QUALITY CONTROL OF AUDIT WORK Slovenian case REPARIS

QUALITY CONTROL OF AUDIT WORK Slovenian case REPARIS Project in Macedonia 2009. 04. 01 Meta Duhovnik, Ph. D. , SLOVENIAN INSTITUTE OF AUDITORS

Basic regulation • EU basis: – Directive 2006/43/ES on statutory audits of annual accounts and consolidated accounts (Official Journal of the EU, No. L 157 - 9. 6. 2006) • Regulation enforced in Slovenia: – Auditing Act (Official Journal of the Republic of Slovenia, No. 65/2008 – 30. 6. 2008; hereinafter Zrev-2) – ISQC 1: Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and other Assurance and Related Services Engagements 2009. 04. 01 Meta Duhovnik, Ph. D.

Basic regulation • Regulation enforced in Slovenia (continuation): – ISA 220: Quality Control for an Audit of Financial Statements – Code of Ethics for Professional Accountants (IFAC) – Code of Professional Conduct (Slovenian) 2009. 04. 01 Meta Duhovnik, Ph. D.

2009. 04. 01 Meta Duhovnik, Ph. D.

Quality control of audit work • Quality control system of the audit company • External quality control 2009. 04. 01 Meta Duhovnik, Ph. D.

Quality control system of the audit company in Slovenia Auditing rules: ØISQC 1: Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and other Assurance and Related Services Engagements ØISA 220: Quality Control for an Audit of Financial Statements 2009. 04. 01 Meta Duhovnik, Ph. D.

Definitions • Engagement partner • The partner or other person in the firm who is responsible for the engagement and its performance, and for the report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body. • Engagement quality control review • A process designed to provide an objective evaluation, on or before the date of the report, of the significant judgments the engagement team made and the conclusions it reached in formulating the report. 2009. 04. 01 Meta Duhovnik, Ph. D.

Definitions • Engagement quality control reviewer • A partner, other person in the firm, suitably qualified external person, or a team made up of such individuals, none of whom is part of the engagement team, with sufficient and appropriate experience and authority to objectively evaluate the significant judgments the engagement team made and the conclusions it reached in formulating the report. 2009. 04. 01 Meta Duhovnik, Ph. D.

Definitions • Engagement team • All partners and staff performing the engagement, and any individuals engaged by the firm or a network firm who perform procedures on the engagement. This excludes external experts engaged by the firm or a network firm. • Firm • A sole practitioner, partnership or corporation or other entity of professional accountants. 2009. 04. 01 Meta Duhovnik, Ph. D.

Definitions • Inspection • In relation to completed engagements, procedures designed to provide evidence of compliance by engagement teams with the firm’s quality control policies and procedures. • Listed entity • An entity whose shares, stock or debt are quoted or listed on a recognized stock exchange, or are marketed under the regulations of a recognized stock exchange or other equivalent body. 2009. 04. 01 Meta Duhovnik, Ph. D.

Definitions • Monitoring • A process comprising an ongoing consideration and evaluation of the firm’s system of quality control, including a periodic inspection of a selection of completed engagements, designed to provide the firm with reasonable assurance that its system of quality control is operating effectively. • Network firm • A firm or entity that belongs to a network. 2009. 04. 01 Meta Duhovnik, Ph. D.

Definitions • Network – A larger structure: • that is aimed at cooperation, and • that is clearly aimed at profit or cost-sharing or shares common ownership, control or management, common quality control policies and procedures, common business strategy, the use of a common brand name, or a significant part of professional resources. 2009. 04. 01 Meta Duhovnik, Ph. D.

Definitions • Partner • Any individual with authority to bind the firm with respect to the performance of a professional services engagement. • Personnel • Partners and staff. 2009. 04. 01 Meta Duhovnik, Ph. D.

Definitions • Professional standards • IAASB Engagement Standards, as defined in the IAASB’s Preface to the International Standards on Quality Control, Auditing, Review, Other Assurance and Related Services, and relevant ethical requirements. • Relevant ethical requirements • Ethical requirements to which the engagement team and engagement quality control reviewer are subject, which ordinarily comprise Parts A and B of the International Federation of Accountants’ Code of Ethics for Professional Accountants (IFAC Code) together with national requirements that are more restrictive. 2009. 04. 01 Meta Duhovnik, Ph. D.

Definitions • Reasonable assurance • In the context of ISQC, a high, but not absolute, level of assurance. • Staff • Professionals, other than partners, including any experts the firm employs. 2009. 04. 01 Meta Duhovnik, Ph. D.

Definitions • Suitably qualified external person • An individual outside the firm with the competence and capabilities to act as an engagement partner, for example a partner of another firm, or an employee (with appropriate experience) of either a professional accountancy body whose members may perform audits and reviews of historical financial information, or other assurance or related services engagements, or of an organization that provides relevant quality control services. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1 compared with ISA 220 ISQC 1 ISA 220 • The quality control • Quality control policies and procedures that are which are documented applicable to the and communicated to the individual audit firms personnel. engagement. 2009. 04. 01 Meta Duhovnik, Ph. D.

Elements of a system of quality control ISQC 1 ISA 220 • Leadership responsibilities for quality within the firm • Relevant ethical requirements • Acceptance and continuance of client relationships and specific engagements • Human resources • Engagement performance • Monitoring 2009. 04. 01 • Leadership responsibilities for quality on audits • Relevant ethical requirements • Acceptance and continuance of client relationships and audit engagements • Assignment of engagement teams • Engagement performance • Monitoring Meta Duhovnik, Ph. D.

