frequency of engagement reviews within the member firm itself. For larger member firms, engagement review procedures are performed each year and cover approximately 1/3 of the partners such that all partners are covered over three years. For medium or small member firms with fewer numbers of partners, the frequency of engagement review procedures may be reduced to once every two or three years while still achieving the requirement to review each partner at least once every three years.

Some firms have established a minimum number of engagements to be reviewed or a minimum percentage of engagement hours that must be reviewed over a specified period (e.g., the program has a goal of reviewing 10% of total engagement hours over three years). Certain of these firms report that they have moved away from these requirements as the requirement to review each partner at least once every three years and selecting a sample of engagements using engagement attributes as discussed below have obviated the need for these additional review requirements as appropriate coverage was being obtained.

In addition to requirements for reviews of individual partners, most firms establish various criteria to guide the selection of engagements from a risk management perspective.

Examples of criteria used by firms to achieve a risk based approach include, but are not limited to:

• New clients or engagements

• Engagements for public companies

• Engagements involving cross border offerings (public or private)

• Engagements for higher profile/public interest entities

• Engagements designated as higher risk by the risk management function

• Engagements not considered typical for the industry expertise of the office or practice being reviewed

• Engagements for “foreign” SEC registrants

• Multinational engagements

• Audit engagements for financial statements prepared using International Financial Reporting Standards (IFRS)

Some firms report efforts to involve more specialists in the engagement review process including personnel with specializations in tax, information technology, actuary science, etc.

Some firms report efforts to introduce an increased “element of surprise” into the engagement review process. Often logistical considerations require some advance notification to engagement


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teams in order that the relevant work papers are available to the inspection team at the appropriate time. These firms now identify only a few engagements in advance in order to ensure that the review team can commence their procedures on the first day of the review and then select the remaining engagements once the inspection has commenced.

Most firms outline required procedures on dealing with engagements which are judged to be seriously deficient with respect to the relevant GAAP or GAAS. Some of the actions required include:

• Required communication of the findings to specified risk management or quality partners;

• Required written response from the engagement partner including plan for corrective action, if appropriate, on the reviewed engagement and future engagements which must be approved by office managing partner, risk manager or others;

• For significant GAAP deficiencies, consideration of whether restatement or prospective adjustment is required;

• For significant GAAS errors, consideration of whether additional audit procedures should be performed;

• For inadequate documentation, consideration of whether additional documentation should be added to the work papers (currently dated);

• Requirement of the review team to perform one or more additional engagements reviews for the engagement partner to confirm that the finding is an isolated incident;

• Requirement that the partner be subject to further engagement reviews in the following year (i.e., acceleration of review cycle).

Tools

The two primary tools provided by networks to their member firms with respect to the inspection program are suggested compliance tests for the system of quality control (see above Testing the System of Quality Control) and engagement review questionnaires.

Each participating firm has developed a standard audit engagement review questionnaire based on their firm’s audit methodology and related firm policies and procedures. There are a variety of approaches utilized for these questionnaires and many firms report amending their approach from time to time to maximize the effectiveness of the questionnaire tools.

In reviewing an engagement, a review needs to conclude whether the engagement has been performed in accordance with firm and professional standards (e.g., the audit has been performed in accordance with ISAs). The key challenge in designing an effective questionnaire is to create a questionnaire that appropriately covers all significant requirements embodied by the firm’s audit methodology and other policies and procedures and yet is not excessively complex or lengthy. The questionnaire also should be designed in a manner to elicit as much constructive feedback from the review team as possible for the benefit of the engagement team and those charged with governing the program (e.g., the National Quality Partner).

In general, the audit engagement questionnaires for participating firms are fairly detailed documents which require the reviewer to consider between 50 and 100 individual questions.


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Most firms report that such length is necessary to cover the requirements of the professional standards.

Several firms also include supplemental industry questionnaires (banking, insurance, real estate, extractive industries, etc.). Some firms also include a specialized questionnaire for inbound/outbound referred work.

About half of the participating firms use a Yes/No/Not Applicable format for their engagement questionnaires. In this approach, the reviewer is required to conclude whether the engagement team complied with the relevant methodology point or professional standard. “No” answers require further commentary, explanation or recommendation by the reviewer and a response from the engagement team.

The other half of the participating firms uses a graded approach to many questions in their questionnaire (e.g., Satisfactory, Needs Improvement, Unsatisfactory, and Not Applicable). This approach is preferred by these firms as it is felt that the Needs Improvement category permits more constructive criticism from review teams on relatively minor points and therefore facilitates more useful feedback to engagement teams. In this approach “Needs Improvement” and Unsatisfactory” response require commentary, explanation or recommendation by the reviewer and a response from the engagement team

With respect to overall conclusions in audit engagement questionnaire, most firms require Yes/No conclusions on a set of questions which can be generalized as follows:

• Was the engagement performed in accordance with the applicable generally accepted auditing standards and the firm’s audit methodology?

• Was the engagement performed in accordance with the applicable generally accepted accounting standards (i.e., the quality of financial statement presentation and disclosure)?

