their potential for sub-saharan...

VVDFiJ9 ; LUER 276 c E aAM C4EC I,~ICAL SERIE.s v n-

lQuality Rev"I Schemes for AuditorsTheir Potential for Sub-Saharan Africa

Sonia R. Johnson

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r WORLD BANK TECHNICAL PAPER NUMBER 276

AFRICA TECHNICAL SERIES

Quality Review Schemes for AuditorsTheir Potential for Sub-Saharan Africa

Sonia R. Johnson

The World BankWashington, D.C.

Copyright C 1995The Intemational Bank for Reconstructionandievelopment/mE WORLD BANK1818 H Street, N.W.Washirnon, D.C 20433, US-AI

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Soma R. Johnson is an accounting education consultant to the Capacity Building and ImlementationDivision, Africa Technical Departnent, of the World Bank

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Johnson, Sonia R., 1958-Quality review schemes for auditors : their potntial for Sub

-Saharan Africa / Sonia R. JohnsLonp. cm - (World Bank technical papers, ISSN 0253-7494; 276)Includes bibliographical references.ISBN (invalid) 0-8213-3186-X1. Auditing-Standards 2. Accounting-Standards. 3. Auditing-

-Standards-Afica, Sub-Saharan. 4. Acounting-Standards-Africa,Sub-Saharan. L Title. IL Series: World Bank technical papers;no. 276.HF5667.J645 1995657.45-dc2O 95-1367

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Contents

rpq

Foreword ..... . vi

Accnowledgeenets ......... vif

Abbreviations .................................. . ..... ix

Absta .. ........................................... Id

Executive SunnarY ....... . 1

Accountingand Audit g ............................... IQuality Review Schems ............................... IObjective of e Report .................................. 2PilotQualityReviews ................................ . 2Benefits and Risics ................................... 3Recommndations . ................................... 3

1. Accounting and Auditin in Sub-Sbamn Aica ..... S............... S

Accounting and Auditing Standrds ............................. SPrivateSector AccountingandAuditig ........................... 6Public Sector Accoun.t .................................... 7PublicSector Auditin ....... .......... .................... 8Interest in Development of te Accouninge ................ .. 10Educationand Training ..................................... 11Summary ............................................... 13

2. Quaty Review . .......................................... 15

What is a Quality Review? . . . 15ThePurposeofaQuality Review ............................... ISQualityReviewSchemes ......... ........................... 15ImplicationsforSSA ...................................... 21Summary .............................................. 22

3. Adaptation to SSA - the Reuts of Two PUb Review Sdc ..... .25

Objectives and Fomat ofPbos ........ ....................... 25C ounies .............................................. 2SReviewers . ............................................ 26Pre-PilotAs te ......................................Aciiis.. 26The Piots .................................. 27The TanzaniaPilotQuaitReview . . . 28The Senegal Pilot Quity Review .............................. 31

v

plcatIsoms orSSA . ........ .. 33SU ....... . 35

4. d_ ........ . 37

Beeit .......... 37RislinalPmiUe .......... 38NextStep .............. 38

AMw

A. Ineruional Federadon of Accogtus., Slmmu ofPOicyoCof mciAwAuriuthS eQulkyofAAn dkrad ard Sed Urvl ........ 41

B. Review Schemes ......................................... 49C. Reviewers ............................................. 55D. MTcRewPi .:....................................e. oc.. 59E. Eduaton ad Reacto of Members ............................. 69F. Tan;a_ia Plot Quaity Review

Guide fbr Auditors: Your Qaeaiiom Auswerd ...... .. .. .. .. ...... 75.0. Pilot Qudliy Review ............................. 79

H. Qualty Review Schme Cleckidt ................ 87

Roui me .................................................. 89

1. Phic Secor Acconing in UpgodUa ............................... 81.2 MheAucitorGCnermalsDDeprtnmnt in Maawi........................ 91.3 The Tauzmna Audk Corportion . ........... . ....... . 10IA TbeAccotmam7 Pvofouio inSiemLon I. . 122.1 Mm Society of Arunum h MW*W ............................ 18

Tabes

2.1 Prpo eof QmfityReviewS ............................. 172.2 Quality Review Shm Retviews. Benefit and Reai .... .......... 202.3 ReviewFees . ............................................ 21

vi

Foreword

Poor financial management in Sub- not adequately represnted in the finacialSaharan Africa has been identified as a major statements.obstacle to the &velopment of equitableeconomic growth. Good accountig and This paper assesses existing schemesauditing systems and qualified personnel to for reviewing the quality of the work ofmanage them are necessary if there is to be auditors, describes the results of two pilot testeffective financial decision-maing and in Tanzania and Senegal, and recmmends thatmonitoring of fiscal development and public similar schemes be inoduced in Sub-Sabaranfinance. An important element of governance Africa. Existng review schemes have beenis transparency in financial accountability, effictive in helping improve auditing qualtStrengthening the capacity of ountries to and capacity by identfing problems andmanage their own financial affairs will encouraging firms to correct substndardfacilitate improved governance. practices. The Intenmational Fedeaion of

Accountanm, which represents some 111The accountig aTd auditng profession bodies worldwide, has issued a Stame of

in Sub-Saharan Africa is weak. There is a Policy encouraging its member bodies toshortage of accountants at all levels; introduce review schemes. A number ofaccountng and audiing standardsr are not countries, including Malawi, South Africa,developed or monitored; accounting and Tanzania, and Zimbabwe are in the process ofauditng traiing is inadequae, especially introducing their own review schemes. Thethe public sector, and there is a lack of introduction of such schemes in Sub-Saharanaccountability. The role of the auditor thus Africa will help ensure that axuitors arebecomes increasingly important Audit reports competent. The ultimate development goal isshould provide an impartial, idependent, capacity building dtrough, in this instance,expert opinion upon which management, improvement of the capacity of auditors inshareholders, and other interested parties can Sub-Sabaran Afica. The introduction of arely. They should indicate whether the review system is an important step towardsaccounts on which the reports are made are this objective.re.able, and if not, they should identif issues

/ Kevin M. CleaverDirectorTechnical D amntAfrica Region

October 12, 1994

vii

Acknowledgments

In preparin this report, the author D. Atherton (AICPA), N. Baldwin (HKSA),benefited from the contibutions of dhe G. Dickinson (ICAO), J. Flexer (CGAA), R.folowing indiiduals. From the World Bank: Fryer (DRT International), J. Holden (JMU),A. Kenefick and E. Daffem, Peer Reviewers; P. Gray (NZSA), M. McKenna (ASCPA), E.C. Lyle, J. Maknda, and M. Sabai, who McMahon (ICA), J.M. O'Neill (SOCAM),undertook the pilot reviews; .A Akinlotan, G.A. Rippey (Tbe US Department ofRA. Andesen, J.E. Graves, A. Heron, P. Education), H. Youngs and R. MidgeleyLandell-Mills, A. Ravat, and M. Stevens who (ACCA) who provided details of their reviewprovided belpf comments on this and earlier schemes; A. Dadd (PW), P. Dean (UNdmRh of the report; A.S. Bhandari, L.V. DDSMS), and J. Gruner (IFAC) who providedDomnkgo, J.R. Edwards, B. Falconer, M. especially helpfil comments; P. RandolphPilgar-Vidal, D. Radel, and S. Singh, who (Collins Barrow) who assisted widh the pilotprovidod their experience of auditors in SSA; review in Tanzania; and L.S.L. Utouh and D.and S. Ngo-Bodog who Iindly provided high- Malonga (NBAA) who provided generusquaity deskaop publishiqg expertise. From support for the pilot review in Tanzana.outside the Bank special thaks are given to:

"Uii

Abbreviations

ABWA Association of Accountancy Bodies in West AfricaACCA Chartered Association of Certified AccountantACPS Association des Comptables Professionnels du S6nEgalAICPA American Insfitute of Certified Public AccountasARC Audit Registration ConnmitteeASB Accounting Standards BoardASCPA Australian Society of Certified Practising AccountantsC&AG Controller and Auditor GeneralCART Committee Appointed Review TeamCGAA Certified General Accountants AssociationCICA Canadian Institute of Charered AccountantsCPA Certified Public AccountantCPD Continuing Professional DevelopmentDPMT Department of Personnel and Management TrainingDTI Department of Trade and IndustryEC. European CommunityECSAFA Eastern Central and Southem Africa Federation of AccountantsPAP Financial Accountability ProgramFIDEF F6d6ration Internationale des Experts ComptablesIKSA Hong Kong Society of AccountantsIASC Iternational Accounting Standards CommitteeICAEW Institute of Chartered Accountants in England and WalesICAA Institute of Chartered Accountants in AustraliaICAI Institute of Chartered Accountas in kelandICAO Institute of Chartered Accountants of OntarioIDA International Development AssociationIFAC International Federation of AccountanAsINTOSAI International Organization of Supreme Audit InstitttionsIPAM Institute of Public Administration and ManagementISA International Standard on AuditingJMU Joint Monitoring UnitMAB Malawi Accounants BoardNBAA National Board of Accounns and AuditorsNZSA New Zealand Society of AccountantsOCAG Office of the Controller and Auditor GeneralODA Overseas Development AdministrationOIG Office of the Inspector GeneralONEEAS Ordre National des Experts et Evaluaterus du SenegalPAEC Public Accountants Examinations CouncilPCPS Private Companies Practice SectionQRP Quality Review ProgramRAB Report Accepa BodyRPB Reogized Professional BodyRSB Recognized Supervisory Body

ix

Abbreviations

SAICA South African Institute of Chartered AccountantsSEC Securities Exchange ConunissionSECPS SEC Practice SectionSOCAM Society of Accountans in MalawiSSA Sub-Sahaan AfricaTAC Tanzania Audit CorporationUNDP United Nations Development Programme

x

* Abstract

T11 pwr ducribc dn am of die work of udito, describes the resiw ofamows an maudkeg In SubSaba Akrio wo pio cm in Tania and Seneal, and(&A, md di mproe of havig an rommends do simiar sch beudig profesi whi seoo m t bAlul introduc.d In SSA a a way to mnaialnthe hghet stmdmrb. _I pqier - sadard..Alud cmf for vewig th Xqitye of

xi

Executive Summary

Weakness in financial management to undertaldng compliance auditing. Fewcapability affects the progress of both the government auditors have the necessary skillspublic and private sector in Sub-Saharan to undertake value-for-money or computerAfrica (SSA). Inadequate accounting and audits, or to audit financial statements.auditing has hindered the development offinancial decision-making and led to ineffective The public sector plays an importantmonitoring of fiscal development and role in SSA. Since it controls a large part ofimbalances in public finances. Numerous the region's wealth, the need for well-studies of accounting and auditing in SSA have developed financial systems and personnel toconcluded that sustained economic growth manage them is extremely important. Untilcannot be maintained in the absence of a sound recently, there has been little governmentaccountng and auditing infrastructure and an interest in developing the accounting andappropriately trained accounting and auditing auditing profession and, in particular, inprofession. While recognizing that the work of improving public sector accounting andthe accountant is just as imnporta as the work auditing in SSA. Although there are still someof the auditor, this report concentrates on one countries in SSA where there is a reluctanceaspect of financial management - the role of on the part of government to improvethe external auditor. accounting and auditing, countries are

increasingly seeing the benefits of soundPoor accountmg and weak internal governmntal accounting and auditing systenms.

audit make the role of external audit very An important element of govence isimportant. Audit reports should provide an transparency m financial accountability andindependent, expert opinion upon which m nt of resources. Strengtheningmanagement, shareholders, employees, and goverl capability to manage its financialother interested parties can rely. Reports affairs will contnbute to improved governance.should indicate whether the accounts arereliable, and if not, they should identify issuesnot adequately represented in the financial Quality Review Schemesstaements. Where audit reports provide suchwarnings they should do so in clear and The concept of review of auditors firstunambiguous terms, so that the reader can arose in the 1960s and 1970s in the Unitedunderstand the nature and the fncial States when there was widespread scrutiny ofimplications of the problems. the auditing profession. In 1969, the American

Institute of Certified Public Accountants(AICPA) recommended that a scheme be set

Accounting and Auditing up to provide auditing firms with anopportunity to have objective cross-reviews of

Often, external auditors have to be their auditing work. Since then Australia,brought in to audit the accounts of World Canada, Hong Kong, Ireland, New Zealand,Bank projects bese of lack of in-country and the United Kingdom, and more recentlycapacity and capability among auditors in Malawi, South Africa and Zinbabwe haveSSA. Most of the public sector auditing decided to introduce similar schemes. Theentities in SSA are undertffed, and many do main purpose of a review scheme is to testnot have sufficiently skilled personnel to be whether auditors are doing their jobs properlyable to carry out their duties adequately. In and are obseving high professional standards.addition, auditing expertise is often restricted Independe reviews of audit and accounting

1

Qufity Review Schemes for Auditors in SSA

practcos have been shown to be effective n * Help ensure that the auditors arehelping firms identify and correct substandard competent and independent.prctces.

* Help ensure the reliability of financialThe International Federation of statements.

Accountats (IFAC), which has over 111member bodies in 81 countries, encourages the * Provide the basis for a model reviewinroduction of reviews. The Council of IFAC scheme which could be adoptedcomides that member bodies need to throughout SSA.deinvstrate that there are adequate self-regulatory programs in place to provide * Help national accounting bodiesreasonable assurance that auditors adhere to introduce their own review schemes.the t standards in performing audit andrelaed services. In July, 1992, its Council A long-term goal would be for SSAissued a Statement of Policy of the Council; accounting bodies to be able to administer'Assuring the Quality of Audit and Related their own review schemes, on a national orServices'(see Amex 1). The Statement asks regional basis. The ultimate developmentalthat over a period of time IFAC member goal of the introduction of a review schemebodies: (a) adopt or develop quality control however, would be the improvement of thestndards and guidance; (b) develop quality capability of African auditors.asurance programs; and (c) require firms tomake improvements to quality control policiesand procedures when necessary. The concept PSlot Qualt Reviewsof review is familiar to some of the firms inSSA, because large intenational firms of The report also describes the results of

ditors already have sysems of peer review two pilot quality reviews in Tanzania andin which they are reviewed by partner firms. Senegal, which took place in March and May,In addition, the Society of Accountants in 1993 respectively. The purpose of these pilotsMalawi (SOCAM) has underaken a peer was to:rview of its members, and the South Africanlnstitun of Chartered Accountants (SAICA) * Assess the reaction of government andnd the Insdtute of Chartered Accoutants of private sector auditors to the conceptZimbabwe have decided to introduce review of auditor reviews.schem.