Leadership responsibilities ISQC 1 ISA 220 • The firm’s chief executive officer (or equivalent), or, if appropriate, the firm’s managing board of partners (or equivalent) should assume ultimate responsibility for the firm’s system of quality control. 2009. 04. 01 • The engagement partner is responsible for the overall quality on each audit engagement to which that partner is assigned. Meta Duhovnik, Ph. D.

Leadership responsibilities ISQC 1 Ø Establishment of policies and procedures that address performance evaluation, compensation, and promotion (including incentive systems) with regard to its personnel, in order to demonstrate the firm’s overriding commitment to quality. Ø Assignment of management responsibilities so that commercial considerations do not override the quality of work performed. Ø Provision of sufficient resources for the development, documentation and support of quality control policies and procedures. 2009. 04. 01 Meta Duhovnik, Ph. D.

Leadership responsibilities ISA 220 Ø Engagement partner is taking care of importance to audit quality of: Ø performing work that complies with professional standards and applicable legal and regulatory requirements; Ø complying with the firm’s quality control policies and procedures as applicable; Ø issuing auditor’s reports that are appropriate in the circumstances; and Ø the engagement team’s ability to raise concerns without fear of reprisals. 2009. 04. 01 Meta Duhovnik, Ph. D.

Leadership responsibilities ISQC 1 • Any person assigned operational responsibility for the firm’s system of quality control by the firm’s chief executive officer or managing board of partners should have sufficient and appropriate experience and ability, and the necessary authority, to assume that responsibility. 2009. 04. 01 Meta Duhovnik, Ph. D.

Ethical requirements ISQC 1 ISA 220 Ethical requirements ordinarily comprise Parts A and B of the IFAC Code together with national requirements that are more restrictive. 2009. 04. 01 Meta Duhovnik, Ph. D.

Ethical requirements The fundamental principles of professional ethics, which include: ØIntegrity ØObjectivity ØProfessional competence and due care ØConfidentiality ØProfessional behavior 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1: Ethical requirements ØThe firm shall establish policies and procedures designed to provide it with reasonable assurance that the firm and its personnel comply with relevant ethical requirements. ISA 220: Ethical requirements ØThroughout the audit engagement, the engagement partner shall remain alert, through observation and making inquiries as necessary, for evidence of noncompliance with relevant ethical requirements by members of the engagement team. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1: Ethical requirements – independence Ø The firm establishes policies and procedures designed to provide it with reasonable assurance that the firm, its personnel and, where applicable, others subject to independence requirements (including network firm personnel) maintain independence where required by relevant ethical requirements. Ø Such policies and procedures shall enable the firm to: – communicate its independence requirements to its personnel and, where applicable, others subject to them; – identify and evaluate circumstances and relationships that create threats to independence, and to take appropriate action to eliminate those threats or reduce them to an acceptable level by applying safeguards, or, if considered appropriate, to withdraw from the engagement, where withdrawal is permitted by law or regulation. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1: Ethical requirements – independence Ø At least annually, the firm obtains written confirmation of compliance with its policies and procedures on independence from all firm personnel required to be independent by relevant ethical requirements. Ø Relevant policies and procedures to assure independence are: – setting out criteria for determining the need for safeguards to reduce the familiarity threat to an acceptable level when using the same senior personnel on an assurance engagement over a long period of time; and – requiring, for audits of financial statements of listed entities, the rotation of the engagement partner and the individuals responsible for engagement quality control review, and where applicable, others subject to rotation requirements, after a specified period in compliance with relevant ethical requirements. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISA 220: Ethical requirements – independence Ø The engagement partner has to: Ø obtain relevant information from the firm and, where applicable, network firms, to identify and evaluate circumstances and relationships that create threats to independence; Ø evaluate information on identified breaches, if any, of the firm’s independence policies and procedures to determine whether they create a threat to independence for the audit engagement; Ø take appropriate action to eliminate such threats or reduce them to an acceptable level by applying safeguards, or, if considered appropriate, to withdraw from the audit engagement, where withdrawal is possible under applicable law or regulation. Ø The engagement partner shall promptly report to the firm any inability to resolve the matter for appropriate action. 2009. 04. 01 Meta Duhovnik, Ph. D.

IFAC Code Independence requires: ü independence of mind ü The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment. ü independence of appearance ü The avoidance of facts and circumstances that are so significant that a reasonable and informed third party , having knowledge of all relevant information, including safeguards applied, would reasonably conclude a firm’s or auditor’s independence had been compromised. 2009. 04. 01 Meta Duhovnik, Ph. D.

IFAC Code Possible threats to independence ü Self-interest threat ü Self-review threat ü Advocacy threat ü Familiarity threat ü Intimidation threat 2009. 04. 01 Meta Duhovnik, Ph. D.

IFAC Code Self-interest threat Ø Self-interest threat may occur as a result of the financial or other interests of a professional accountant or of an immediate or close family member. 2009. 04. 01 Meta Duhovnik, Ph. D.

IFAC Code Self-review threat Ø Self-review threat may occur when a previous judgment needs to be re-evaluated by the professional accountant responsible for that judgment. 2009. 04. 01 Meta Duhovnik, Ph. D.