• Was sufficient audit evidence gathered and documented to support the report issued?

One firm has developed a comprehensive set of flowcharts of the overall inspection process as well as the testing of the system of quality control and engagement reviews. This provides review teams as well as the firm being reviewed with additional clear instructions and guidance on the conduct of the review.

At least two firms provide comprehensive grading guidance to review teams as part of the instructions issued by the network. This guidance provides possible fact patterns for each question in the questionnaire and then describes how a reviewer might assess the particular answer for that question. For example:

Question: For a new client, evaluate the client acceptance procedures performed prior to acceptance of the client.

Example reason for a Needs Improvement grade:

• There exists minor documentation deficiencies; however the reviewer can conclude that an appropriate client acceptance evaluation, including consideration of independence, appears to have been made.

Example reasons for an Unsatisfactory grade:


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• No evidence (written or verbal) that client acceptance procedures were performed indicating that risks were not properly considered or evaluated

• Lack of consultation with prior auditor

• Missing approvals for the client procedures performed

These firms report that reviewers have responded well to having the additional guidance available to support their assessments and also assist in discussing issues on reviewed engagements with the engagements teams. Additionally, the guidance is seen to assist in providing some consistency in the assessment and grading across the network.

Another firm has developed and maintains a database of common findings and recommendations which can be used by reviewers as a resource when preparing their report to a member firm. The advantage of this type of resource is that it can assist in reducing duplication of effort by capturing the previously effective solutions for the benefit of the organization.

Some firms acknowledge there may be some drawbacks to these types of tools as they may discourage creative thinking on the part of review teams or encourage the notion that the internal inspection is simply a “box-ticking” exercise. However, most firms using these tools indicate that the benefits outweigh the possible downsides and that reviewers are appreciate having the additional guidance and support materials while performing inspection and preparing their report and recommendations.

Use of technology

Two firms have developed specific technology tools to support their global inspection programs. One firm has developed an internet based tool that permits reviewers to complete and document their engagement reviews through a web interface which is then transmitted to a database available to the central support team. This permits immediate aggregation of the detailed results of all engagement reviews performed globally and the subsequent manipulation and analysis of the results of the reviews.

This firm also leverages off of its automated client tracking and risk profile system in certain countries. This system permits the central support team to have real time access to the firm’s client database and to select specific engagements to be reviewed by using the more than twenty five characteristics that can be assigned to each engagement.

Another firm uses a CD-Rom based automated questionnaire which is loaded onto a reviewer’s computer and permits direct input of answers and recommendations into the software. Results can then be transmitted via e-mail or diskette to the central support team. This also then permits aggregation of the detailed results of all engagement reviews performed globally and the subsequent manipulation and analysis of the results of the reviews.

These firms report good experience and reviewer acceptance of such tools. Benefits of the use of such technology cited include:

• Greater standardization of approach and reporting and therefore greater consistency of approach and assessment among reviewers


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• Less administrative time and resource at national and international levels to accumulate detailed statistics, causes of “No” responses and recommendations for improvement

• Ability to automatically tailor questionnaires according to engagement profile characteristics. For example, if an engagement is indicated as a multinational engagement, the software will include questions regarding instructions to participating offices and reporting received from participating locations. If the engagement is not indicated as such, these questions are automatically excluded from that particular questionnaire. This automatic “tailoring” of questionnaires is seen as a major benefit to reviewers as they do not have to separately consider the applicability of a variety of questions which may or may not be appropriate for the engagement under review. This tailoring is also useful to add questions specific to particular industries, SEC engagements etc.

Other inspection procedures

In addition to requiring compliance tests of the system of quality control and in depth engagement reviews, one firm requires the review team to also select a sample of audit engagements where the financial statements have been prepared using IFRS. The review team is required to review only the financial statements and disclosures. No review of the working papers is necessarily required. The purpose of the review is to obtain a view of the quality and consistency of disclosure in the financial statements when IFRS is used. The firm reports that these additional procedures do not require a significant amount of additional review time, but provide useful additional evidence of the quality and consistency of application of IFRS within the firm being reviewed.

Reporting and action plans

A key element of an effective inspection program is the preparation of the report on the results of the inspection and the preparation of an action plan to address any deficiencies identified during the review. It is important that deadlines be established and enforced with respect to the preparation of these documents.

The timely communication of results to the partners and professional staff is important to reinforce the firm’s commitment to quality, provide feedback on overall firm performance and to highlight those areas that require additional attention by partners and professional staff.

Any action plan prepared by a member firm should be periodically followed up, at minimum during the next inspection review. Depending on the nature of the actions to be taken by the firm, it may be appropriate to follow up at a date prior to the next inspection. Participating firms report that periodic and systematic follow up on action plans, outside the normal cycle of inspection, has been a successful tool to encourage accountability in member firms as well as demonstrating commitment from the international network on matters of quality.