* Ascertain whether the review processthat has been introduced in odter

Objective of the Report countries is appropriate for use inSub-Saharan Africa.

This report examines review schemesalready opeating, describes their stengths and * Iron out any practical difficulties inworking methods, and assesses how they could the review process.be adapted for use in a scheme to review thequaity of auditors in SSA. The main The pilots reviewed goverment andolbectives of such a scheme would be to: private auditors in Tanzania and Senegal.

They were carried out by Bank staff in* Identify weaknesses in the audit conjunction with a consultant with specific

process, which the auditor, experienceof undertaking quality reviews. Theprofessional body or the Bank could pilot quality reviews involved: (a) anhelp rectify. examination of the quality controls in place in

2

Executive Summary

eal audit entity and firm; (b) a review of a provide an objective way to identify anysunple of randoly selected audit files to technical assistance the Bank could provide tocheck compliance with national accounting and the accounting and auditing profession orauditing stanards; and (c) a wrap-up meeting public sector accountants and auditors toto dicuss the review findgs. The reaction improve the quality of their service. Inreceived was extremely favorable, and all addition, the Bank could use a review schemneaudit entities and firns reviewed welcomed the as a step toward improving governance of itspilot quality reviews. client countries.

While most of those reviewed were in Although both pilots were wannlycompliance with national accounting and received by the auditors reviewed, there mayauditing standards, the reviews found be some risks with the introduction of aexamples where they had not been observed. review scheme. Some countries will see suchThese findings were discussed with those a review as threatening, others may beconcerned and were followed up by a offended and refuse to participate. The resultsconfidential written report. Apart from the of the reviews could also raise confrontationsauditors, who received feedback on their with governments that the Bank might wish towork, major beneficiaries of the pilot quality avoid. Lessons learned from the pilot showreview were the national accountng bodies. that these risks can be inimized throughThe pilots highlighted gaps in the coverage of involving the auditors and the nationalnational accounting and auditing standards, accounting bodies at all stages of the reviewand identified the areas in which the national process. The process itself should bebody should be providing assistance to its participatory, the national accounting bodiesmembers. On the basis of this information the should be invited to join the review teams, andnational accounng bodies will be able to there should be open dialogue between theestablish a program to improve the quality of reviewers and the auditor.their members.

RecommedationlsBenefits and Risks

The pilots highlighted the manyThe auditor would benefit through benefits to be obtained from quality reviews,

reciving expert advice on how to improve and the large part they can play in helpingoperations from the reviewers. The national improve the capability of both public andaccounting bodies would receive guidance on private sector auditors. Based upon the successhow to implenment their own review schemes, of the pilot quality reviews in Tanzania andand would have a model which they could Senegal this report reconmmends theadapt for their own use. For Bank Operations, introduction of a model review scheme tothe introduction of a review scheme would assess the quality of auditors in SSA.

3

Chapter 1: Accounting and Auditingin Sub-Saharan Aftica

In many countries in SSA, accounting Labour Office and the World Bankand auditing performance has been participated in a survey on accounting needs inunsatisfactory in recent years. This is due Africa (UN 1991 a). The survey found that theprimarily to a critical shortage of accountants development of national accounting andand auditors at all levels, and also to the lack auditing standards was not given a highof recognized and accepted accounting and priority. Although most survey respondentsauditing standards, and the inadequacy of realized the importance of accounting andaccounting development. Given that resources auditing standards, they considered the mostare limited in Africa it is vital that they be put imnediate need to be the education andto the best use, and not lost through poor training of students. They were of the opiniondecision-making and weak control. that until more resources became available, theIncreasingly, accounting is providing the basis adoption of international standards was thefor performance evaluation, and the most appropriate course of action.development of the accouning and auditingprofession is important in achieving this. The Some countries have chosen to modifythroughput of accounting and auditing International Accounting Standards Committeeprofessionals is extremely slow, and there are (IASC) standards to suit their own needs. Themore vacancies than qualified personnel. The extent of modification however, varieslack of accounants and auditors affects the between countries. For exanple, in Zimbabwepublic sectr particularly which is unable to accounting and auditing standards andoffer an adequate remuneration package to guidelines are reviewed by the Accountingatact or retain qualified personnel. Practices Board, an independent body

consisting of representatives of the profession,government and the business community. The

Accounting and Auditing Standards Board is responsible for makingrecommendations as to which IASC and IFAC

The tools and chniques of fincanial pronouncements should become Zimbabwedecision-making, of performance standards. Compliance with standards ismeasurement, of intnal control procedures, mandatory, and they apply to parastatals andand the cultivation of an appropriate ethical local authorities as well as all businesses. Theoutlook (including the need for accountability) Institute monitors the extent of complianceneed much more emphasis. The use of with these standards.accounting and auditing standards in achievingthis is very important. Auditors are expected In Mauritius, the government,to apply generally accepted auditing standards realizing the inportance of regulatingthat have been prescribed by a country's law, standards, established the Accounting andor that have been adopted by public Auditing Standards Committee in 1989. Theaccountants or associations of public Committee formulates and publishesaccuntants in the country concerned, together accountig and auditing standards andwith generally accepted international standards guidelines, and is working on a set ofon auditing where feasible. standards, using the U.K. Accounting

Standards Board (ASB) and IASCIn 1990, the UN Centre on pot ats as a guide. Having standards

TransnationDa Corporations, the International adapted to local needs has in many countries

5

Qual; Review Schemes for Auditors in SSA

encouraged compliance, because accountants may relv on them for determining taxationand a ditors understand why the standards liability.have been inroduced, and as a result havebeen active in their implementation. This Most of the national accounting bodieshowever, is the exception rather than the rule. in SSA are small. Their priority is to setToo infrequently are standards written examinations, and they have little time toespecially for the particular country organize continuing professional developmentenvironment, and the use of IASC accounting courses (CPD) for their members. There isstandards and IFAC auditing standards may insufficient monitoring of accountants andnot be appropriate given the socio-political, auditors to ensure that they comply witheconomic, and cultural values within a accounting and auditing standards, and as acountry. Even in countries where there are result, private sector avcountants and auditorsaccounting and auditing standards, most are may be failing to maintain standards. A studyvoluntary, and there is little monitoring of undertaken on behalf of the United Kingdomcompliance. It is important that there be a Overseas Development Administration (ODA),greater effort on the part of the African bodies which reviewed a sample of Tanzania financialto encourage the application of and compliance statements, noted that some entities were notwith standards either through the adoption of complying with Tanzanian or Internationalinternational accounting and auditing Accounting Standards (ODA 1991).standards, or preferably through thedevelopment of country or regional standards. IndependenceNon-compliance with standards and lack ofmonitoring may eventually discredit the The International Standard on Auditngaccounting and auditing profession in SSA. 'Basic Principles Governing an Audit (ISA3)

states: "The auditor should be straightforward,honest and sincere in his (sic) approach to his

rivate Sector Acoounting and Auditing professional work. He must be fair and mustnot allow prejudice to bias or override his

While some countries have little objectivity. He should maintain an impartialaounting and auditing capacity, the private attitude and both be and appear to be free ofsector in SSA is in general reasonably well any interest which might be regarded,developed. A number of countries have offices whatever its actual effect, as beingof the large international firms and many have incompatible with integrity and objectivity."established indigenous firms. Through offering Independence is the cornerstone of the auditinggood remuneration packages, private sector profession, and without it an auditor cannot beauditing firms are able to attract and retain the determined to be reliable.better qualified personnel. Weaknesses,however, may arise with the small firms which Although auditors may be technicallydo not have the backing of an international proficient, and appear to be independent, theyfirm, or the finances of a large indigenous nay not be impartial. Determining whether anfirm For these firms, it may be financially auditor is independent can be just as difficultdifficult to keep up-to-date with new as ascertining competence. Many of thedevelopments. Many of these small firms audit countries in SSA are small, and the number ofowner-managed companies, and although the qualified auditors is low. These auditors maycompanies may not require a detailed analysis be dependent upon the govenmment or certainof their financial position, the audited accounts parasttals for a sizeable part of their income,often form the basis of government taxation or may have close family relationships withassessments. As such, the quality of these powerfil political figures. In some countries,accounts is important for governments who there may not be a tradition of independent

6

Accounting and Auditing

auditors. As the auditor's opinion and report them adjust estimated expenditures foris one on which the owners and management inflation or control expenditure. Budgets aeof the entity, and other interested parties rely, often drawn up without reference to previousthe use of independent auditors of a years' actual expenditures and do not representprofessional caliber capable of deliveing such the priorities of the line ministries. Paastatan opinion is very important. financial man is also weak in many

countries, and the parastatals' sponsoringministries may lack the ability to oversee their

Public Sector Accounting financial affairs.

The public sector includes government Lack of Appropriaciy Trained Stffministries and departments, local authorities,and parstatals. Effective government The needs of the public sector are noaounting and auditing is important to the different from those of the private sector;smooth running of the public sector. With few adequate accounting systems and procedures,exeptions however, performance does not and trained staff. Apart firn the Lusophonemas up to the stutory rquirements. A countries, most countries in SSA havenumber of countries have not published accounting and audifing regulations, but lackaudited accounts for more than five years. In the staff to execute them. Attracting andLesotho and Uganda, accounts were not reng appropriately trined, qualified, andpresented to the Auditor General for eight motivated staff is a significant problem in theyears. Those that are more up-to-datare full public sector. This applies to governmentof inaccuracies and rarely meet the statutory ministries and to the vast majority of publicdeadline, which is usually six to nine monis enterpses or parastatal organizations.after the close of the financial year. A stuy of Although poor compensation is a princpalgovernment financial management in cause, lack of relevant training and recognitiondeveloping countries udra by the UN for public sector work contributes to thefound government accounting to be problem.uoordinated. Multiple accounting systemseast in the ministries of financ ent l Most govemmen accounting andbanks, spending agencies and field offices, and auditing cadres are severely undersuffed, anda large amount of time is spent attetin g to are unable to retain qualified accountants andreconcile the data (UN 1991 b). Failure to auditors who leave for the private sector. Thesupply timely and accuate data holds up the shortage of qualified accounting and financialpeazation of essential financial reports. As a nianagement personnel in the governmentresult, mportan monthly and amual reports ministries or public enterprises results in lateupon which govemen rely to make publication of annual accounts, unrealisticdecisions are often very late and unreliable. budgets and indequate monitoring and controlGovement accounting is seen as a routine over opeations and cash flow. Better trainedtask which is carried out by low- level clerical staff however, is only one way to improvestaff. Accounting is not seen as an effective public sector accounting. There is also a needmanagement tool which can be used to for accountng system and procedures to bemonitor, forecast and manage de public im ved. accuing standards and gidelinespuMse to be implemented, and government

exediture to be adequatcly controlled.Intemal controls are weak, and Without better trained staff however,

governme budgets, in particular, are often goverments will not have the expertise tomeaningless. Spending minstries receive little introduce new systems or procedus, as theguidance from the Ministry of Finance to help Uganda example in Box 1.1 illusta.

7

Quality Review Schemes for Auditors in SSA

Box 1.1: Public Sea$or Accountig In Uganda

Tbe situation in Uganda is typical of the problems facing many governments in Africa, anddeaxmstrazes the task governments face if they wish to improve their accounting and auditing systemsand procedures. Government accounting in Uganda is a common cadre. Recruitment and rtention ofaccounting staff is difficult, and ther are a number of vacancies. There are few fully qualifiedaccountants in the govemment, and the majority of staff hold only secondary school qualifications.Most of the staff have received neither formal classroom nor adequate on-the-job taining. As aresult, many staff are not familiar with the requiements of their jobs. Tbis rsults in delays andinefficiencies in the production of accounts.

For some yeas, the Governmnt of Uganda has bem conscious of th Lack of skilledmanpower. and with donor assistance has becn able to train some staff. Thc munbers trainedhowever, have been small and although the courses provided the individuals concerned with variousskills, they did not develop in-countzy teaching expertise. Currendy, little in-wsrvice traing isoffered. There are no full-time tainers, and staff are taken out of their jobs to teach part-tim. TbeTreasury realizes that, without increased relevant trainiDg. staff camnot perlbfm their existing jobswell and will not have the necessary skllls to develop or implement new systems. Assistance toovercome these problems is being provided to the Treasury under an IDA-financed Economic andFiacial Mangement project.

Public Sector Auditing without tackling the more important aspects oflack of intenal control. The status of the

Public sector auditing in SSA mcludes government auditor also may be low. Oftengoyemrnment auditors and state auditing the head is not a qualified accountant, and it iscorporations. Depending upon theirnmandates, not unusual for there to be no qualifiedthese organiZationS may be statutorily accountants working as govenment auditors.responsible for the audit of government Many countries are struggling to undeakeministries, dpartments, and parasals. The simple compliance auditng. and the vastrole of the sovernment auditor is to verify the majority cannot contempklte undertakingadequacy of governent accounting records, anything more advanced. Most governmentprocedures and reports, and it is vital for the auditors lack the skills to be able to undertakegovenment auditor to maintain high computer or value-for-money audits.Thestandards. Even where there are audited example of Malawi illustrated in Box 1.2 isaccounts, they often deal with trivial matters. typical of that facing most public sectorFor example, audited reports may coneuntrate auditing entities in SSA.on small amoumts of money unaccouted for,

8


Box 1.2: The Auditor General's Department in Malawi

In 1990, Malawi's Department of Personnd and Management Training (DPMT) completed ajob inspection study of the Auditor General's Department. The study was carried out as part of aprogram of iospections of all ministries and departments in the Civil Service. The terms of referencefor the audit review were to examine the work actually being carried out by the Auditor General'sDepartment to determine and report on whether: the work being done was necessary for the properdischarge of essential functions; the organization structure was the most economical and consistentwith efficiency; the number of posts were adequate, but not excessive to carry out the necessary workefficiendy; and the grading of posts was consistent with Civil Service grading standards. The studywas carried out throgh means of questionnaires, interviews, and a review of DPMT statistics.