IFAC Code Advocacy threat Ø Advocacy threat may occur when a professional accountant promotes a position or opinion to the point that subsequent objectivity may be compromised. 2009. 04. 01 Meta Duhovnik, Ph. D.

IFAC Code Familiarity threat Ø Familiarity threats may occur when, because of a close relationship, a professional accountant becomes too sympathetic to the interests of others. 2009. 04. 01 Meta Duhovnik, Ph. D.

IFAC Code Intimidation threat Ø Intimidation threat may occur when a professional accountant may be deterred from acting objectively by threats, actual or perceived. 2009. 04. 01 Meta Duhovnik, Ph. D.

IFAC Code Safeguards üTwo broad categories: üSafeguards created by the profession, legislation or regulation. üSafeguards in the work environment. 2009. 04. 01 Meta Duhovnik, Ph. D.

IFAC Code Safeguards created by the profession, legislation or regulation include ü Educational, training and experience requirements for entry into the profession. ü Continuing professional development requirements. ü Corporate governance regulations. ü Professional standards. ü Professional or regulatory monitoring and disciplinary procedures. ü External review by a legally empowered third party of the reports, returns, communications and information produced by a professional accountant. 2009. 04. 01 Meta Duhovnik, Ph. D.

IFAC Code Safeguards in the work environment include Depending on the circumstances üFirm – wide safeguards üEngagement specific safeguards 2009. 04. 01 Meta Duhovnik, Ph. D.

IFAC Code Firm-wide safeguards in the work environment may include: Ø Leadership of the firm that stresses the importance of compliance with the fundamental principles; Ø Leadership of the firm that establishes the expectation that members of an assurance team will act in the public interest; Ø Policies and procedures to implement and monitor quality control of engagements; 2009. 04. 01 Meta Duhovnik, Ph. D.

IFAC Code Firm-wide safeguards (continuation 1) Ø Documented policies regarding: Ø the identification of threats to compliance with the fundamental principles, Ø the evaluation of the significance of these threats and Ø the identification and the application of safeguards to eliminate or reduce threats to an acceptable level; Ø For firms that perform assurance engagements, documented independence policies regarding: Ø the identification of threats to independence, Ø the evaluation of the significance of these threats and Ø the evaluation and application of safeguards to eliminate or reduce threats to an acceptable level; 2009. 04. 01 Meta Duhovnik, Ph. D.

IFAC Code Firm-wide safeguards (continuation 2) Ø Documented internal policies and procedures requiring compliance with the fundamental principles; Ø Policies and procedures that will enable the identification of interests or relationships between the firm or members of engagement teams and clients; Ø Policies and procedures to monitor and, if necessary, manage the reliance on revenue received from a single client; Ø Using different partners and engagement teams with separate reporting lines for the provision of nonassurance services to an assurance client; 2009. 04. 01 Meta Duhovnik, Ph. D.

IFAC Code Firm-wide safeguards (continuation 3) Ø Policies and procedures to prohibit individuals who are not members of an engagement team from inappropriately influencing the outcome of the engagement; Ø Timely communication of a firm’s policies and procedures, including any changes to them, to all partners and professional staff, and appropriate training and education on such policies and procedures; Ø Designating a member of senior management to be responsible for overseeing the adequate functioning of the firm’s quality control system; 2009. 04. 01 Meta Duhovnik, Ph. D.

IFAC Code Firm-wide safeguards (continuation 4) Ø Advising partners and professional staff of those assurance clients and related entities from which they must be independent; Ø A disciplinary mechanism to promote compliance with policies and procedures; Ø Published policies and procedures to encourage and empower staff to communicate to senior levels within the firm any issue relating to compliance with the fundamental principles that concerns them. 2009. 04. 01 Meta Duhovnik, Ph. D.

IFAC Code Engagement-specific safeguards in the work environment may include: Ø Involving an additional professional accountant to review the work done or otherwise advise as necessary; Ø Consulting an independent third party, such as a committee of independent directors, a professional regulatory body or another professional accountant; Ø Discussing ethical issues with those charged with governance of the client; 2009. 04. 01 Meta Duhovnik, Ph. D.

IFAC Code Engagement-specific safeguards (continuation 1) Ø Disclosing to those charged with governance of the client the nature of services provided and extent of fees charged; Ø Involving another firm to perform or re-perform part of the engagement; Ø Rotating senior assurance team personnel. 2009. 04. 01 Meta Duhovnik, Ph. D.

National regulation • • • Auditing Act Code of Professional Conduct Basic Auditing Principles Guidelines for setting the fees Guidelines for the Operation of the Audit Companies 2009. 04. 01 Meta Duhovnik, Ph. D.

More restrictive national requirements – Auditing Act (Article 45(1)) ü An audit company is not allowed to audit an individual legal person if (1): Ø it holds investments in that legal person; Ø that legal person holds investments in the audit company; Ø the persons related to the legal person are: vclose family members of the management or supervisory board or the certified auditors of an audit company, vjoint indirect or direct holders of a qualifying (10%) holding in the audit company; 2009. 04. 01 Meta Duhovnik, Ph. D.

More restrictive national requirements – Auditing Act (Article 45(1)) ü An audit company is not allowed to audit an individual legal person if (2): Øthe audit company organizational unit in the network it belongs to, or person connected with the audit company performs or has performed in the two years prior to concluding an agreement on the auditing of a legal person's financial statements: vany type of accounting or bookkeeping services, vvaluation services for the purpose of financial reporting that could affect the items in the financial statements, 2009. 04. 01 Meta Duhovnik, Ph. D.