Sanctions

Some firms specify sanctions that could be imposed for failure to complete an appropriate inspection, poor inspection results, failure to prepare an action plan or failure to implement the action plan according to the agreed timetable. Where specified, the sanctions typically are varied in their severity, for example:


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• All (or higher risk) engagements required to be subject to second partner review from outside the national practice

• International inspection scheduled for the next year (accelerated review)

• Interim visits by review team to monitor action plans (i.e., prior to the next regularly scheduled review) at the cost of the reviewed firm

Linkage of results with performance evaluations

At least one firm reports efforts begun in this year to input the results of engagement reviews directly into the performance evaluation process for individuals performing the engagements. In this manner, both good and poor engagement results can be considered in the individual’s performance evaluation and compensation. While the results of this effort are not yet known, this would appear to be an effective means to demonstrate to professionals within the firm that the firm is committed to quality and is willing to reward or penalize professionals in relation to the quality of their work.

Confidentiality and document retention

Most firms specifically instruct member firms to not include client names in documents (e.g., engagement review questionnaires) in order to protect client confidentiality.

Some networks provide instructions to their member firms on document retention policies with respect to the internal inspection program. Examples of these requirements include:

• A requirement that all notes, drafts, etc. pertaining to the inspection should be destroyed by the review team at the completion of the inspection.

• A requirement that only a specified partner (e.g., the Quality Partner) maintain any documentation related to the inspection.

• A requirement that all documentation (paper and automated) of the inspection including the overall report be destroyed no later than the end of the following year (i.e., an inspection program covering audits completed by December 31, 2002 would require destruction of documents related to the program no later than December 31, 2004).

External inspection Coordination with external inspection processes

External inspection refers to inspections that may be performed with respect to a national practice by the relevant (self) regulatory body in that country. Generally, national practices will need to coordinate their internal inspection program with the external inspection processes.

Firms report that, in most jurisdictions, the external inspection process relies to some extent on the internal inspection program of the firm (i.e., the external inspection program relies on the results of the internal inspection by reviewing the firm’s processes and controls, observing the internal inspection as well as some independent testing of engagements and the system of quality control).


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Most firms performing globally directed internal inspections generally do not rely on national external inspection processes to provide evidence of compliance with firm policy or relevant professional standards. Some firms, however, do require that their national practices report on the results of the national external inspection processes as part of their reporting to the network.

Obstacles Language

All firms report that identifying reviewers with adequate language skills is often an obstacle for their global inspection programs. This can be particularly acute for those countries where the relevant language is predominant only in the country subject to inspection. Often the only international reviewers available with requisite language skills are partners or managers who are currently on expatriate assignments outside of the country being reviewed.

Most firms indicate that the best solution in these cases is to use local partners and managers to provide translation support to the review team.

Technology

Several firms noted that identifying and implementing appropriate technology to support the global inspection program as an obstacle. The two reasons most often cited include the use of different IT platforms among member firms and the use of different audit methodologies among member firms.

Coordinated reviews of multinational engagements

Several firms noted pilot efforts to coordinate the engagement review of multinational clients across several national member firms. These firms indicate that these efforts have largely been unsuccessful due to difficulties in harmonizing the request to national practices to review specific clients in a particular year with the general requirements which must be followed by national practices (e.g., the requirement to review every partner once every three years or other risk based selection criteria).

Benefits Consistency

While it is often difficult for networks to quantify the direct benefits of their globally directed global inspection programs, participating firms indicate that such programs are an important part of their efforts to deliver consistent, high quality audit services across the globe. These programs provide the network leadership with a view of the performance of national member firms and are often seen as an important tool to educate and reinforce global policies and methodologies.

Risk Management

Several firms note that the program is an essential element of their ongoing global risk management efforts. These firms note the deficiencies in the performance of national member firms identified by the program have led to the “de-branding” of certain of such firms.


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One firm reports using the international inspection process as the initial means of comprehensively assessing the members of their network and either upgrading firms to “full” members or moving firms to correspondent status and de-branding of such firms.

Reliance on the work performed by member firms

Some participating firms also indicate that their globally directed internal inspection programs also provide a basis for member firms within the network to rely on the work performed by another member of the network, particularly for multinational engagements.

The IAASB recently released an exposure draft of proposed revised ISA 600, “The Work of Related Auditors and Other Auditors” which requires a group auditor, when using the work of another auditor, to consider, among other things, the quality control process of the other auditor’s firm. In the case of a related auditor, the group auditor ordinarily will be able to rely on common policies and procedures on, among other things, quality control. Therefore, the existence of a properly structured globally directed internal inspection program may provide a basis for reliance on the work of other network firms.

Expansion to other disciplines and functional areas

Two firms indicate that the benefits derived from the globally directed internal inspection program for the assurance practice has resulted in the same approach and methodologies being applied to other disciplines within the network (e.g., tax, advisory services). Additionally, one firm has developed specialized review process using the same concepts to perform in-depth reviews of certain functional areas such as Human Resources and Education and Training. This process has also been tailored to review a national firm’s technical department including review of resources, organization and quality of advice.

International Federation of Accountants 545 Fifth Avenue, 14th Floor, New York, NY 10017 USA Tel +1 (212) 286-9344 Fax +1(212) 286-9570 www.ifac.org

Globally Directed Internal Inspection Programs-Final 2 · • Develop and deliver review team...

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