The study recommended the creation of forty-two new posts to enable the audit program tobe steadily extended. Tbe inspection team was concerned about the low number of qualified auditstaff. With expansion of the audit function, particuarly of parasatals, auditors are coming intocontact with more sophisticated accounting systems, especially computerized accounts. The study

tified the need for advanced training so that the auditors are beter equipped to cope with the everincs.ng demands of the accounting world. The inspectors also reported that the Department shouldbe attempting to recruit better qualified staff with relevant diplomas and degrees.

In,dependce while the independence of these bodies may beapparent, their impartiality has been difficult

Normally, the independence of a to judge. The main argument to support thegovernment auditor is not questioned if the view that they are independent is that theirauditor's position is established under position as a parastatal gives them greaterconstitutional or legal provisions designed to independence than a private auditing firmassure independence. In addition to because they are not dependent upon fees. Thegovernment auditors, some countries, counter argument is that political pressre mayincluding Ethiopia and Tanzania, have state be brought to bear on the auditors whenauditing corporations which are statutorily matters of government policy are involved andresponsible for the audit of state enterprises. thereby reduce their impartiality. It is aThe situadon of state auditing bodies has difficult situation as the Tanzania example incaused some concern for the Bank, in that Box 1.3 illustrates.

9


Box 1.3: The Tanzania Audit Corporaion

Before the Ausha Declaration, the statutoy audits of most companies and the fewpautals were caried out by private firms of accounns. Following the Declaration, the need forthe government to ensue prper management of its funds invested in parastatals, led to theestablishment of a state auditing body the Tanzania Audit Corporation (TAC), under the TanzaniaAudit Corporation Act of 1968. TAC lies fimctionally under the Ministry of Fmance, EconomicAffais and Planning, and is governed by a Board, whose Chief is the Director General. TAC isrquired to undetake the audit of al parastatals, and currnly has over 400 clients. From the early1970s, TAC has rcceived substantial technical assistance from the Swedish International DevelopmentAgency, and has been able to upgrade its technical skills.

A study of the accounting and auditing profession in Tanzania financed by the ODA (ODA1991) reviewed a sample of the work of TAC. The review identified a number of problems with bothshort fonn and management reports: short form reports are not qualified when scrious problems areraised in the mangement report; qualifications in short form reports may be ambiguous; managementreports are too long and important points are buried in detail. Previous studies have also questionedthe independence of TAC when maners of government policy are involved.

TAC rigorously defends its independence, and maintains that it has made a significatcontution to the improvement of financial manage_ent in Tanzania, through assisting withaccounfing problems, drawing attenion to wcaknesses thmugh its audit reports, and hdping to devisca consistent financia statement format. TAC has also suspended staff for accepting travd expensesfrm a client. TAC encourages its staff to gain professional qualifications as it wishes to upholdpofessional standards. The annual report of the Director of TAC is direct, and sedsm to emphasizethe integrity of the office.

Xnterest in the Development of the Malawi, UNDP helped establish theAc oounting Profession Accountant Geneal's Training School in 1983

which provided experu to design courseDonor terrcst Program and write study manuals. During

implmetaion ithe School was relativelyDonor assistance has been instrumental successful. Since the project finished in 1987

in developing accountin and auditing in however, the School has been stuggling toAfrica. Where donor assistance has been given survive. The Goverment of Malawi does notfor a sustained period, projects have been have sufficient funds to mn the School as wasparticularly effective. For example, in originally intended; study manuals have notLesotho, the Institte of Acountants and the been updated, and the number of coursesCentre for Accounting Studies were founded offered has been reduced. This has resulted inin 1977 and 1979 respectively, with assistance Some new entrants to the accounting cadrefrom the Irish Bilateral Aid Program. The having to wait for up to two years beforcIrish goverment is still supportg the Centre, undergoing basic induction training. This lackbese it realizes the importance of of trai seriously affects the quality of

tinuing assistance unti1 the Centre can be governnt accounting in Malawi.successfully administered by local staff. Wheredonor assistance has been given for short Government Interestperiods, governments and colleges with limitedresources have not been able to sustain the Another problem is that publicobjecives of the project. For exmple in acc tability is not accorded a high priority

10


by some govemments. This often leads to low profession is thriving. Establishing an effectivemorale among financial management body takes time and money, and manypersonnel. One main influence on the countries (especially the smaller ones) aredevlopment of the accounting profession is struggling to develop their accounting bodiesthe interest of government. The profession as the example of Sierra Leone in Box 1.4needs the backing of government if accounting illustrates. Strong national accounting bodiesis to improve, both in the private and public are required who can provide leadership tosectors. In certain countries there is little ensure the application of sound accounting andofficial emphasis on accountability, and auditing standards, to regulate the ethicalaccounting is not highly regarded. In many standards of accountants and auditors, and tocountries, even where there is an accounting set examinations for students. There is thebody, there is no legislation controlling who related need for good colleges to preparecan undertake an external audit and anybody students for these examinations and forcan call themselves an auditor, a.- for example employers willing to provide staff within the Congo. This situation is not conducive appropriate onthe-job training.to promotion of the profession. Lack ofconcern with financial performance in the Trainingpublic sector inevitably reduces the motivationto achieve performance, or even to report On-the-job training is inportant.adequately. Leaming about the theory of accounting and

auditing is limited if a student is not shownIn other countries, the increasing how to put it into practice. Often, skilled

intrest of governments is helping the training and proper supervision are lacldng,profession develop, and is creating a demand which results in trainees not being able tofor accountants and auditors. In Swaziland, the carry out their jobs adequately. Apart fromMinister of Finance sees the development of taining offered to students working inthe profession as fimdamentai to the economic accounting and auditing firms, training is notgrowth of the country. The 1985 Accountants' comprehensive. There are no clear careerAct reflects the recognition of the Government paths in companies or governent deparntentsof Swaziland of the importance to the country and sudents are not able to gain a broad rangeof a mature and efective accounting of experience. There must be monitoring ofprofession. It appreciates that new commercial waining by the professional bodies, becaseand industrial initiatives will be greatly emnployers are not always aware of theenhanced or severely impeded according to the advantages of proper training programs.level of accountancy knowledge andproficiency which can be made available. The Intenational Standard on Auditing

'Basic Principles Governing an Audit' states:'he audit should be performed and the reportprepared with due professional care by persons

Education and Trainhg who have adequate traiing, experience andcompetence in auditing. The auditor requires

Poor education is a stumbling block to spedalized skldls and competence which arethe development of the accountig and acqui through a combination of generalauditng profession. The low level of technical education, technical knowledge obtainedaccounting and auditing competence is both a through study and formal courses concludedquantitatve and qualitative problem. Many by a qualiffyi examination, and practicalcountries have their own national accountig experience under proper supervision. Inbodies but the establishment of a body does addition, the auditor requires a continuingnot necessarily mean that the accounting awareness of developments including relevant

11


Be. 1.4: The Acomutac Profession X Slerra Leone

The situation in Sierra Loee is typical of a number of countries in SSA which are stillsoggling to establish an effective professional body. In 1960, the voluntary Association ofAccountants of Sierra Leone was formed to regulate and advance the interest of the accountancyPofeo in Sierra Leone. In 1988, the goverment of Sierra Leone formally recognized the lnstituteand passed the Insfitute of Charered Accountants of Sierra Leone Act. Under the Act the Institute isreponsiblle for conducting examinadons; suprvising training contracts; establishing a register ofpracticing accountants; mantang professional standards; and disciplining mmbers. Despite itssaory rcognition however, the Institut is still dependent upon volunteers to run the Institute andhs no permaent office. Such a situation restricts what the nstitute can accomplish.

Ihe Institute realizes that the accountancy profession will not devdop in Sierra Leone untilaccountancy education and training is more readily available. None of the fifky-ne members of theInste qualified in Sierra Leone; all studied overseas for their qualifications. The Institute of PublicA _mm ntration and Mangement (IPAM) has inuoduced courses for accounting tchicians, and hasstarted comses for Levels 1 and 2 of the U.K. Chared Association of Certified Accountants(ACCA) eumnations. There are no courses for the final level of the ACCA examinations. The

itute would like IPAM to offer all levels so that students do not have to go overseas to study.IPAM however, is heavily dependent upon part-time accountancy lecturers and does not havesufficient staff to be able to expand its accouancy courses.

The Institute is facing an up-hill battle to gain recognition. A recent study undertken onbdealf of the British Council (British Council 1992) found that the concept of accountability is alien toa lre secton of the businss community, and that the regulatory framework of the country needs tobe updated. The Institute is not consulted by govemment or the business community for its views. Ifthe acncy profession is to develop in Sierra Ieone it needs to be stegthened. Adequatestaffing is a necessary step for the Institute to become an effective orgamization for its members andstudnts, but the Insite lacks the finances to provide this. The Institute needs donor assistance.Without it, it is unlikely that the profession will develop.

intemational and national pronouncements on qualified members will follow theiruccounting and auditing matters, and relevant profession's code of ethics, and that theregulations and statutory requirements." national accounting body will discipline

members not adhering to professionalDonor-fimded capacity building standards. Disciplinary action is normally as a

projects have stressed the pre-qualification result of a complaint from a member of theeleent of accounting and auditing traiing. In public. All over the world, members of thean effort to increase the number of qualified public are reluctant to complain to apersomel, emphasis has been placed on professional body about a member; they doastablishin~g and strengthenmng national not understand the disciplinary mechanism,accounig bodies to set examinations, and feel that their complaint will not be treatedstrengthening exsting educational institutions seriously by the professional body which willto improve the quality of accounting side with its menber. The experience in manyeducation, and establishing purpose-built industial countries has shown that complaint-centers of accounting excellence. Little based systems are not effective and that aconsIderation has been given to what happes system of practice monitoring is required toto the accounants and auditors once they are maintain standards.qualified. The is a tacit assumption that

12


Sumnary background, auditors and the quality of theirwork are increasingly importan. The overl

The accounting and auditingprofession accounting and auditing situation in SSA willin most countries in SSA is weak. There is a not improve until there are suitable tainingshorta of accountants and auditors at all schemes for both private and public sectorlevels; accounting and auditing standards are accountants and auditors, until governmentsnot developed or monitored; accounting and are able to offer adequate salaries to retainauditing training is inadequate, especially in qualified personnel, and until there isthe public sector; and there is a lack of government commIitinent to improvinggovemmental accountability. Against this accountability.

13

Chapter 2: Quality Review

What is a Qualit Review ? One advantage of the schemes in the countriesthat have already adopted them has been the

A quality review is an independent educational bendit. It is a learning exeiencerevew of a fim's auditing practices. A typical for the practicing accountant. The reviewsreview would include reviewers visiting a have drawn attention to problems which thefirm, obtainig an understanding of how its finns have been then able to address.quality control systems work, and testingrelevant records and files. On completion of Review schemes can:the review a report would be writtenincluding, if applicable, a letter of coments * Help ensure that the auditors areindicatng the areas in which the fum needs to competent and independent.improve. It is not the intention of the reviewto challenge the auditor's judgement over the * Help ensure the reliability of financialaudit conclusions reached. It is a review of the statements.work peformd and whether the workrecorded supports the audit opinion. A quality * Identify potential problems with thereview is not a re-audit of completed audits. It auditors, at an early stage, which theis a check that the systems in place are auditors, professional accounting bodyadequate. A re-audit can only provide or the Bank could rectify.assurance that a particular audit has beencarried out satisfactorily. It does not provide * Make auditors aware of auditingassurance that fiutur audits would be standards.accptable. Current programs involvemembers being reviewed by fellow * Improve the capability of Africanpractitioners, hence the fretly used term auditors.'peer review.

The last is the most significant for inprovedauditing in Africa.