More restrictive national requirements – Auditing Act (Article 45(1)) ü An audit company is not allowed to audit an individual legal person if (3): vtax consultation services that could affect items in the financial statements, vagency services in tax and judicial procedures regarding tax matters, vinternal auditing services, vservices involving the set-up or introduction of an information system that includes the area of accounting or the generation of information included in the financial statements of a legal person, 2009. 04. 01 Meta Duhovnik, Ph. D.

More restrictive national requirements – Auditing Act (Article 45(1)) ü An audit company is not allowed to audit an individual legal person if (4): vbusiness and financial services that affect items in the financial statements and business and financial services that include advertising, trading or guarantees for the equity and debt securities of a legal person, vlegal services, vany other services that could affect the items in the financial statements; Ø it is connected with a legal person in some other way and doubt regarding the independence and objectivity of auditing may exist due to this connection. 2009. 04. 01

More restrictive national requirements – Auditing Act (Article 45(2)) ü A certified auditor is not allowed to audit an individual legal person if (1): Øhe/she has, as key audit partner, audited the financial statements of a legal person for seven consecutive years following the date of his/her first appointment, and if following the last audit, two years have not passed for which another key audit partner audited the financial statements; Øhe/she holds investments in that legal person; 2009. 04. 01 Meta Duhovnik, Ph. D.

More restrictive national requirements – Auditing Act (Article 45(2)) ü A certified auditor is not allowed to audit an individual legal person if (2): Øhe/she is connected with a legal person in some other way, and doubt regarding the independence and objectivity of auditing may exist due to this connection; Øhe/she performs or has performed services affecting the financial statements in the two years prior to carrying out auditing tasks. 2009. 04. 01 Meta Duhovnik, Ph. D.

More restrictive national requirements – Auditing Act (Article 46) ü A certified auditor or key audit partner that audits financial statements may not assume the function of member or consultant of a management body or head of an accounting and/or financial department at the legal person being audited until at least two years have passed following the cessation of audit work as a certified auditor or key audit partner. 2009. 04. 01 Meta Duhovnik, Ph. D.

More restrictive national requirements – Auditing Act (Article 47(4)) ü The price for auditing services shall not übe conditional on the provision of additional services for the audited legal person or üdependent on any other conditions. 2009. 04. 01 Meta Duhovnik, Ph. D.

More restrictive national requirements – Auditing Act (Article 9(2)) ü One of the tasks and competencies of the Institute in the field of auditing and other specialist fields related to auditing: üdefining guidelines for setting the fees for auditing services and corporate, real estate, machines and equipment valuation services. 2009. 04. 01 Meta Duhovnik, Ph. D.

More restrictive national recommendations – Guidelines for Setting the Fees ü Guidelines: üThe fee has to be adequate to the nature, timing and extent of the work performed. üThe recommended prices: Øassistant Øauditor Ømanager Øcertified auditor Øengagement partner between 34, 92 and 43, 65 € between 56, 74 and 69, 84 € between 78, 57 and 104, 76 € between 104, 76 and 126, 58 € between 135, 31 and 161, 50 € ØThe invoice has to be paid within 8 days after receipt. ØNo more than 60 % can be required in advance. 2009. 04. 01 Meta Duhovnik, Ph. D.

More restrictive national requirements – Code of Professional Conduct ü Rule 1 (Independence) ØThe audit firm is not allowed to gain the majority of the revenue from only one source. 2009. 04. 01 Meta Duhovnik, Ph. D.

More restrictive national requirements – Guidelines for the Operation of the Audit Companies ü Any action that could threaten the independence of personnel vfor example employment offering, or v service offering, ü is forbidden. 2009. 04. 01 Meta Duhovnik, Ph. D.

Acceptance and continuance of client relationships and specific engagements ISQC 1 Ø The firm has to establish policies and procedures for the acceptance and continuance of client relationships and specific engagements, designed to provide the firm with reasonable assurance that it will only undertake or continue relationships and engagements where the firm: Ø is competent to perform the engagement and has the capabilities, including time and resources, to do so; Ø can comply with relevant ethical requirements; and Ø has considered the integrity of the client, and does not have information that would lead it to conclude that the client lacks integrity. 2009. 04. 01 Meta Duhovnik, Ph. D.

Client relationships ISQC 1 Ø The firm has to obtain such information as it considers necessary in the circumstances before accepting an engagement with a new client, when deciding whether to continue an existing engagement, and when considering acceptance of a new engagement with an existing client. 2009. 04. 01 Meta Duhovnik, Ph. D.

