AICPA Governmental Audit Quality Center Member Conference Call on The New Standards on Quality Control and Practical Im

1. AICPAGovernmental Audit Quality CenterMember Conference Callon The New Standards on Quality Control and Practical Implementation Tips May 14, 2009

2. Presented by Diane Edelstein, CPA Maher Duessel, CPAs & Ahava Goldman, CPA AICPA

3. What we will cover? Provide an overview of the requirements of Statement on Quality Control Standards (SQCS) No. 7 Discuss the elements of a system of quality control; Provide practical tips for implementing SQCS No. 7 in your governmental audit practices; Brief you on the quality control requirements of Government Auditing Standards and how they relate to SQCS No. 7; and Review the additional GAQC membership requirements relating to your system of quality control and tips for implementing them.

4. Overview of Statement on Quality Control Standards (SQCS) No. 7, A Firm’s System of Quality Control(AICPA, Professional Standards, vol. 2, QC sec. 10)

5. SQCS No. 7 Issued October 2007 Supersedes all previous SQCSs Effective as of January 1, 2009 Compliance with PCAOB QC standards does not automatically mean compliance with SQCS 7.

6. SQCS No. 7 The firm must establish a system of quality control designed to provide it with reasonable assurance that: The firm and its personnel comply with professional standards and applicable regulatory and legal requirements, and Reports issued are appropriate in the circumstances

7. SQCS No. 7 A system of quality control consists of: Policies designed to achieve these objectives and The procedures necessary to implement and monitor compliance with those policies.

8. SQCS No. 7 Documentation and Communication Required to document QC policies and procedures. Extent based on firm characteristics Required to communicate QC policies and procedures to personnel. More effective if in writing, but not required to be.

9. Elements of a System of Quality Control

10. Required Elements of QC System Leadership responsibilities for quality within the firm (the “tone at the top”) Relevant ethical requirements Acceptance and continuance of client relationships and specific engagements Human resources Engagement performance Monitoring

11. Tone at the Top Objective Promote a quality-oriented internal culture

12. Tone at the Top Policies Require the firm’s leadership to assume ultimate responsibility for the QC system. Assign management responsibilities so that commercial considerations do not override the quality of work performed.

13. Tone at the Top Policies (Cont’d) Assign operational responsibility to appropriate personnel (experience, ability, authority) Address personnel performance evaluation, compensation and advancement to demonstrate the firm’s overarching commitment to quality. Devote resources to developing, communicating, and supporting QC policies and procedures.

14. Relevant Ethical Requirements Objective Reasonable assurance that the firm and its personnel comply with relevant ethical requirements. Independence Objectivity Integrity

15. Relevant Ethical Requirements Policies Require personnel to comply with relevant ethical requirements Communicate independence requirements to personnel Identify and evaluate threats Withdraw from engagements if effective safeguards to reduce threats to independence acceptably cannot be applied

16. Relevant Ethical Requirements Policies (Cont’d) Annually obtain written confirmation from all personnel required to be independent Confirm independence of another firm who performs part of the engagement Rotate personnel for audits or attest engagements where required by regulation

17. Acceptance and Continuance of Client Relationships and Specific Engagements Objective - Firm should undertake or continue relationships and engagements only where it: Has considered the integrity of the client and the risks associated with providing professional services in the particular circumstances. Is competent to perform the engagement and has the capabilities and resources to do so. Can comply with legal and ethical requirements. Has reached an understanding with the client regarding the services to be performed.

18. Acceptance and Continuance of Client Relationships and Specific Engagements Policies Evaluate management’s integrity and consider risks of engagement Evaluate whether engagement can be performed with professional competence; undertake only those engagements firm has capabilities, resources and competence to perform; and periodically evaluate whether relationship should be continued

19. Acceptance and Continuance of Client Relationships and Specific Engagements Policies (Cont’d) Obtain an understanding with the client regarding the services to be performed, preferably in writing. Establish procedures on withdrawal from an engagement or from both the engagement and the client relationship Document how issues were resolved.

20. Human Resources Objective Reasonable assurance of sufficient personnel with the necessary capabilities, competence and commitment to ethical principles to perform the engagements and enable the firms to issue appropriate reports.

21. Human Resources Policies and procedures should address: Recruitment and hiring, if applicable; Determining capabilities and competencies; Assigning personnel to engagements, if applicable; Professional development; and Performance evaluation, compensation and advancement.

22. Engagement Performance Objectives Engagements are consistently performed in accordance with professional standards and regulatory and legal requirements, and the firm or the engagement partner issues reports that are appropriate in the circumstances.

23. Engagement Performance Policies Plan all engagements to meet professional, regulatory, and the firm’s requirements. Perform work and issue reports and other communications that meet professional, regulatory, and the firm’s requirements. Require that work performed by other team members be reviewed by qualified engagement team members, which may include the engagement partner, on a timely basis.

24. Engagement Performance Detailed guidance on Engagement performance (plan and execute) Supervision responsibilities Review responsibilities Engagement documentation Consultation policies and procedures Resolution of differences of opinions, including a requirement that reports not be released until the differences of opinions are resolved.

25. Planning Procedures Assign engagement team Update client information and obtain engagement letter Prepare planning document Work programs tailored to engagement Staffing requirements and need for specialized knowledge Risk assessment – economic conditions and fraud considerations Budget with sufficient time

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

27. Review Responsibilities Policies Determined on the basis that qualified engagement team members, which may include the engagement partner, review work performed by other team members on a timely basis.