The Purpose of a Quality Review

A quality review ascertains whether an Quality Review Schemesauditor's system of quality control providesreasonable assurance of conforming with The concept of quality and peer reviewprofessional standards. A quality review schemes first arose in the 1960s and 1970s inshould result in increased user confidence in the United States when there was Widespreadthe reliability of financial statemnnts, becase scrutiny of the practicing accuntingthe user can be assured that the auditors have pmfession. In 1968, the Council of theadhered to professional standards. A quality American Institute of Certified Publicrview can also identify weaknesses in the Accountants (AICPA) approved theaudit process and so provide technical establishment of a voluntary program wherebyassistance to aid professional development. members could obtain confidential views of

15


accounting and auditing engagements. The can be taken by member bodies to achievereviews commenced in 1971 and by 1976 these objectives.AICPA had reviewed over 300 firms. Sincethen, an ever-increasing number of bodies, To date, only one country in SSA,including the Australian Society of Certified Malawi, has carried out a review (see BoxPracticing Accountants (ASCPA), the Institute 2.1). The South African Institute of Charteredof Chartered Accountants of Ontario, (ICAO), Accountants (SAICA) and the Publicthe Hong Kong Society of Accountants Accountants' and Auditors' Board (PAAB)(HKSA), the Institute of Chartered have approved the implementation of an auditAccountants in Ireland (ICAI), the New review program. The main purpose of theZealand Society of Accountants (NZSA), the review will be to help provide assuance to theChartered Association of Certified Accountants public that persons engaged in public practice(ACCA), and the Institute of Chartered are maintaining the prescribed level ofAccountants in England and Wales (ICAEW), professional standards. SAICA will behavc introduced similar schemes. In addition, responsible for the planning, supervision andthe Society of Accountants in Malawi execution of the practice review program, and(SOCAM) has carried out a review of its will appoint a full-time chief reviewer tomembers who hold practicing certificates. coordinate the reviews. SAICA hopes to startSOCAM intends to use this experience to undertaling reviews in 1994. The nsitute ofimplement a regular review program. Chartered Accountants of Zimbabwe has also

decided to introduce a review scheme whichQuality review is a learning experience will be admdnistered by Institute staff.

for the practicing accountant. Independentreviews of audit and accounting practices have The National Board of Accountantsbeen shown to be effective in helping firms and Auditors (NBAA) in Tanzania, which isidentify and correct substandard practices. The responsible for the registration of accountantsInternational Federation of Accountants and auditors, also sees the need for the(IFAC) also encourages meber bodies to introduction of a review scheme to ensure tatintroduce peer review programs, and in July its registered accountants and auditors are1992, its Council issued a Statement of Policy adhering to Tanzania's accounting and auditingof the Council 'Assuring the Quality of Audit standards. A study undertaken on behalf ofand Related Services'(see Annex 1). The view ODA, which reviewed a sample of Tanzaniaof the Council of IFAC is that in today's financial statements, noted that some entitiesenvironment, many segments of society are were not complying with either Tanzanian orincreasingly dependent fo; decision-making on International Accounting Standards (ODAinformation over which they have no control. 1991). Under an IDA-financed Financial andThey turn to auditors for assistance in Legal Management Upgrading Project,assessing the credibility of this infornation. technical assisance will given to NBAA toThe Council of IFAC considers that member help it develop a review scheme.bodies (twelve countries in SSA are membersof IFAC) need to demonstrate that there are Intrdcion of Scemesadequate self-regulatory programs in place toprovide reasonable assurance that auditors Table 2.1 and Annex B summrize theadhere to the highest standards in performing different review schemes and their purpose.audit and related services. IFAC believes that There are two main reasons why qualitymember bodies should take on the task of review schemes have been introduced: (a) aencouraging and assisting firms of auditors to desire upon the part of the professional bodymaintain and improve the quality of their to ensure that its members are observingservice. The Stament discusses the steps that professional standards, as in Canada; and (b)

16

Quality Review

government intervention, as in the United review process as a threat, and as an inswlt.Kingdom. The review schemes have taken Practitioners held that they were observingtime to implement. All the accounting bodies professional standards, and that they did notthat have introduced schemes spent a need to be reviewed. Some bodies, foroDnsiderable time discussing the idea, drawing example, AICPA, did not receive a favorableup the scheme and educating their members reaction from members, and it was some timeabout the purpose of the scheme before before a mandatory scheme could beimplementation. Many bodies met with introduced.resistance from practitioners who saw the

Table 2.1: Purpose of Quaiy Review Schemes

ACCOUNT REVIW SCHEM . MODUCIM PURPOBODYr

Ansusalian Qualky Assurance 1993 To ensur dut members in public prcice are complying withSocieAy of CPAs die professional sandards of ASCPA. Reviews are undertaken

every fve years.

INdnstimof Pracice specion 1981 To assure the public tha nnbers practicing audiing aeCh1anerd mainuaning pmfessionl stundards. Members are inspecedAcconants of evey four years.

Hg Kong Pracice Review 1992 To ensure dt udits have been carrid out in accordance wihSociety of Me Society's auditing stdards an guidies, and to assufeAccountants the public of the quality of the work of pactcing CPAs.

Reviews are undertaken every four yeas.

[naiitu of Pracie Review 1987 To ensure that all menbers in public prcce maintainCbhareed professiona standads. Reviews take place every five years.Accountants inIrelnd

New Zeal Pracdce Review 1990 To ensure dtht the Society's mdato accoundng and auditdgSociety of standmds are being adhered to. Reviews tke place every fiveAsecouawans ________________ ____________ years.

South African Practice Review 4994 To assure the public t persons engaged in public practiceInstit of are minnig the prsbed levd of professional staidards.Chatred Reviews wi take place every five years.

Carterd Investmnt 1987 To ensure that those members so authorized ar complying wihAssocation of Business the inestmnt business mles. Reviews ae underaken eveyCerfed two or five years. depemlin on the lvd of investments held.Accountants

Registered Auditor 1991 To ensture duat the nmenber is complying with ACCA rues andguidance on practice management.

Iasd_t of [test 1987 To ensure dtat tbose menbers so authorized ar complyingwithCbatrd Businos the investment business mles.Accounrants inEngand and Registed Auditor 1991 To crsu dtst audit work is carried out with independence adWaes integrity and in accordance wh ICAEW stndxrds.

Americn Peer Review 1977 To ensurt dat members ae complying wih the r squ oem ofInitkt of Stment on Quality Contol Stndards No. 1. 'Systnem ofCPAs Qaty Review 1988 Quality Control for a CPA firnm.

17


Box 2.1: U. Soddy of Accountants In Mlawi: acdng Cealllkate Review

In 1981, the Public Accountants and Auditors Act was passed to regulate the accountanyprofession in Mdawi. Tle Act established the Public Accountants Examinatons Council (PAEC) andthe Malawi Accountants Board (MAB), and formally recognized the Society of Accountnts inMalawi (SOCAM). PAEC is responsible for determining the examination syllabus and trainingstuctre for the Malawi accountancy profession, MAB is responsible for the registradon of allprofesiona and tedhnician accountants, and SOCAM is the membership body.

SOCAM is responsible for the formulation and monitoring of professional ahics, accountingand auditing standards, and the provision of continuing professional dtevlopment. Under the PublicAccnts and Auditors Act, SOCAM has the responsibility for the renewal of practicingcerdficates. In 1988, MAB advised SOCAM that it interpreted this responsibility as something morethan the collection of annual renewal fees. After due deliberation, the Councl of SOCAM decidedthat a review of those members holding practicing certificates should be carried out.

In 1992, SOCAM carried out its first practicing certificate review. The aim of the reviewprogram was to ensure that the public is justified in placing a high degree of competecwe and trust inholders of practicing certificates. In addition, the reviewers took the opportuniy of the review toobtain feedback from members on the activities of SOCAM. The reviews were carried out by twosenior Councl members of SOCAM. Due to legal consta a detailed review of working paperswas not undertaken. In general, the reviewers found a sound knowledge and application ofintnational accounting and auditing sadards, and ethical standards, as adapted by SOCAM, and agood knowledge of the Companies and Taxation Act. Less satisfacry was the knowledge of thePublic Accounants and Auditors Act. The reviewers also found that SOCAM has failed to kteep itsmembers up-to-date with techimcal material, and most members have to rely upon their nmbershipof foeign accouning bodies for such infmation.

;he review program was welcomed by both inational and local firms, and the Council ofSOCAM has decided to make the program a regular exercse. In designing its future review progrm,the Council took into consideration members' concems over the independence of the reviewers. Manybodies with similar concems have chosen to appoint fll-time staff to undertake reviews. SOCAM isa small body however, and cannot bear the cost of hiring such staff. To try to ensr independecethe new program will have a senior non-practiioner who will be accompanied by onc or morcpractitiones. Firms will be able to object to any of the reviewers proposed. SOCAM would like toextend the review to include an analysis of a selection of working papers and the Council issuggesting that practitioners change their engagement letters with their cLients to cover the possibilitythat working papers may be selected for independet confidental review.

Reviewers appoint as reviewers members withconsiderable experience in an auditing firm.

Full details of the selection of They have not chosen to appoint membersreviewers are included in Annex C. In with experience in industry and commerce orchoosing a reviewer professional bodies look academia. Most of the bodies have appointedfor a number of qualities: (a) independence their reviewers as full-time members of staffand intgrity; (b) professional competnce; (c) to ensure consistency and independence. Manyatention to detail; and (d) excellent inter- of the practitioners being reviewed come frompersonal skills. AU the bodies that have close-knit communities, for example, Hongibntrduced review schemes have chosen to Kong and Ireland, and the professional bodies

18

Quality Review

concluded that it would be difficult for * Supervision of audit staff is poor.members to objectively review each otherwhen they were competing for the samne * Documentation of key auditbusiness. procedures or conclusions is inade-

quate.Revews

* Practitioners do not have formalThe review process, which is detailed policies or procedures for accepting

in Annex D, varies from body to body. new clients, or continuing to serveGenerally, reviewers are looking to see existing ones, and are overdependentcompliance with auditing standards. The on a small numnber of clients.reviewers will test a firm's quality controlpolicies and procedures by reviewing a sample * Lack of independence.of audit and non-audit engagement files.Overall, review schemes have been successful Benefluwhen:

As Annex E and Table 2.2 illustrate,- -The process has been transparent. most accounting bodies have found more

benefits to the introduction of the review* The fears and concerns of members schernes than drawbacks. AICPA has found

have been taken seriously, and that the improvements firms have madeguidance in how to prepare for the between their initial and most recent reviewsreviews has been freely given. have demonstrated the educative value of

reviews. In some cases the imnprovement has* They are educational, not punitive and been dramatic, and firms have gone from an

assistance has been available to help adverse or highly modified review to a cleanthe firms address their problems. opinion in a relatively short period. In

particular, the accounting bodies have found* The outcome of the review, and the that the schemes:

knowledge obtained during the reviewhas been kept confidential. * Protected the public by identifying

deficiencies.Resuls

* Enhanced the image of the professionThe reviews have uncovered a mumber in dte eyes of the public.

of generic problems:* Improved the quality controls and

* The workload of some practitioners is working methods of practitioners.more than they can handle.

* Led to practitioners introducing* Practitioners are not undertaking improved CPD programs to ensure

sufficient continuing professional that all staff are informed of newdevelopment (CPD), and are failing to accounting and auditing standards andkeep up with accounting and auditing techniques.standards.

* Made practitioners more confident, in* Consultation with other partners or that they know that they are adhering

outside eperts is inadequate. to the profession's standards.

19


* Inproved employee morale. to be self-regulated, than to be governmentregulated. AICPA, in particular, believes that

* Enabled firms to reorganize staff to goverment will not intervene as long as thebetter address the needs of their review process is seen to be improvingclients, and comply with accounting standards.and auditing standards.

Many accounting bodies realize that it is better

Table 2.2: Quality Review Scheme Reviewers, Beneits and Reaction

BODY REVIEWERS BENFT REACTION

Austnli n Society of Reviewers are nenibe of Too ealy to say. Too early to say.CPAs ASCPA or the Insftit of

Chartered Accoununts inAustralia

Institute of Chartered ICAO has 4 ful-tme and 3 put- plworn ion andards, Initial hostiity by members whoAccoutof time inspectors/detailed deduction in potentir' fet thraned. Today theontario reviews. 32 part-ime inspectr disciplinary action. progrum is wel received.

and 2 part-time detailedrevieers. Al inspectors armembers of [CAO with extensiveexperience in practice.

Hong Kong Society HXSA has appoind 2 members Too early to say. Members were inially concernedof Accountt of staff as fia-time reviewers. over possible breach of

confidentiality. HKSA hasovercome tis problem byappoinun fhf-tine reviewers.

nstitute of Charerd ICAI has 4 full-time reviewers Impovement in stadards, Reviews are seen as a positiveAcown in who ae mambers of dhe bIsue. enhanced rpuaon of exurcise.Irelad members.

New Zend Society NZSA has 2 fl-time employees Too early to say. Initial raction is favorable.of Accountants and 4 part-time reviewers.

Chartered ACCA has 7 full-time compliance Too early to say. Favorble.Associion of officers. AU arm members ofCertified Accountants ACCA or ICAEW.

Inslthe of Chanterd JMU has 40 inspect (icudig Too early to say. Favorable.Accounants in 8 senior inspcttors and 4 regionlEngland and Wales controers).

Amercan Institute of AICPA uses a vaiety of review Inprovement in sandads VaiCs from fear of the reviewCPAs metbods including firm-onirm, ad quly cools pcess to wlcoming iL

stat socirey tms and tams puttogether through its conWmterdatbase.

20

Quality Review

Table 23: Review Fees

BODY COST

Australian Society of CPAs The fee is negotiated between the reviewer and the reviewee.

Institute of Chartered Reviewee pays CANS90 (US$75) per hour. Average cest for soleAccountants of Ontario practitioner CANS1,000 (US$830), and for large firm

CANS10,000 (US$8,300). Administrative overheads are met frmmembers fees.

Hong Kong Society of Cost of practice review will be absorbed by dte Society's GeneralAccountants Fund.

Institute of Chartered Reviewee pays circa £1RSO (US$81) per hour. AdministraveAccountants in reland overheads ar met from members fees.

New Zealand Society of Reviewee pays $NZ80 (US$42) per hour. Aveage cost for soleAccountants Practitioner SNZ600 to $NZ800 (USS318 to US$424), and for two

parrs, SNZI.000 to $NZ1,200 (US$530 to US$636).

Chartered Association of Fee included in fee for annual practicing cerdficate.Certified Accountants

Institute of Chartred Fee varies accrding to size of firm. Average cost for soleAccountants in England and prctitioner with no listed dients £230 (US$409), and for firmWales with 251 + partners with 41 + offices £86,250 (US$153,525).

American Inste of CPAs Fee varies according to size of firm. Small firms vary between$1,500 and $3,000. Large firms can cost up to $1 Million.AICPA administrative budget was $3.8 Million in 1991.

Revew Scheme Costs nmplicafions for SSA

For the first year of operation HKSA The intrduction of quality reviews inestinates that the running costs of its Practice SSA could provide a basis from which toReview Program will be HK$1 million improve the auditing profession in SSA. It is(US$130,000). The administrative budget for not, however, the sole answer to the problemthe AICPA Quality Review Program topped of weak accounfing and auditing capacity in$3.8 million in 1991. Pracitioners have also SSA, it is just part of the solution. Overallcomplained about the costs involved in accountability will not improve in the privateundergoing a review. Table 2.3 indicates the sector unfil there are stronger nationallevel of review fees. Of those schemes accounng bodies able to provide technicalreviewed, two bodies charge no additional fees support to their members, and in the publicfor reviews, and another three bear the sector until the fundamental constraints ofoverheads of the review schemes. poor remuneration and lack of training are

tackled.