Client relationships ISQC 1 Ø If issues have been identified, and the firm decides to accept or continue the client relationship or a specific engagement, the firm has to document how the issues were resolved. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1 Client relationships Ø The firm has to establish policies and procedures on continuing an engagement and the client relationship, addressing the circumstances where the firm obtains information that would have caused it to decline the engagement had that information been available earlier. Such policies and procedures shall include consideration of: Ø the professional and legal responsibilities that apply to the circumstances, including whethere is a requirement for the firm to report to the person or persons who made the appointment or, in some cases, to regulatory authorities; and Ø the possibility of withdrawing from the engagement or from both the engagement and the client relationship. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISA 220 Client relationships • The engagement partner has to Ø assure that appropriate procedures regarding the acceptance and continuance of client relationships and audit engagements have been followed, and Ø determine that conclusions reached in this regard are appropriate. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISA 220 Client relationships Ø If the engagement partner obtains information that would have caused the firm to decline the audit engagement had that information been available earlier, the engagement partner has to communicate that information promptly to the firm, so that the firm and the engagement partner can take the necessary action. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1 Human resources Ø The firm has to establish policies and procedures designed to provide it with reasonable assurance that it has sufficient personnel with the competence, capabilities, and commitment to ethical principles necessary to Ø perform engagements in accordance with professional standards and applicable legal and regulatory requirements; and Ø enable the firm or engagement partners to issue reports that are appropriate in the circumstances. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1 Human resources Ø Personnel issues relevant to the firm’s policies and procedures related to human resources include, for example: Ø Recruitment Ø Performance evaluation Ø Capabilities, including time to perform assignments Ø Competence Ø Career development Ø Promotion Ø Compensation Ø The estimation of personnel needs 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1 Human resources Competence is the knowledge and skills necessary to accomplish tasks that define the individual’s job. Ø Competence can be developed through a variety of methods, including the following: Ø Professional education Ø Continuing professional development, including training Ø Work experience Ø Coaching by more experienced staff, for example, other members of the engagement team Ø Independence education for personnel who are required to be independent 2009. 04. 01 Meta Duhovnik, Ph. D.

Assignment of engagement teams MSR 220 • The engagement partner has to assure that the engagement team, and any auditor’s experts who are not part of the engagement team, collectively have the appropriate competence and capabilities to: ü perform the audit engagement in accordance with professional standards and applicable legal and regulatory requirements; and ü enable an auditor to issue a report that is appropriate in the circumstances. 2009. 04. 01 Meta Duhovnik, Ph. D.

MSR 220 Engagement teams • The engagement partner may take into consideration such matters as the team’s: Ø understanding of, and practical experience with, audit engagements of a similar nature and complexity through appropriate training and participation; Ø understanding of professional standards and legal and regulatory requirements; Ø technical expertise, including expertise with relevant information technology and specialized areas of accounting or auditing; Ø knowledge of relevant industries in which the client operates; Ø ability to apply professional judgment; Ø understanding of the firm’s quality control policies and procedures. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1 Engagement performance Ø The firm has to establish policies and procedures designed to provide it with reasonable assurance that Ø engagements are performed in accordance with professional standards and applicable legal and regulatory requirements, and Ø the firm or the engagement partner issue reports that are appropriate in the circumstances. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1 Engagement performance Ø Such policies and procedures have to include: Ø matters relevant to promoting consistency in the quality of engagement performance; Ø supervision responsibilities; Ø review responsibilities. Ø The firm’s review responsibility policies and procedures have to be determined on the basis that work of less experienced team members is reviewed by more experienced engagement team members. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1 Engagement performance - consultation Ø The policies and procedures of the firm have to assure that: Ø appropriate consultation takes place on difficult or contentious matters; Ø sufficient resources are available to enable appropriate consultation to take place; Ø the nature and scope of, and conclusions resulting from, such consultations are documented and are agreed by both the individual seeking consultation and the individual consulted; and Ø conclusions resulting from consultations are implemented. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1 Engagement performance – Engagement quality control review Ø The firm has to establish policies and procedures requiring, for appropriate engagements, an engagement quality control review that provides an objective evaluation of the significant judgments made by the engagement team and the conclusions reached in formulating the report. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1 Engagement performance – Engagement quality control review Ø Policies and procedures have to: Ø require an engagement quality control review for all audits of financial statements of listed entities; Ø set out criteria against which all other audits and reviews of historical financial information and other assurance and related services engagements shall be evaluated to determine whether an engagement quality control review should be performed; and Ø require an engagement quality control review for all engagements, if any, meeting the criteria established. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1 Engagement performance – Engagement quality control review Ø The firm has to establish policies and procedures setting out the Ø nature, Ø timing and Ø extent of an engagement quality control review. Such policies and procedures require that the engagement report not be dated until the completion of the engagement quality control review. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1 Engagement performance – Engagement quality control review Ø The firm has to establish policies and procedures on documentation of the engagement quality control review which require documentation that: Ø the procedures required by the firm’s policies on engagement quality control review have been performed; Ø the engagement quality control review has been completed on or before the date of the report; and Ø the reviewer is not aware of any unresolved matters that would cause the reviewer to believe that the significant judgments the engagement team made and the conclusions it reached were not appropriate. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1 Engagement performance – Differences of opinion Ø The firm has to establish policies and procedures for dealing with and resolving differences of opinion within the engagement team, with those consulted and, where applicable, between the engagement partner and the engagement quality control reviewer. Ø Conclusions reached have to be documented and implemented. Ø The report must not be dated until the matter is resolved. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1 Engagement performance – Engagement documentation Ø The firm has to establish policies and procedures for Ø engagement teams to complete the assembly of final engagement files on a timely basis after the engagement reports have been finalized; ü In the case of an audit such a time limit would ordinarily not be more than 60 days after the date of the auditor’s report. Ø the retention of engagement documentation for a period sufficient to meet the needs of the firm or as required by law or regulation. ü In the specific case of audit engagements, the retention period would ordinarily be no shorter than five years from the date of the auditor’s report, or, if later, the date of the group auditor’s report. 2009. 04. 01 Meta Duhovnik, Ph. D.