28. Review Checklist Has the work been performed in accordance with professional standards and regulatory and legal requirements? Have significant findings and issues been raised for further consideration? Have appropriate consultations taken place and have the resulting conclusions have been documented and implemented? Is the nature, timing, and extent of work performed appropriate and without need for revision? Does the work performed support the conclusions reached and is it appropriately documented? Is the evidence obtained sufficient and appropriate to support the report? Have the objectives of the engagement procedures been achieved?

29. Engagement Documentation Policies Require the engagement team to complete the assembly of final engagement files on a timely basis. Establish procedures to maintain the confidentiality, safe custody, integrity, accessibility, and retrievability of engagement documentation. Require the retention of engagement documentation for a period of time sufficient to meet the needs of the firm, professional standards, laws, and regulations.

30. Consultation Policies Consultation takes place when appropriate (for example, when dealing with complex, unusual, unfamiliar, difficult, or contentious issues) Sufficient and appropriate resources are available to enable appropriate consultation to take place All the relevant facts known to the engagement team are provided to those consulted The nature, scope, and conclusions of such consultations are documented The conclusions resulting from such consultations are implemented

31. Differences of Opinion - Policies Within the engagement team, with those consulted, and between the engagement partner and engagement quality control reviewer Conclusions reached are documented and implemented The report is not released until the matter is resolved

32. Engagement Quality Control Review (EQCR) Establish criteria for determining whether an engagement quality control review should be performed, Evaluate all engagements against the criteria Perform an engagement quality control review for all engagements that meet the criteria, and complete the review before the report is released. Establish procedures addressing the nature, timing, extent and documentation of the engagement quality control review.

33. EQCR - Procedures An objective evaluation of the significant judgments made by the engagement team, and the conclusions reached in formulating the report. Reading the financial statements or other subject matter information and the report, and consideration of whether the report is appropriate. Review of selected engagement documentation relating to the significant judgments the engagement team made and the conclusions they reached Discussion with the engagement partner regarding significant findings and issues. Extent depends on the complexity of the engagement and the risk that the report might not be appropriate in the circumstances.

34. Monitoring Objective – reasonable assurance that QC policies and procedures are Relevant Adequate Operating effectively Complied with in practice

35. Monitoring - Requirements Ongoing evaluation of appropriateness of design and operating effectiveness Assign responsibility for the monitoring process to a partner. Assign performance of the monitoring process to competent individuals. Perform sufficiently comprehensive procedures.

36. Monitoring Procedures Review of selected administrative and personnel records pertaining to the quality control elements Review of engagement working papers, reports, and clients' financial statements Discussions with the firm's personnel Summarization of the findings from the monitoring procedures, at least annually, and consideration of the systemic causes of findings that indicate that improvements are needed

37. Monitoring Procedures cont’d Determination of any corrective actions to be taken or improvements to be made with respect to the specific engagements reviewed or the firm's quality control policies and procedures Communication of the identified findings to appropriate firm management personnel Consideration of findings by appropriate firm management personnel who should also determine that any actions necessary, including necessary modifications to the quality control system, are taken on a timely basis

38. Assessment of The appropriateness of the firm’s guidance materials and any practice aids; New developments in professional standards and regulatory and legal requirements and how they are reflected in the firm’s policies and procedures where appropriate; Compliance with policies and procedures on independence; The effectiveness of continuing professional development, including training; Decisions related to acceptance and continuance of client relationships and specific engagements; and Firm personnel’s understanding of the firm’s quality control policies and procedures and implementation thereof. Monitoring Procedures cont’d

39. Monitoring Monitoring procedures may be accomplished through the performance of: Engagement quality control review Post-issuance review of engagement working papers, reports, and clients’ financial statements for selected engagements Inspection procedures

40. Monitoring Self-inspection Not prohibited Higher risk that noncompliance with policies and procedures will not be detected

41. Monitoring - Communication To engagement partners and others: • Deficiencies noted as a result of the monitoring process • Recommendations for appropriate remedial action. To all relevant personnel: • Monitoring results at least annually.

42. Monitoring Procedures to deal appropriately with complaints and allegations Clear channels for personnel to raise concerns without fear of reprisal Documentation of complaints and responses

43. Monitoring - Documentation Document evidence of the operation of each element of its system of quality control. Form and content based on firm characteristics Retain this documentation for a period of time sufficient to permit those performing monitoring procedures and peer review to evaluate the firm’s compliance.

44. SQCS No. 7 - Practice Aid AICPA Audit and Accounting Practice Aid Series: Establishing and Maintaining a System of Quality Control for a CPA Firm’s Accounting and Auditing Practice Available at http://www.aicpa.org/download/members/div/auditstd/System_of_Quality_Control_Practice_Aid.pdf

45. Practical Tips for Implementing SQCS No. 7

46. Tips for Implementing SQCS No. 7 • Do you update your current Quality Control document or start over? • It is important to remember that your Quality Control Document is fluid • Improving your document is ongoing. • Keep prior versions with noted effective dates.

47. Tips for Implementing SQCS No. 7 • Areas we struggled with: • Engagement quality review criteria. • EQCR reviewer being independent to the engagement. • Acceptance and continuation of client relationship documentation. • Complaints and allegations. 47

48. Additional Quality Control Requirements of Government Auditing Standards

49. Yellow Book QC Requirements • July 2007 Revisions to Yellow Book • Supersedes the Jan. 2007 and 2003 revisions • Enhanced and clarified the requirements for an audit organization’s system of quality control by specifying the elements of quality that an organization’s policies and procedures collectively address • Added a requirement that external audit organizations make their most recent peer review report publicly available

50. Yellow Book QC Requirements • Paragraph 3.50 – 3.54 discuss QC Requirements • Requirements for system of quality control are consistent with the AICPA proposed statement on Quality Control Standards except that the GAGAS requirements state that reviews of the work and the report that are normally part of supervision are not monitoring controls when used alone