21


Cost papers. Such a restriction severely affects thebenefits of a quality review scheme. It is

As mentioned previously, some bodies possible that this will be the case in somehave chosen to employ full-me rwiewers to countries in SSA. Bank assistance may betry to ensure independence and confidentiality required to demonstrate to governments thein the review process. In addition, all bodies benefits of quality review, and the need forhave hired full-time staff to administer their legislative change.review schemes. Many accounting bodies inSSA however, do not have sufficient income Review Fndingsto be able to hire full-me members of staff toundertake reviews, and administer the review In those countnes that are operatingprocess. The cost of the review process will review schemes, most of the problems raisedhave to be passed onto those reviewed. In during quality reviews are not severe. Themost countries, the accounting body charges quality review exercise seeks to fine-tunethe reviewees fees to cover the cost of the accounting firms, which are already operatingreviews. Auditors however, have complained at a high standard. Most firms have qualityabout the level of the fees, and a similar controls, and the reviewer is only required tosituation is likely to arise in SSA. If auditors review a sample number of files to check thatobject to paying fees for the reviews, they the controls are worldng adequately.may vote against the introduction of a quality Particularly in the public sector in SSA, manyreview scheme. To overcome this problem, auditors have received no fomial training.accounting bodies will have to emphasize the Reviewers may find that there are no qualityeducational benefits of the reviews, and where control procedures in place, and that aneeded, will have to provide advice to help substandal review of files will have to beauditors improve the quality of their service. carried out, which will be time-consuming and

costy. The reviews, especialy in the publicIn Malawi, SOCAM has realized that sector, are likely to reveal serious deficiencies

it cannot bear the cost of hiring full-time staff. and a significant developmental effort will beThe format for the review was designed by needed before standards improve.members of the Society and the initial reviewwas carried out by two Council members. Forfutre reviews, SOCAM has decided to Summaryitroduce a system of peer revwiew, whereby apractitioner will be reviewed by a fellow ReviewS of auditors have beenmember. Although such a method may be the undertaken by the accountng and audingmost cost-effective way of introducing a profession since the early 1970s. The numberreview scheme in SSA, there could be of bodies introducing review schemes hasproblems over independence and client risen, espcially in recent yea's. IFAC, whichconfidentiality. To address these problems, has a memnbership of 111 professionalSOCAM has decided that the reviewees will accounting bodies from 81 countries, hasbe able to object to any of the proposed issued a Statement of Policy of Councilreviewers, and that a permanent feature of the encouraging member bodies to introducereview will be the participation of a non- review schems for practicing accountants.practitfoner.

All the schemes that have beenLegal Restrictions introduced have taken time to implement;

many bodies faced iniial opposition, and hadIn a number of countries, legal to spend considerable time educating membes

restrictions have prevented access to worldng about dte benefits of their schemes. The cost

22

Quality Review

of establishing the schemes has been Many accounting bodies in SSAsignificant; all bodies have had to employ staff however, do not have sufficient income toto administer the schemes; some have engagd beable to hire f(ill-time mimbers of staff totheir own full-tie reviewers. Overall opinion undertake reviews, and administer the reviewbowever, is satisfied that the benefits balance process. In addition, the reviews may revealthe cost. The schemes that have been serious deficiencies which the accountig bodyestablished have helped improve quality may not have the capacity or resources tocontrols and working methods of auditors, rectify. Exernal assistance may be required tohave enhanced the profession in the eyes of enable accounting bodies to introduce reviewthe public, and have prevented government schemes and provide the necessary support toregulation of the profession. help their members improve.

23

Chapter 3: Adaptation to SSA -the Results of Two Pilot Review Schemes

There are weaknesses in the auditing is one thing to objectvly agree with the needprofession, particularly in the public sector, in for a review process, it is quite another toSSA. The national accounting bodies have yet undergo one.to develop to the stage where they effecdvelymonitor the activities of their members, and In 1992, the preliminary research forensure that professional standards are being this report was issued as a discussion draftmaintained. The review schemes that have 'Quality Review Schemes for Auditors: Theirbeen introduced by the accounting bodies have Potential for Sub-Saharan Africa.' (Johnsonprovided an objective way to review the work 1992). The draft was sent to nationalof the practicing accountant to ascertain that accountn bodies, govermment auditors andauditing standards are being adhered to. The the donor community. The Discussion Draftschemes have had a number of benefits, recomunended that before a model scheme wasnotably, they have protected the public by inplemented throughout SSA, two pilotidenifying deficiencies, and have enabled reviews should be carried out to helpauditors to improve their quality controls and overcome these problems. The reaction to theworking methods. The introduction of a concept from SSA was very positive. Thereview scheme in SSA could achieve similar pilots were undertaken in March and May.results, and provide a platform from which to 1993. The main objectives of the pilots were:;mprove the capability of the auditing to:profession. rne development and introductionof a review scheme would be too expensive * Assess the reaction to the concept offor most accounting bodies in SSA. It is auditor reviews.recommended that a model review schemeshould be introduced which national * Ascertain whethr the review processaccounting bodies could adapt to suit their is appropriate.individual needs.

- Iron out any practical difficulties.

Objectives and Format of the PilotsReviews Countries

The quality review schemes that have For the pilot scheme, one Anglopbonebeen introduced around the world all met with and one Frneophone country were chosen:some degree of hostility from the members. Tanzana and Senegal. To gain the most fromWhen accounting bodies have explained the the pilot, a sample of auditing firms andprocess, their members have understood the government auditing entities were reviewed.purpose and the benefits of the reviews. This Both Tanzania and Senega have a reasonabledoes not mean however, that nmbers are not mmiber of fully qualified accountants andafraid of the review process or are not auditors. In Tanzania, the National Board ofapprehensive about the consequences of a Accountants and Auditors (NBAA) hadreview. The same concerns will be present expressed an intrest in introducing qualitywhen introducing a review scheme to SSA. It reviews. It was felt that the pilot would be

25


welcomed and the Bank would be able to u king quality reviews for the followingassist in taining NBAA staff to undertaki its reasoms:own reviews. The immediate past President ofthe FMdfration Intemationale des Experts * The taing the Bank would beComptables (FIDEF) is based in Senegal, and required to give the reviewers woudthe introduction of quality reviews in Senegal be kept to a minimum.could ease its implementation in other Franco-phone countries. * The reviewers have established

records, and the Bank could bereasonably assured of their abiLity to

Reviewers carry out succsful reviews in SSA.

Apart from technical ability, a person * There would be less risk of the pilotneeds to bave excellent inter-personal sldlls to not being successful because of a weakundertake a review effectively. Indeed, these reviewer.skills are, in mnywvays, more important thantechnical ability. The purpose of these reviews Representatives of the nationalis educational, and the reviewers are not accounting body were invited to participate insimply underaking an audiigexercise. There the review process, as a long-termmust be confidentiality of the review and development goal is for the accounting bodiescients. In those countries tha have introduced to managp their own review schemes.qualit review schemes, the reviews have beencarred out by fellow practitioners or bymemnbers of staff of the accoumting body. Pre-Pilot ActivitesApart from a few coumtries, for example,Kenya, Nigeria, South Africa, Tanzania, and Before the pilot, the followingZinbabwe, most of the accounting bodies in actviies were undertaken.SSA are small. Even in these counties, thestaffing of professional bodies and mumber of * Reviewerswereselectedandsensitizedmembers may not be sufficient (or be to the particular requirements of theappropriately experienced) to develop and Bank, and the African accounting andsustain an effective independent quality review auditing scene.scheme.

A gide for ditors was writtenAlthough review schemes in other dearly explaining the review process

countries have used fellow members (whether and addressing some of the anxietiesfull-time or part-time employees), it was the auditrs have, so that the wholedecided that fellow pactitioners should not be review process is transparent (seeused to review members for the pilots because Annex F).the communities are closeknit, they allcompete for the same business, and it could be * A questionnaire was sent to all thosedifficult for the reviewers to be truly participating in thc pilot review toindependent. They have litle or no experience obtain basic information about theof reviews, and training would be costly. For audit entity or firm and its internalthe pilot review process to go smoothly and controls and audit procedures (seegain credibility, the Bank needed to mimiz Annex G).the risks. It was decided that the Bank shouldhire reviewers with specific experience of * The countries were visited by Bank

26

Pilot Schemes

staff and representatives of the to challenge the opinion of the auditor. Ingovernment, accounting bodies and reviewing auditors, the Bank did not expect tofirms were met. see the same level of documentation of quality

controls or procedures in a small national firmReviewers familiarized themselves or government auditor as in a largewith local accounting and auditing international one, which would have morestandards, Treasury regulations and fonral procedures.other legislation that affect theaccounting and auditing profession. On completion of the review, the

reviewers discussed their findings with the* Any in-country legal constraints to the auditors, and suggested actions that the

carrying out of the pilots were auditors could follow to improve their workingascertained. methods. A confidenial written report of the

findings was sent to each auditor after thereview. As the aim of the pilot review was

The Pilots educational, not punitive, the involvement ofthe national accounting bodies was on the basis

Prior to the pilot, meetings were held that no disciplinary action would bewith al the auditors that were subject to undertaken even if deficiencies were found,review to explain: (a) the objectives of the and that auditors should be given thequality review scheme; and (b) what the opportumty to imiprove. At the end of thereviewers would be looking for. This was review process, a wrap-up meeting was helddone to ensure that the auditors clearly with all those reviewed to discuss, in generalunderstood what the review would entail, and terms, the problems encountered and theto enable the auditors to explain their working solutions recommended.methods to the reviewers. For the reviews tobe successful, it was important for the auditors The pilot quality reviews looked at:to actively participate, and to accept that thereviewers were there to help them, not punish * The indeendence of the auditor, andthm Part of the success of the pilot was due what is done to ensure independence.to the active participation of the nationalaccounting bodies, goverments, and the * The number of staff employed, theirauditors being reviewed. qualifications, and staff supervision.

On the actual day of the review, the * Compliance widt generally acceptedreviewers met with the senior partner or accounting and auditing standards.nominated official to explain the reviewprocess and to discuss the information in the * Audit planning, including assignmentquestiomnaire. On the basis of these of pesnnel.discussions the reviewers were able to form anopinion on the level of quality controls in * Accounting and auditing hours andplace. Thiss information determined the number client lists.of audit engagement files that were reviewed.The fles were examined to ascerin the level * CPD, audit manuals and otherof compLiance with the generally accepted documentation.auditng and accountig stadards in Tanzaniaand Senegal, and whether there was adequate * Consultation with partners or otherdocumentation to support the auditor's experts.opinion. It was not the intention of the reviews

27


* Hiring and advancement. qualification. In addition to its studenteducation program, NBAA organizes short

* Acceptance and continuance. seminars for its members. NBAA has 149authorized auditors on its register.

The Tanzania Pilot Quality Review An inportant part of the pilot reviewwas to obtain active participation frcom the

The pilot quality review was carried national accounting body. NBAA was involvedout in March, 1993. Reviews were undertaken in the pilot review from the inception. Staffof the Office of the Controller and Auditor were consulted on the initial proposal andGeneral (which is responsible for the audit of received a draft copy of the Discussion Draftministry accounts), the Tanzania Audit for comment. Prior to the actual review, twoCorporation (which is responsible for the audit visits were made to Tanzania specifically toof parastatals) and five private auditing firms talk to NBAA and the auditors about the pilot.which were selected by NBAA. The private A representative from NBAA attended al theauditing firms were selected to ensure a initial meetings with the auditors and therepresentative sample of international, subsequent reviews to learn about qualitynational, small and large firms. reviews and how NBAA could introduce a

similar scheme for its own practicingRegulaoy Framework members. The involvement of NBAA

contnrbuted significantly to the success of theUnder the Coanies Ordinance Act, pilot quality review.

1932, every company must keep proper booksof account, which nmst be audited. The The Controller and Auditor GeneralAccountants and Auditors (Registration) Act of1972, requires all accountants and auditors in The Controller and Auditor General isTanzania to register with NBAA. The Act also responsiblc for the audit of aU governmentrequires that every body of persons, whether ministries and departments. The Office of thecorporate or unincorporate, engaged in Controller and Auditor General (OCAG) wasTanzania inanytrade orprofession, and either set up under an Ordinance in 1961, and thehaving assets or turnover in excess of a post of Controller and Auditor Generalspecified amount employ at least one (C&AG) is estblished in the constitution ofauthorized accountant or auditor. In addition, the Republic of Tanzania, which requires theself-employed persons earning a gross income President to appoint a C&AG, and providesof more than a certain amount must have their safeguards against arbitary dismissal fromincome tax returns prepared or certified by an office. The Ordinance direcs that allauthorized accountant or auditor, and every set government accounts must be submitted withinof accounts must be prepared or certified by four months of the end of the financial year,an authorized accountant or auditor. and be audited within nine months of the end

of the financial year. The C&AG must submitThe National Board of Accounts an anmnal report on all accounts audited to Iheand Auditors President, who is required to table the report

before the National Assembly.The main finctions of NBAA are to

conduct examinations and regulate the The Office of the Controller andactivities and conduct of accountants and Auditor General has an established staff of 563auditors. NBAA offers an accounting (99 in the audit cadre and 464 in thetechnician qualification plus a professional examination cadre). It is, however,Certified Public Accountant (CPA) uaffed, and there are only 65 auditors

28

Pilot Schemes

and 320 examiners in post. In addition to the Pre-Pilo: Acdvitiesstaff located in the Office of the C&AG inDar-e-Salaam, staff are also stationed in some In addition to the general activitiesof the larger ministries undertaking continuous outlined here, two pre-pilot meetings wereaudit, and in twenty branches throughout held with the auditors who participated in theTanzania. A five year program of assistance to pilot. The purpose of these meetings was toimprove the effectiveness and efficiency of describe the review process, answer anygovernment internal audit (the responsibility of questions and obtain detailed profiles of eachthe Ministry of Finance) and government of the audit entities and firms. The reactionexternal audit is being financed by the UK received during these meetings was extremelyOverseas Development Administration (ODA) favorable, and all the auditors welcomed the(Tanzania Public Administration Training and pilot reviews.Institutional Development Program (PATID):Goverment Audit). The program, which has The Reiewbeen running for three years, involvesbringing audit skills up-to-ate and helping The generic details of the reviewbuild local capacity. Under the IDA-financed process have been outlined previously. InFmancial and Legal Management Upgrading carrying out the review, the same proceduresProject (EILMUP) assistance is being provided were adopted for TAC and the five auditingfor twenty-nine staff to complete their CPA firms, in that the reviewers looked forexaminations at the Institute of Accountancy, compliance with Tanzanian accounting andArusha. auditing standards. Unlike the auditing finns,

the Controller and Auditor General is notTanzania Audit Corporanon and the statutorily obliged to carry out his audit inPrivate Auditing Frms accordance with Tanzanian standards. The role

of the Controller and Auditor General isWith some forty CPAs, the Tanzania defined by the Constitution of Tanzania which

Audit Corporation (TAC) is by far the largest requires him to:auditing entity in Tanzania. Under theTanzania Audit Corporation Act of 1968 TAC * Grant to the Treasury credits on theis required to audit in accordance with the best Exdcequer Account.professional standards (Section 4(2)). Untilrecently, legislation required TAC to audit the * Satsfy itself that all moniesaccounts of all parastatals. Under the Public appropriated by Act of Parliament andCorporations Act 1992 most parasttals will be disbursed have been applied to theable (under certain conditions) to appoint an purpose for which they wereauditor other than TAC. It is expected appropriated and that the expenditurehowever, that TAC will continue to play a conforms to the authority whichmajor role in the auditing profession either in governs it.its current form, or as a privatized auditingfini. Apart from Coopers and Lybrand (the * Audit and report at least once in everyonly international firm in Dar-es-Salaam), year, upon the public accounts of theTarma Somaiya (a correspondent firm of Price United Republic, the accounts of allWatehouse), and Massawe and Co., the offices and authorities of theauditing profession is dominated by small Govemment of the United Republicaccounting firms of which there are about and the accounts of the Clerk of thefifty-five. National Assembly.