More restrictive national requirements – Auditing Act (Article 39 (2)) ü When auditing financial statements, the audit company must ensure that: ü the certified auditor who signs the audit report on financial statements, participates in at least 15% of total audit time; ü the total number of working hours of the assistants of the certified auditor with more than two years of audit experience account for at least 60% of total audit time; ü the total number of working hours of other persons in the audit group account for a maximum of 25% of total audit time. 2009. 04. 01 Meta Duhovnik, Ph. D.

National requirements – Auditing Act (Article 39 (5)) ü The audit company shall store the audit documentation for six years following the completion of an audit. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISA 220 Engagement performance • The engagement partner has to take responsibility for: Ø the direction, supervision and performance of the audit engagement in compliance with professional standards and applicable legal and regulatory requirements; Ø the auditor’s report being appropriate in the circumstances; Ø reviews being performed in accordance with the firm’s review policies and procedures; Ø the engagement team undertaking appropriate consultation on difficult or contentious matters; Ø not dating the auditor’s report until the completion of the engagement quality control review (where applicable); Ø following the firm’s policies and procedures for dealing with and resolving differences of opinion within the engagement team, with those consulted or, where applicable, between the engagement partner and the engagement quality control reviewer. 2009. 04. 01 Meta Duhovnik, Ph. D.

National requirements – Auditing Act (Article 37 (3)) • Engagement performance – consultation v. Whenever the testing and assessment of individual items in the financial statements require professional knowledge not available to a certified auditor, the legal person has to, at the request of the audit company, obtain an expert opinion or appraisal from a certified appraiser. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1 Monitoring ü The firm has to establish a monitoring process designed to provide it with reasonable assurance that the policies and procedures relating to the system of quality control are relevant, adequate, and operating effectively. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1 Monitoring ü The monitoring process has to: üinclude an ongoing consideration and evaluation of the firm’s system of quality control including, on a cyclical basis, inspection of at least one completed engagement for each engagement partner; ürequire responsibility for the monitoring process to be assigned to a partner or partners or other persons with sufficient and appropriate experience and authority in the firm to assume that responsibility; ürequire that those performing the engagement or the engagement quality control review are not involved in inspecting the engagements. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1 Monitoring • The firm has to evaluate the effect of deficiencies noted as a result of the monitoring process and determine whether they are either: – instances that do not necessarily indicate that the firm’s system of quality control is insufficient to provide it with reasonable assurance that it complies with professional standards and applicable legal and regulatory requirements, and that the reports issued by the firm or engagement partners are appropriate in the circumstances; – systemic, repetitive or other significant deficiencies that require prompt corrective action. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISQC 1 Monitoring – Documentation of the System of Quality Control • The firm has to establish policies and procedures requiring – appropriate documentation to provide evidence of the operation of each element of its system of quality control, – retention of documentation for a period of time sufficient to permit those performing monitoring procedures to evaluate the firm’s compliance with its system of quality control, or for a longer period if required by law or regulation, – documentation of complaints and allegations and the responses to them. 2009. 04. 01 Meta Duhovnik, Ph. D.

ISA 220 Monitoring v The engagement partner has to consider ü the results of the firm’s monitoring process as evidenced in the latest information circulated by the firm and, if applicable, other network firms and ü whether deficiencies noted in that information may affect the audit engagement. v A deficiency in the firm’s system of quality control does not necessarily indicate that a particular audit engagement was not performed in accordance with professional standards and applicable legal and regulatory requirements, or that the auditor’s report was not appropriate. 2009. 04. 01 Meta Duhovnik, Ph. D.

External quality control • Main objectives: vto ensure auditors meet their obligation to society to provide work of the highest quality; vto fulfill the need to sustain public confidence in the profession by demonstrating a concern for maintaining high standards of professional work; vto avoid the adverse consequences of sub-standard work and loss of public confidence; vto encourage, educate and assist members and member audit firms in achieving the highest standards of professional work, consistently throughout the profession. 2009. 04. 01 Meta Duhovnik, Ph. D.

Legal basis v Auditing Act v IFAC pronouncements v Institute’s auditing rules 2009. 04. 01 Meta Duhovnik, Ph. D.

The basis for disciplinary procedure • Zrev-2 • Act on general administrative procedure 2009. 04. 01 Meta Duhovnik, Ph. D.

Competence for external quality control • Institute – Auditing Council – The president of the Auditing Council represents the Institute in the procedures to be performed by the Auditing Council under public authorization given to the Auditing Council by the Auditing Act. • Agency for the Public Oversight of Auditing (hereinafter Agency) – Expert Council 2009. 04. 01 Meta Duhovnik, Ph. D.

Auditing Council • decides about the issue of licences for auditing firms and certified auditors; • supervises the auditing; • adopts the auditing rules; • defines the criteria for obtaining the certificate of a certified auditor; • performs other professional tasks related to the development of the auditing profession. 2009. 04. 01 Meta Duhovnik, Ph. D.

Auditing Council • Seven members: – the director of the Institute; – four members with the license of a certified auditor; – two representatives of the interested public with appropriate knowledge and experience in the field of accountancy and finance. • Appointed for a term of four years. 2009. 04. 01 Meta Duhovnik, Ph. D.

Quality control • Audit companies • Certified auditors 2009. 04. 01 Meta Duhovnik, Ph. D.

Monitoring • Carried out by experts: – authorized by the Director of the Institute and employed at the Institute: • 3 certified auditors and 1 lawyer; – authorized by the Agency. 2009. 04. 01 Meta Duhovnik, Ph. D.