29


ReWiew Flndings staff. As a result, the quality of the workproduced can suffer. While many donors are

The Offlce of dhe Controller and assisting government audit departnents inAuditor General. The quality review schenes SSA, including Tanzania, it will be some timethat have been introduced by accounting before they have sufficient capacity tobodies are for private sector auditors. effectively carry out their mandates.Although some goverfnment auditors aremembers of accounting bodies that operate TAC and the Private Auditi.ng Firms.such review schemes, they have not been The findings of the reviews of the privateincluded in the review schemes because they sector auditors were similar to those found indo not offer services directly to the public. the countries that currently operate reviewOne of the objectives of the pilot was to test schemes. Although most of those reviewedwhedher the same review scheme could be were in compliance with Tanzanian accountingused for both private and public sector and auditing standards, the reviews foundauditors. examples where these standards had not been

followed. These findings were discussed withA problem that surfaced during the those concerned, and were followed up by a

pilot was that auditors in the public sector are confidential written report. The reviews alsooften not subject to the same accounting and revealed that Tanzanian accounting andauditing standards as their private sector auditing standards have not kept pace withcounterparts. In Tanznia, the Controller and international standards, and that there areAuditor General is not statutorily obliged to significant gaps in the national standards whichaudit in accordance with Tanzanian standards. NBAA needs to address.It was not possible therefore, to subject hisoffice to the same review as the private The pilot review findings identified aauditing firms. The content of the review was disparity in the level of compliance witha review of documentation for the audits of standards between the international and largetwo IDA-financed projects, and an assessment national firms, and the small firms. Theof the traiing program of OCAG. The review international firm and the large ricdonal firmfound a nurmber of weaknesses including; reviewed were in compliance with the nationalinsufficient audit pl3nning and procedures, accounting and aud:- gstandards. In addition,lack of adequate supervision, and poor audit where there were no national standards, thesedocumentation. firms were in compliance with international

standards. These firms have the backing ofIn SSA, there are a nunber of international links which can provide them

problems which affect the quality of the work with technical suppon. They are regularlyof the government auditor. Governmet reviewed through their partner andaccounting is poor, accounting systems are correspondent frms, ax. the substae of theinadequate and the accounts that are prepared pilot review was not new to them.are difficult to audit. Government auditorshave little control over the amount of work The small firms do not have thisthey are required, by statute, to undertake. backing, and some weaknesses were found inUnlike private sector auditors, goverment the level of compliance. Although some of theauditors cannot decline to take on audit auditors reviewed are members of UKresponsibilities if they are overburdened. In accounting bodies and do receive someaddition, it is often difficult for government technical material (members' handbook andaudit departments to recruit and retain suitably monthly joumal) from their UK bodies, theyquWified staff. OCAG in Tanzania does not are, to a large extent, dependent upon thehave one fully qualified CPA working on its services of NBAA to keep them professionally

30

Pilot Schemes

up-to-date. As the private sector becomes Senegal (ONEEAS) did not participate in themore developed in Tanzania, there will be an review process. The review was however,Lnesing role for small firms which offer diacussed in detail with, and supported byaccounting and auditing services. If small ONEEAS.businesses are to start on a sound fmancialfooting, it is important that they receive The Regulatory Frameworkaccurate advice. Through its participation inthe pilot reviews, NBAA was able to identify Senegal is a member of OCAMthe areas in which it should be providing (Organisation Commune Africaine Maigachesupport to its members to help them improve. et Mauricienne) and as such is a party to the

common regulatory framework of OCA'4 forReaction. At the end of the mission, a dhe reporting and disclosure of financial

wrap-up meeting was held with those auditors information. OCAM regulations have beenreviewed, and representatives of NBAA, to legally promulgated in Senegal as follows:discuss the generic findings. The feeling of thenmeting was that the reviews were very usefiul * Discisure. Ordinance-Law 75-83 ofand that NBAA should introduce a similar December 20, 1975 requires allscheme for all its authorized auditors. It was registered business, corporate orfelt that such a scheme could play a major role individual, to maintain records andin improving the quality of the audidng produce annual financial statements inprofession. As well as providing the auditors accordance with the Senegalesewith an objective review of a sample of their version of the OCAM accounting planfiles, the pilot also provided the auditors with (Plan Comptable).an opportunity to discuss with the reviewersnd NBAA staff the direction in which they * Reporting. Ordinance-Law 85-40 of

would like to see the p:oion develop and July 29, 1985 renders thethe assistance they would like NBAA to commissariat-aux-comptes obligatoryprovide. Under an IDA-financed Fiancial and for all business entities. TheLegal Management Upgrading Project, professional responsibilities of thetechnical assistance will be provided to help Commissaires-aux-Comptes areNBAA to develop a review scheme. This will defined in Presidential Degree 88-987.include funding for an expert to visit Tanzania These responsibilities however, fall far

ree times over the lifetime of the project to short of the auditing standardsassist NBAA develop its acunting and published by the ONEEAS and ofauditing standards, and establish a review Intemational Standards on Auditingscheme to monitor compliance. (ISAs).

Senegalese statutory requirements forThe Senegal Pilot Quality Review financial reporting are embodied in Law

no.75-783 dated December 20, 1975, underin carying out the pilot reviews, the which all companies with the exception of

Bank sought to involve the national accountng banks and financial establishments are requiredbody in the process. The firms which to file financial statements prepared onparticipated in the reviews however, were standard printed fomis, within four morths ofasked whether they wanted a representative the statutory year end. These statementsfrom the national body to be present during include:the actual review. In Senegal, the firmsdecided that they would prefer that the Ordre * Operating StatementNational des Experts et Evaluaurs Agr6es du

31


* Appropriation Account Ordre opposed but was unable to prevent.

* Balance Sheet 1he Reiew

* Statement of sources and application The pilot quality review was carriedof funds out in May, 1993. Reviews were undertaken

of eight private auditing firms. The private* Statement of off-Balance Sheet auditing firms were selected to ensure a

comnitments. representative sanple of international,national, small and large firms. The generic

The statutory requirement to issue details of the review process have beenpublished financial statements on standard outlined in the preceding text. In carrying outforms precludes any deviation from statutory the review, the same procedures were adoptedreporting requirements. All financial for all firms. The reviewers looked forstatements of clients reviewed had been compliance with the auditing standards issuedprepared on such forms. Major modifications by ONEEAS for the Commissaire auxare required to these forms to enable them to Comptes, the Senegalese Accounting Plan,comply with International Accounting respect of international auditing standards, andStandards on disclosure and presentaton of whether there was adequate documentation tofinancial informtion. support the auditor's opinion.

Ordre Naiondw des Experts et Review FfndingsEvalaeurs Agrses du Senegal (TheNAb&nal Order of Licensed EWerts As in Tanzania, the findings of thewad Valuers of Senegal) reviews varied. Standards varied

tremendously, regardless of the size of theThe profession in Francophone Africa client or of the auditing firm; some small

is not as developed as in Anglophone Africa. firms were found to maintain files in goodThere are few national accounting bodies, and order and in respect of most intemationalmost accounan and auditors have earned mclditing standards whereas others, includingtheir qualifications in France. None of the oue of the major firms, were conspicuous forFrancophone countries are members of IFAC the poor condition of their files and their lackand IASC. ONEEAS was created in 1983 by of sufficient evidence of audit tests andOrdinance-Law 83-06. It is a multi- controls carried out. Following each review, adisciplinary body incorporating insurance meeting was held with the practitionerassessors and mechanical engineers, in concemed to discuss any matters arising as aaddition to accountants. Apart from result of the review. A written confidentialmain ning an office and secretariat, report of the recommndations and suggestionsONEEAS has not been particularly active in for improvement was sent to each firm. Thesedevelopment of the accoing profession. reports will not be sent to ONEEAS. TheWith Bank finance, it has produced a manual reviews also revealed that Senegalese statutoryof auditing standards, but it does not appear to requirements for financial reporting do notcarry much influence in political circles, as comply with international accounting standardsevidenced by the recent admission to in the areas of disclosure and presentation ofONEEAS of State Inspectors (Inspecteurs financial information, and, the auditingd'Etat) with more than fifteen years' standards developed by ONEEAS are not inexperience, a government initiative which the line with international auditing standards.

32

Pilot Schemes

Reacton national accounting body can help, or bestrengthened to help, auditors improve the

The reaction to the reviews was quality of their services. In many countriesfavorable and the auditors were supportive of there are no qualified accountants working asthe quality review pilot, and the concept of government auditors and govermment auditorsintroducing a quality review scheme in are not required to adhere to the sameSenegal. Unfortunately, the President of standards as private sector auditors. As aONEEAS was not available at the end of the result, the national accounting body has littlemission, and a wrap-up neeting was not held. contact with the public sector. In deciding howONEEAS does not have the same level of to overcome any deficiencies, a decision willinfluence as NBAA in Tanzania. Before a have to be made on a country-by-country basisquality review scheme could be effectively as to whether it is best to support theintroduced in Senegal, ONEEAS would need government auditor directly or whetherto be strengthened to establish itself as the assistance should be directed through theauthoritative body in Senegal for the national accounting body.accounting auditing profession, and for thedevelopment and monitoring of accounting and Standards. Government auditors areauditing standards. In its current form, not always subject to the same standards asONEEAS has to promote the interests of many their private sector counterparts. A qualityprofessions. If the accounting and auditing review scheme established for the privateprofession is to develop, it may be more sector may not be appropriate for the publicappropriate to establish a separate body sector. Many goverunent auditing bodies arededicated to the accounting and auditing members of the International Organizaion ofprofession in Senegal. Supreme Audit Institutions (INTOSAI).

INTOSAI is an independent body which aimsat promoting the exchange of ideas and

Implications for SSA experiences between Supreme AuditIrstitutions. Like IFAC, INTOSAI issues

Annex H sumnmaries the makin areas standards. INTOSAI auditng standardsthat accounting bodies need to consider before provide a ftamework for the establishment ofthey can introduce a quality review scheme. procedures and practices to be followed in theWith a few exceptions, the accouning bodies conduct of an audit. Their standards are likein SSA do not have the same level of human international auditing standards in that theyresources and technical expertise as those that emphasize independence, skills and exercise ofhave introduced review schemes. The need to due care. In addition, they recognize the factregulate the profession however, is just as that the independence of the Auditor Generalstrong. Before a quality review scheme can be is determined by statutory regulations overintrduced in SSA, there are a number of steps which the Auditor General may have nothat will need to be taken to overcome the control. The standards also prescrbe that theparticular problems facing the Region. auditor should report on economy, efficiency

and effectiveness, in addition to the regularGovernent Audiors compliance audit.

If a quality review scheme is Members of INTOSAI are not obligedintoduced for government auditors, it is likely to follow these. However, an increasingthat major deficiencies will be found. When number of countries, including South Africa,deficiencies are found in the private sector, the are adhering to INTOSAI standards.

33


Inestablishingaquality review scheme accounting body. There are some countries infor government auditors in SSA, the scheme SSA which do not have national accountingcould be devised using the standards bodies. Although the Bank could undertakepromulgated by INTOSAI. These standards quality reviews of auditors in such countries,appear to be the most appropriate to monitor the benefits would be limited. For the qualitythe quality of the work of the govermnent of auditing to improve there needs to beauditor. regular monitoring, and a national accounting

body wiHing to assist its members inprove thePnvate Sector Aditors quality of their services. It would be

premature to undertake a quality review inThe findings of the reviews of the countries where there are no national bodies.

private sector auditors were similar to thosefound in the countries that currently operate Involvement of Regional Accountingsuch schemes. Where there is a difference, it Bodiesis in the capability of the national accountingbody. The countries that have introduced such There are a number of regionalsdemes have strong accounting bodies who accounting bodies in SSA. The most active ofare able to assist their menbers overcome any these are: (a) the F6d6ration Internationale desdeficiencies. In SSA, most of the national Experts Comptables (FIDEF), whichaccounting bodies do not have the capacity to represents the Francophone countries; (b) thehelp their members improve the quality of Association of West African Accountingtheir work. If review schemes are to be Bodies (ABWA), which includes The Gambia,itroduced in SSA, national accounting bodies Ghana, Liberia, Nigeria, Senegal and Sierrawil need strengthening, not just to introduce Leone; and (c) the Eastem, Central andsuch sdhemes, but also to help their members Southem Africa Federation of Accountantovercome any deficiencies the reviews may (ECSAFA) which has member bodies fromuncover. Kenya, Lesotho, Malawi, Mauritius, Namibia,

South Africa, Swaziland, Tanzania, Zambia,Sandards. Before a quality review and Zimbabwe. Although these bodies have

scheme can be introduced, the been established for some years, in terms ofprofessional accounting and auditing standards the services they offer, they are in theirthat must be adhered to by auditors should be infancy. Unlike the national accounting bodies,established. In carrying out a quality review, the regional bodies seldom have permanentthe reviewer must have a set of accounting and staff, and they are run by volunteers, oftenauditing standards to use as a guide in with support from national bodies.deterning whether a practitioner's audit filesand financial statements are in compliance. A problem that has been identified inNot all countries in SSA have their own those countries that have introduced reviewnational standards. Where this is the case, the schemes is that where the communities arenational body may wish to adopt internadonal small it can be difficult to ensure reviewerstandards or prepare its own standards before independence. In the futnre, if the regionala quality review scheme is introduced. bodies become stronger, and employ

permanent staff, they could play a part inIwulvenent of National Accountng helping national bodies introduce their ownBodes review schemes. In the short-term, the

regional bodies could play a useful role inThe pilots demonstaed that a quality compiling a list of auditors in the region who

review scheme can be successfully introduced are able to carry out reviews. This informationwhen there is commitment from the national could then be provided to national bodies

34

Pilot Schemes

looldkg for qualified reviewers. Much as way of assessing the capability andinternational firms undertake peer reviews of independence of auditors, and would identifyfirms in other countries, members from sister deficiencies which could be rectified. The twoaccounting bodies could be invited to pilot reviews in Tanzania and Senegal wereundertake peer reviews of each others very successful, and showed that a qualitymembers. review scheme could play an important role in

improving the capacity of auditors in SSA.The pilots demonstrated that the type of

S_mmary review scheme that has been introduced inother countries can be easily adapted by

The pilot review schemes in Tanzania accounting bodies in SSA to review the qualityand Senegal introduced the concept of audit of auditing firms or state audit corporations.review to SSA and helped iron out practicaldifficulties in the review process. The pilot Where the model scheme was lessreviews were participatory, with national appropriate was in reviewing the work of theaccounting bodies being involved in the government auditors, who are not statutorilyreviews. The reviews were undertaken by obliged to comply with national accountingBank staff in conjunction with an expert with and auditing standards. In reviewing the workxperience of carrying out a similar review of government auditors, a scheme could be

scheme. 1The reviewers assessed e devised which would use the standards adoptedindependence of the auditor, compliance with by the International Organization of Supremeaccounting and auditing standards, and made Audit Institutions (INTOSAI). These standardsrecommendations to the auditor on how to are being accepted by an increasing number of

improve working procedures and standards. supreme audit institutions, and would be theAs well as providing feedback to the auditors mOst appropriate criteria by whiA.h to monitorwho were reviewed, the reviews assisted the the quality of the work of the governmentnational body identify the areas in which its auditor-

Iem s need support.

The introduction of a review schemefor SSA auditors would provide an objective

35

Chapter 4: Conclusions

Quality Review is an educational and play an important role in improving thesupportive service that assists auditors in capacity of auditors in SSA. The pilotsmaintaining and inproving their professional demonstrated that the type of review schemestandards. Its introduction has enhanced the that has been introduced in other countries canreputation of auditors with the public and the be easily adapted by accounting bodies in SSAbusiness community. It has also demonstrated to review the quality of auditing firms or stateto governments that accounting bodies can be audit corporations.self-regulating and can ensure that accountingand auditing standards are adhered to. In most The pilot reviews highlighted thatcountries in SSA, the national accounting government auditors arc not subject to thebodies are not strong, and do not carry out a same accounting and auditing standards asmonitoring role. Without effective monitoring, private sector auditors - their mandate as laidit is highly unlikely that accounting and down by statute is different. Governmentauditing standards will be complied with. The auditors are rarely qualified auditors, and theintroduction of a quality review scheme could national accounting body has little, if any,assist national accounting bodies improve the influence over their activities. The results ofstandards of their members. the pilots show that a quality review scheme

established for private sector auditors is notThe main aimn of governnent auditing necessarily appropriate for the public sector,

is to ensure public accountability for and that national accounting bodies could havegovernment revenue and expenditure. Only problems reviewing government auditors. Athrough the anmal report of the government long-term development goal would be forauditor to Parliament can a country's citizens government auditors to move closer to theirfird out whether the public finances have been private sector counterparts in terms of theappropriately spent. As sorw. countries in SSA quality of their training, and the standardsare moving away from socialist-based adopted. In the meantime, however, aeconomies, and parastatals are being sold, the different set of review criteria will have to berole of the government auditor is becoming established for government auditors.more important for prospective purchasers,who will look at the audited financialstatements to establish the financial viability of Benefitsthe parastatal. The reviews could also enableparastatal monitoring bodies to have well- As poor compliance is often as a resultbased confidence in the quality of parastatal of weak institutional capacity, the introductionaudited financial statenients. of a review scheme could provide the basis for

technical assistance to the auditor and theThe pilot review schemes in Tanzania accounting profession. Reviews would apply to

and Senegal introduced the concept of audit both the private and public sectors. Theyreview to SSA and helped iron out practical would assist in improving government anddifficulties in the review process. The two private sector auditing practices. This wouldpilot reviews were very successful; they have an effect on government, parastatal andshowed that a quality review scheme could company audits. Confidence in the quality of

37


the auditor would also improve confidence in dme members of staff to undertake reviews,the reliability of financial statemnents. The and administer the review process, and theirmain purpose of the quality review systems members may not wish to cover the costs ofnow operating in countries around the world is the review. In addition, the reviews mayto test whether auditors are doing their jobs reveal serious deficiencies which theproperly and are observing high professional accounting body may not have the capacity orstandards. A review system for auditors in resources to rectify. External assistance maySSA would have as one of its development be required to enable accounting bodies togoals the improvement of the quality of audit introduce review schemes and provide thereports. necessary support to help their members

inmprove.An important elemnent of governance is

transparency in financial accountability andmanagement of resources. Strengthening Net Stepsgovernmental capability to manage its financialaffairs would contribute to improved The concept of quality review has beengovernance. The Bank could use a review successfully introduced into SSA through thescheme as a step toward improving better two pilots and the issue of the Discussiongovernance in its client countries. The Draft (Johnson 1992), which received wideintroduction of a review scheme could support from the accounting profession. IFAChighlight weaknesses and lack of transparency which represents some twelve accountingin accounting and auditing. The Bank could bodies in SSA is encouraging its members toaddress this lack of accountability through introduce quality review schemes, and asupporting the development of the accounting number of these are naking plans to establishand auditing profession in SSA. review schemes. This report will be

disseminated to all accounting bodies(national, international, and regional),

Risks and Problems government auditors, the donor community,and other interested parties in SSA. It is

There are some risks associated with intended that the experiences described in thisthe introduction of a review scheme. Some report can be utilized by bodies interested inauditors will be defensive, and see such a introducing review schemes.review as threatening, others may be offendedand refuse to participate. Lessons leamed from Introducing a review scheme is notthe pilot show that these risks can be easy, and as mentioned previously, externalminimized through involving the auditors and assistance may be required to enablethe national accounting bodies at all stages of accounting bodies to introduce such schemes.the review process. The review process itself The Bank aims to work with accounting bodieswould be participatory, the national accounting to help them introduce review schemes. Thebodies would be invited to join the review Bank will collaborate with the bodies inteams, and there would be open dialogue undertaking reviews of their auditors, whichbetween the reviewers and the auditor. will provide them with a foundation for the

introduction of their own national reviewIn most countries where review scheme. In addidon, the Bank will follow up

schemes have been introduced, the firms pay on the pilot quality reviews carried out infor the review, and the accounting bodies pay Tanzania and Senegal, and the progress madefor the administration of the scheme. Many by the National Board of Accountants andaccountng bodies in SSA, however, do not Auditors to introduce its own review scheme.have sufficient income to be able to hire full- The results of these will be disseminated to all

38

Conchuion

accounting bodies and other interested paties and most cost effective way ofthrough the form of a newsletter. Accounting educating accountants and acoountingbodies in SSA which inroduce, or are technicians.thinking of introducing, review schemes willbe invited to contribute their experiences to * he Ihmpaact offoInnaton Technologythe newsletter. on the Accouning and Auding

Profession. The slow development ofChapter 1 outlined many endeanic the accounting profession in SSA ha

problems facing the accounting and audidng limited the choice and availability ofprofession in SSA. This report has services offered by its members.concentrated on only one aspect of fmancial Accouitants and auditors are failing tomanagement: auditing. One of the conclusions keep up with the revolution inof this report is that accounting and auditing information technology, puttingwill not improve in the private sector until African industries behind theirthere are stronger national accounting bodies European and Anerican counterparts.able to provide technical support to their This component will review themembers, and in the public sector until the education and training needs offundanental constraints of poor remueration accountn and auditors to enableand lack of taining are taclded. As a step them to obtain a good understandingtoward improving accounting and auditing in of computerized accountlng system.SSA, the Africa Region of the World Bank is and their auditing.developing a Financial Accountability Program(FAP). FAP has an integrated approach and * Publc Sector Fimanal Managemet.will address four areas of concem: This component will examine

goverment accounting and financialAccountng and AX ing Sandards. report practices, and detemneThis component will review existing ways of improving the reliability ofstnards adopted in SSA and the financial data and e ourgingextent of compliance. The results wiUl adherence to fumdamental accountingbe used to define how countries should principles.approach the seting and adoption ofappropriate accounting and auditing FAP will be undertaken in closestandards collaboration with the accoumting profession in

SSA. The findings of FAP will be published in* heAccouting Profession-Eduation 1995, and will be disseminated to all

andi Trainng of Accouns. This accounting bodies, governments, the donorcomponent will review the quality and coummnity and other interested parties ineffectiveness of accounting education. SSA.This analysis wil! provide new andfledgling accuning bodies andgovernments with advice on the best

39

Anne,x A: International Federation ofAccountants, Statement of Policy of

Council Assuring the Quality of Audit andRelated Services

Introduction Implementation of appropriate qualitycontrol policies and procedures is the

IFAC's Code of Ethics for responsibility of each firm of practicingProfessional Accountants notes that "a accountants. For purposes of this Statement, adistinguishing mark of a profession is 'firm of practicing accountants" is aacceptance of its responsibility to the public." proprietorship, partership, corporation, orIn today's modern enviromment, many association engaged in providing audit andsegments of society are increasingly dependent related services (presently, reviews of financialfor decision-making on information over statements, engagenents to apply agreed-uponwhich they have no control. They tum to procedures, and compilations of financialpracticing accountants for assistance in information) covered by Internationalassessing the credibility of some of that Standards on Auditing issued by IFAC. Theinformation. In this environment, every task of encouraging and assisting firms offailure, whether actual or perceived, by an practicing accountnts to maintain and improveaccountant to comply with professional the quality of audit and related services isstandards and legal requirements makes it primaily that of the member bodies in eachdifficult for the profession to maintain the country concerned. IFAC believes that therpation for integrity, objectivity, an mmber bodies have the responsibility to takecompetence that it has acquired over its many appropriate steps to achieve that objective inyears of service to cliens, employers, and the the legal, social, business and regulatorypublic. Thus, IFAC believes that member environment prevailing within their countries.bodies need to demonstrate that there are iFAC's role is to provide guidance, encourageadequate self-regulatory programs in place to progress, and promote harmonization. Thisprovide reasonable assurance that practicing Statement of Policy discsses the steps that canaccounats adhere to the highest standards in be taken to enhance quality control withinperforming audit and related services. Since accounting firms.regulation of the accountancy profession iscarried out cost efficiently and effectively bythose dedicated individuals who comprise the Objectivesprofession, it is in the intemsts of the world-wide accountancy profession and the public it It is not possible for a Federationserves for member bodies to ensure the document to outline all of the steps memberundertaking of this lknd of self-regulatory bodies need to take to establish effectiveeffort and publicize the program. quality control standards and quality control

41

Qlity Review Schemes for Auditors in SSA

programs. There are widely different * Member bodies should develop qualityconditons that exist in different countries, and review programs designed to evaluatethose standards and programs will most likely whether firms of practicingchange over time in response to new accountants have establishedprofessional standards and programs will most appropriate quality control policieslkely change over time in response to new and procedures and are complyingprofessional standards and developments in the with them.accounting and business envirounent.

* Member bodies should require firmsIFAC recognizes that member bodies of practicing accountarts to make

must consider the perceived strengths and appropriate improvements in theirweaknesses of the practicing profession in quality control policies and procedurestheir countries and the environment in which or in their compliance with thosefirms operate. However, IFAC believes that policies and procedures when the needthe following objectives have world-wide for such improvement is identified. Inapplicability and that member bodies should cases involving failure to comply withstrive to achieve them over a reasonable relevant professional standards in theperiod of time. performance of audit and related

services, appropriatecorrective actionsa Member bodies should adopt or should be taken to prevent continued

develop quality control standards and public reliance on inappropriate orrelevant guidance that require firns of rnisleading reports, and educational orpracticing accountants to establish the disciplinary measures, as indicated byquality control policies and procedures the circumstances, should be taken bynecessary to provide reasonable the member body.assurance of conforming withprofessional standards in perfomn As a basic condition, IFACaudit and related services. In that emphasizes that implementation of an adequateconnection, it should be noted that the self-regulatory program cannot be effectednate and extent of a firm's quality until the firms of practicing accountants in acontrol policies and procedures depend country are bound by an appropriate code ofon a number of factors, such as the ethics and by adequate standards governingsize and nature of its practice, its accounting principles and engagments togeographic dispersion, its organization provide audit and related services. The IFACand appropriate cost/benefit Code of Ethics for Professional Accountants,considerations. Accordingly, the its Intemational Standards on Auditing, andpolicies and procedures adopted by the International Accounting Standards issuedindividual firms will vary, as will the by the International Accounting Standardsextent to which the policies and Committee all provide guidance for suchprocedures themselves and compliance standards.with them are documented. Normally,documentation of quality controlpolicies and procedures would be Establishing Qualit Control Standardsexpected to be more extensive in alarger firm than in a smaller one and Member bodies should promulgate ormore extensive in a multi-office firm otherwise identify the standards against whichthan in a single-office firm of for a the quality control policies and procedures ofsole practitioner.