Quality control – Audit companies • verification of whether individual entities meet the conditions for the issue of a license to provide auditing services: – Institute – directly, Agency – indirectly; • continuous verification of whether certified auditors and audit companies meet the conditions for entry in the appropriate register; – Institute – directly, Agency – indirectly; 2009. 04. 01 Meta Duhovnik, Ph. D.

Quality control – Audit companies (continuation) • monitoring, collection and verification of reports and notifications of audit companies and other persons that are obliged to report to or notify the Institute with regard to individual facts and circumstances in accordance with the provisions of Zrev-2 and other acts: – Institute and Agency; • examinations of the operations of audit companies: – Institute and Agency; • imposing measures of supervision in accordance with ZRev-2: – Agency. 2009. 04. 01 Meta Duhovnik, Ph. D.

Quality control – Audit companies • Examinations of the operations of audit companies have to be carried out: out – at least every three years for audit companies carrying out statutory audits of entities whose securities are traded on the regulated securities market of any Member State; – at least every six years for other audit companies. 2009. 04. 01 Meta Duhovnik, Ph. D.

Quality control – Audit companies • The supervision of an audit company includes: • an examination of the quality control system at the audit company; • verification of the independence of the certified auditors from the audit clients; • verification of the compliance of auditing procedures with auditing rules; • an assessment of the quality and quantity of factors used (composition of the auditing team and working hours); • an examination of the auditing services charged; • direct supervision of certified auditors. 2009. 04. 01 Meta Duhovnik, Ph. D.

Quality control – Certified auditors • Direct supervision of certified auditors is carried out in a way that the quality of their work is verified (during the supervision of the audit company) with an examination of the complete audit documentation related to the audit of at least one client in the period since the last supervision was carried out. 2009. 04. 01 Meta Duhovnik, Ph. D.

Quality control – Supervisors • A person carrying out the supervision of audit companies and the tasks performed by a certified auditor has to – – – be a certified auditor; possess a high level of active knowledge of the Slovenian language; fulfill the special ethical requirements (no conviction of a crime against property or an economic crime that has yet to expunged from the record). • A supervisor has to prepare a written report on the examination of the quality of auditing that shall contain the main findings of the review. 2009. 04. 01 Meta Duhovnik, Ph. D.

Disciplinary sanctions for certified auditors • withdrawal of the licence; • public warning. 2009. 04. 01 Meta Duhovnik, Ph. D.

Withdrawal of the licence • the license was obtained by stating false data; • the conditions required (Article 48 of Zrev-2) were not fulfilled upon acquisition of the license; • certified auditor has been convicted of a commercial or property crime; • certified auditor holds investments in the client; • certified auditor is connected with the client in another manner that could give rise to a doubt as to the independence and objectivity of auditing; • certified auditor violates the auditing rules, which results in a deficient and misleading audit report; • certified auditor violates the duty to protect confidential data; • certified auditor repeatedly violates other provisions of auditing rules. 2009. 04. 01 Meta Duhovnik, Ph. D.

Conditional withdrawal of the licence ØThe Agency may provide that the withdrawal will not be implemented if within the time limit set by the Agency of no less that six months and not exceeding two years, the certified auditor refrains from committing another violation giving rise to the withdrawal of the license or a public warning. 2009. 04. 01 Meta Duhovnik, Ph. D.

Public warning • violation of the auditing rules; • no grounds for withdrawal or conditional withdrawal of the licence. 2009. 04. 01 Meta Duhovnik, Ph. D.

Disciplinary sanctions for auditing firms • order for elimination of violation; • imposition of additional measures; • withdrawal of the licence. 2009. 04. 01 Meta Duhovnik, Ph. D.

Order for elimination of violation • The audit company violates the prohibition connected with the investments; carries out the activities prohibited under Zrev-2; is organized as a joint-stock company but it has not issued registered shares; violates the duty of reporting and notification; fails to publish transparency report (if applicable) on its website within three months of the conclusion of each financial year; – fails to meet any of the conditions for the issue of a license to provide auditing services; – violates other auditing rules. – – – 2009. 04. 01 Meta Duhovnik, Ph. D.

Imposition of additional measures • Serious violation of auditing rules. • Measures: • the improvement of procedures of internal supervision of auditing; • the improvement of procedures of internal supervision concerning the flow of confidential data; • the change of internal structure of the auditing firm; • other measures required for implementation of the auditing rules. 2009. 04. 01 Meta Duhovnik, Ph. D.

Withdrawal of the licence • the licence was obtained by stating false data; • additional measure was imposed on the auditing firm, and the competent body (old or newly appointed) failed to eliminate the violations and/or to take additional measures. 2009. 04. 01 Meta Duhovnik, Ph. D.

Quality control • Financial resources: – Institute • tariff (fee for the supervisory function) – Agency • main source: state budget • sanctions and offences: tariff 2009. 04. 01 Meta Duhovnik, Ph. D.

Reporting under Zrev-2 (Article 77) An audit company has to: • notify the Institute of all changes regarding all facts and circumstances, based on which it obtained a license to provide auditing services, within ten days; • once a year until the end of May of the current year, report data regarding the following to the Institute and Agency: – holders of the audit company's shares and the acquisition of or changes to qualifying holdings; – investments based on which the audit company has indirectly or directly acquired a qualifying holding in another legal person, and any subsequent investments in that legal person; – changes to the articles of association or memorandum of association and all other acts of the audit company; 2009. 04. 01 Meta Duhovnik, Ph. D.

Reporting under Zrev-2 (Article 77) • reporting once a year (continuation): – changes to a cooperation agreement with another audit company or the conclusion of a new cooperation agreement with another audit company; – the method of calculating the amount of auditor's liability insurance and the method of insuring the auditor's liability; – employees; – all contracts on the auditing of financial statements that the audit company concluded with clients from the previous accounting period and all contracts that the audit company concluded for other assurance engagements and agreed-upon procedures engagements; – number of planned and actual hours for each member of the audit team for each individual audit of financial statements; – number of audit reports signed by an individual certified auditor. 2009. 04. 01 Meta Duhovnik, Ph. D.

Reporting under Zrev-2 (Article 77) • The audit company is obliged to report to the Agency and Institute the number of audit reports an individual certified auditor employed or in a contractual relationship with the audit company signed in connection with audits performed of individual and consolidated financial statements and the contents of concluded contracts on the auditing of financial statements in the manner, to the extent and by deadlines defined by the Agency in special regulations. 2009. 04. 01 Meta Duhovnik, Ph. D.

Reporting under Zrev-2 (Article 77) • An audit company has to inform the Institute and Agency in writing about the dismissal or resignation of an audit company during a period for which it has been appointed, and appropriately explain the reasons for dismissal or resignation. • If requested by the Institute or Agency, an audit company has to submit reports and information on all issues relevant to supervision or to carrying out other competencies and tasks of the Institute or Agency. 2009. 04. 01 Meta Duhovnik, Ph. D.

Rules of the Auditing Council • Internal (more detailed) rules regarding the procedure of supervision. • Written statement regarding independence and objectivity of the members. 2009. 04. 01 Meta Duhovnik, Ph. D.

Auditing of the financial statements • Commercial sector – statutory audit according to the Companies Act and Auditing Act • Public sector – statutory audit according to the Accounting Act and Public Finance Act – internal audit according to the Public Finance Act – supervision of the Court of Audit 2009. 04. 01 Meta Duhovnik, Ph. D.

The Accounting Profession Commercial Sector • Statutory audit: – large and medium-sized companies – dual companies – small listed companies – companies obliged to draw up consolidated financial statements – banks – insurance companies 2009. 04. 01 Meta Duhovnik, Ph. D.

The Accounting Profession Public Sector • Audit under the Accounting Act: – mandatory for large legal entities that provide public services – possible (minister’s or mayor’s requirement) • for the financial statements of the legal entities with at least 15% state or municipality ownership • Internal audit under the Public Finance Act – mandatory for all direct and indirect Budget users 2009. 04. 01 Meta Duhovnik, Ph. D.

The Auditing Profession • The period 1996 - 2001 – the first Slovenian Auditing Act • the Institute is responsible for the monitoring of statutory audits – special rules accepted by the Council of Experts • peer review system – 43 auditing firms – 100 statutory auditors - practitioners 2009. 04. 01 Meta Duhovnik, Ph. D.

The Auditing Profession • The period 2002 - 2008 – the second Slovenian Auditing Act • the quality control procedure is prescribed in details by the act – monitoring system • the experts of the Institute – one lawyer – four certified auditors – 42 auditing firms – 130 statutory auditors - practitioners 2009. 04. 01 Meta Duhovnik, Ph. D.

The Auditing Profession • The period 2008 – The third Slovenian Auditing Act • the quality control procedure is prescribed in details by the act – monitoring system • the experts of the Institute – one lawyer – three certified auditors • the experts of the Agency – 50 auditing firms – 115 statutory auditors - practitioners 2009. 04. 01 Meta Duhovnik, Ph. D.

Certified auditor The Auditing Profession Non-practitioner • who at least three years prior • university degree to the involvement in the • a minimum of five years public oversight system working experience (minimum of three years in auditing) – has not carried out • professional examination of statutory audits certified auditor – has not held voting rights in • no previous withdrawal of a an auditing firm license – has not been a member of • no conviction of a commercial or the administrative or property crime management body of an • knowledge of the Slovenian audit firm language – has not been employed or • the license is not tied up to the otherwise associated with performance of audits an auditing firm 2009. 04. 01 Meta Duhovnik, Ph. D.

The Auditing Profession Disciplinary measures on the basis of the Auditing Act issued in 2001 Year 2003 Year 2004 Year 2005 Year 2006 Year 2007 Year 2008 Total Public warnings 9 6 2 3 4 2 26 final 9 6 1 3 – 1 20 Suits at the Supreme Court of the Republic of Slovenia – – 1 – 4 1 6 Withdrawal (final) 1 – – – 1 Orders for elimination of the violation – – – 1 1 Certified auditors Audit companies Orders for elimination of 4 3 10 7 3 3 30* the violation *Two orders for elimination of the violation were issued before 2003; one in 2001 and one in 2002. 2009. 04. 01 Meta Duhovnik, Ph. D.

Publishing of final sanctions The summarised decision is to be published in the professional journal of the Institute (Revizor - The Auditor). 2009. 04. 02 Meta Duhovnik, Ph. D.

meta. duhovnik@si-revizija. si SLOVENIAN INSTITUTE OF AUDITORS Tel. : +386 568 55 54 www. si-revizija. si 2009. 04. 01 Meta Duhovnik, Ph. D.