42

IFAC Statement of Policy of Council

finrs of practicing accountants will be B. Skills and Competencmeasured. Those standards should set out theobjectives of quality controls. It is the The firm should be stffed by personnel whoresponsibility of each firm of practicing have attained and maintain the skills andaCcountantS to implement policies and conpetence required to enabk them to filflprocedures that provide reasonable assurance their responsibilities.of achieving those objectives, and tocommnicate those policies and procedures to Quality control standards developed byits personmel in a manner that provides member bodies should encourage firms ofreasonable assurance that the policies and practicing accountants to adopt quality controlprocedures are understood. policies and procedures that provide them with

reasonable assurance that:The objectives and illustrative

examples of general quality control policies * The firm's recruiting program willand procedures set forth below are based on meet the firn's personnel needs andthose in International Standard of Auditing, that personnel hired by the firm, bothControl of the Quality of Audit Work (ISA7). inexperienced and experienced, willEFAC believes that they are relevant to all have integrity and the other attributes,audit and related services rendered by a firm achievements, and experiencesof practicing accountants. necessary to enable them to perform

with skill and competence.

A. Peronnel Qualties * The firm's continuing professionaleducation (CPE) and training

Personnel in the firm shoudd adhere to the programs are carried out inprinciples of Integnty, Objecavty, Indepen- compliance with guidelines designeddence, and Confidentiality. to provide personnel with the

knowledge required to filfill theirQuality control standards developed by responsibilities and to progress withinmember bodies should encourage firms of the firm.practicing accountants to adopt quality controlpolicies and procedures that provide them with * Personnel are informed about thereasonable assurance that: responsibilities of their positions,

counselled on a timely basis on their* The firm's policies on matters performance, progress, and career

involving integrity, objectivity, opporunities, and advanced toindependence, and confidentiality as positions of greater responsibility inthey relate to the various types of accordance with guidelines that giveaudit and related services provided by appropriate recognition to the qualitythe firm are communicated to of their work.personnel at all levels within the firm.

* Questions on these matters are C. Assigmentidentified and resolved by individualsat appropriate management levels. Work should be assigned to personnel who

have the degree of techimcal training and* Compliance with the firm's policies profidiency required in the circunstnces.

and procedures relating to indepen-dence is monitored.

43


Quaity control standards developed by * Other appropriate procedures for_mber bodies should encourage firms of maintaining the finn's standards of

pracdiing accountants to adopt quality control quality, such as policies andpolicies and procedures that provide them with procedures for the conduct of thereanable assurance that: work, standardized forms, checklists

and questionnaires, and procedures for* Appropriate consideration is given in resolving differences of professional

ssignig personnel to engagements to opinion, are complied with.the workload requirements of anengagement, the skills and competence * Personnel consult with or userequired by an engagement, the authoritative sources on specialized,experience and competence of complex, or unusual matters; to thatpersonnel in reladon to the complexity end, situations requiring consultationor other requirements of an and the persons or sources to beengagement, the extent of supervision consulted should be identified,to be provided, and other relevant appropriate reference libraries shouldfactors. be maintained, and the extent to which

consultation should be documented* Assignment decisions are made by should be specified.

individuals charged with thatresponsibility, with the approval of the * Appropriate on-the-job training isindividual responsible for the conduct provided.of the specific engagement.

* SGuidelines for the review of the workD. Dhrction and Supervion performed and of the work product

are complied with; such guidelinesThr should be suffident direction and should deal, among other things, withsupervion of work at all levls to provide the the qualifications of the reviewer, theJim wih reasonable assurance that the work documentation of the review, and thepen bUrned by the firm meets appropriate types of situations that call for atandards of qualty. Wlenever necessary, review by an individual having no

caualtation should be made mith those who other responsibility for thehbn qpproprate epertise engagement.

Quality control standards developed bymember bodies should encourage firms of E. Acceptance and Continuadon of Clientspracticing accountants to adopt quality controlpolicies and procedures that provide them with The firm should arry out an evaluaion of areasonable assumnce that: prospective clent prior to acceptance and

should revew, on an ongoing basis, its* Work is properly planned by assoaion with present dients. In malang a

appropriate personnel. dedsion to accept or continue with a dient,thefim should consider the nature of the work

* Work is properly supervised at all contemplated by the engagement,organizaional levels, considering the circumstances that would cause the finu totraining, ability, and experience of the regard the engagement, as one requiringpemonnel assigned. specialatention orpresentng special risks, its

44


own indeendce (where required). iuabfiy and other procedures followed by the fins,to service the client properly, and the integrity such as a "cold" review of working paper andofthe client's management. reports, that asist the firm in monitorins

compliance with other quality control policisQuality control stadards developed by and procedures.member bodies should encourage firms ofpracticing accountants to adopt quality control * The mspection program is carried outpolicies and procedures that pmvide then with by personnel with the necessayreasonable assurne that: competence and experience.

* Present and prospective clients are * Corrective actions indicated byevaluated consistently against inspection findings are implementedguidelines relevant to the firm and its on a timely basis.practice by individuals at appropriatemanagement levels.

Providing Other Quality Control* Procedures for identifying and Guidance

addressing conditions that would havecaused the firm to reject a client had Member bodies should considersuch conditions existed at the time of whether firmns of practicing accountants ininitial acceptance are adequate and are their countries need other assistance tocomplied with. understad the objectives of quality control

and to imnlement appropriate quality control- -There is a clear understanding with policies and procedures. Assistance can be

clients about the objectives, nature, provided in various forms, depending upon thescope and limitations of an needs within a country. Examples are listedengagement, ordinarily through below:preparation of an engagenent letter.

Developing guidelines forcomprehensive CPE programs at

F. Inspection may be usefl to firms in plannig, orevaluating the adeqay of, their in-

7hefirm should monitor tde effectiveness housetraining.quality control policies and procedures.

* Providing CPE programs to firms andQuality control standards developed by sole practitioners that do not have themenber bodies should encourage firms of resoures to develop their own internalpracticing accountants to adopt quality control programs, including programspolicies andprocedures thatprovide them with specifically directed to thereasonable assurance that: inplementation of quality control

* The scope and content of the firm's po and procedures.inspection program are appropriately . Mandating CPE when it appears thatdefined in relation to the size of the would be effective in assuring that allfirm, the nare of its practice, the practicing accountants obtain adequatedegree of operating autonomy allowed trainin-.its personnel and operating offices,

45


* Providing guidelines for the conduct can only be fully effective if it has universalof effective internal inspection support. If tile program is nandatory, firms ofprograms. practicing accountants may be selected for

quality review on a test basis based, for* Implementing voluntary programs that example, upon a random selection or upon the

would enable firms of practicing nature and size of their practices, or all firmsaccountants to obtain an independent, may be reviewed over an established period ofconfidential assessment of their quality time. Factors that should be considered incontrol policies and procedures, apart reaching a decision on the scope of a qualityfrom any forrnal program of quality review program include the extent to which allreview. firms of practicing accountants provide audit

and related services and the effect this mayWhen firms of practicing accountants have on the costs and benefits of the program;

have made reasonable progress in the perceived quality of the audit and relatedimplementing quality control policies and services provided by firms of practicingprocedures, including internal inspection accountants; govermnental, regulatory, orprograms, member bodies will be in the best media criticisms of the quality of professionalposition to institute effective quality review services; the extent to which proposals forprograms. Nevertheless, member bodies quality review programs appear to beshould consider implementing a quality review supported by the profession or demanded byprogram for firms of practicing accountants others; and the cost of the program in relationwhen it is perceived that firns have not made to the financial strength of the practicingreasonable progress in a reasonable period of profession and of the member body itself.time in implementing quality control policiesand procedures. When all firms of practicing

accountants are to have quality reviews in agiven country, steps can still be taken to

Establishing a Quality Review Program control the costs without loss of effectiveness.In particular, the program can be implemented

The steps taken by a mnember bodies in over a reasonable number of years, forestablishing a quality review program will example, beginning with large firms withvary substantially, depending on the conditions more extensive audit and related services, asin the country relative to the development of to which there may be greater public reliance.standards for audit and related services and on During that phase-in period, the member bodythe extent to which the concept of quality would continue educational efforts to helpreview has been accepted in the country. In smaller firms develop effective quality controladdition, the organization and structure of the policies and procedures and to prepare forprogram will vary depending on the extent of review. At the same time, it would be prudentpreexisting government involvement in the for the member body to use its best efforts toregulation of the profession and in the communicate to government and to the publiclicensing of professional accountants. the extent of this required commitment by theHowever, mnember bodies planning to establish profession to maintain and iniprove the qualitya quality review program needs to reach of audit and related services.decisions on the following matters, amongothers. When the quality review program in a

country is carried out on a test basis, IFACThe first mnajor consideration is the believes that it is important that all firns of

scope of the program itself and whether it is practicing accountants that provide the auditvoluntary or mandatory. A voluntay program and related services to be reviewed should face

46


the possibility of having their work selected methods. Practicing accounns wouldfor review. ordinarily be expected to have current

knowledge of such matters and, therefore,The second major consideration is should be well suited to carry out quality

whether the review will report on the quality reviews of other firms of practicingcontrol policies and procedures established by accountants. Reasonable oversight proceduresthe firm, or whether the report will address can be adcpted, if necessary, to provide addedonly the work product of the firm. In the first assurance that quality reviews are beinginstance, the review must be conducted at the carried out in an independent, objectiveoffices of the firm so that the reviewer can manner.assess the suitability of the firm's policies andprocedures and its compliance with them, If it is determined that quality reviewsreview the work performed on selected should be carried out by professionallyengagements, and discuss related matters with qualified employees of the nember body or byfirm personnel. In the second instance, non-practicing accountants engaged by thepersonal visits to a firm may not be necessary. member body, care should be taken to insure

that the individuals involved have a currentPersonal visits to a firm to conduct a knowledge of applicable proftssional and

quality review should produce the most benefit quality control standards and the manner into te firm and to the public. Accordingly, this which those standards are generallyapproach should be taken wherever possible implemented by firns of practicingand appropriate. However, if the accountants. Such individuals should also becircumstances in a country make this approach instructed in the need to carry out theirimpractical for some or all finns, off-site procedures, wherever possilble, in a mannerreviews of a firm's work product, including that elicits full cooperation from the finrsreview of selected working paper files if being reviewed, and to maintain thenecessary, can provide a low-cost means of coilidentiality of client information.identifying firns that are in significant need ofassistance in meeting their professional The number of altemative approachesresponsibilities. that exist make it evident that each member

body will have to agree upon the alternativesThe third major consideration is appropriate to it and see to publication of its

whether the reviews are to be conducted by programn in the form of reasonably detailedpmcticing accountants, by employees of the standards and procedures. In that cormection,member body, or by non-practicing IFAC believes that it is important for a

a engaged by the member body. successful quality review prograri to havestandards that address at least the following

The services rendered by firms of matters:practiing accountans require a comprehensiveknowledge of professional standards and, in * Maintaining the confidentiality ofmany cases, legal, regulatory, and tax client information.requirements. They usually call forknowledge of the dients's business and of * Assuring the independence andmaers affecting the industry in which the objectivity of reviewers.dient operates, such as economic conditions,gvne regulations, and changes in * Assuring that reviewers have thetechnology. They may involve special technical skill and knowledge and teexpertise in matters as diverse as, for specialized experien to perform theexumple, hedging transactions, and valuation review wiffi professional competene.

47


* Documenting the review procedures * Inposing disciplinary measures onfollowed in a manner that permits an firms that refuse to cooperate in theobjective assessment of whether the conduct of the review, in takingreview was performed with due care necessary corrective actions, or thatareand in compliance with its standards. found to have serious deficiencies that

cannot be dealt with in a meaningful* Reporting the findings of the review in way by remedial or educational

a manner that assists the measures.reviewedfirm in identifying andimplementing any necessary corrective Member bodies establishing a qualityactions ar.d in making other desirable review program will also need to developimprovements in its quality control specific administrative procedures to guide thepolicies and procedures. selection of review teams, to monitor the

progress of reviews, to evaluate the* Requiring, where applicable, the performance of review teams, and to deal with

imposition of added corrective, the resolution of differences of professionaleducational, or monitoring procedures opinion on matters related to the review,pursuant to guidelines that assure that among other things.firms will be treated fairly andconsistently. Examples of such Finally, the number of tasksprocedures are requirements for enumerated above, and each member bodychanges in certain quality control implementing a quality review program willpolicies and procedures, for specified identify many others, makes it evident thatcontinuing education, or for revisits careful advance planning, committedby reviewers to obtain assurance that members, and a qualified staff comprehensivecorrective actions planned by the firm training and communication programs arehave been appropriately implemented. essential to success.

48

Annex B: Review Schemes

Many ountries have voluntarily advice; management consultancy; andintroduced schemes, but in others govermnents insolvency. Initially, the reviews willhave enforced regulation. This annex descnbes concentrate on the policies and procedures inthe operatMn of the review schemes listed place to ensure compliance with professionalbelow. standards. ASCPA would like to extend the

review to include a conprehensive practice* The Australian Society of Certified assessment, but it is experiencing some

Practising Accountants problems, in that confidentiality issues andlegal constraints are curtailing the Society's

* The nstitute of Chartered Accountants access to working papers. Reviews will takeof Ontario place every five years. ASCPA has some

4,400 mmbers to review.* The Hong Kong Society of

AccountantsThe Institute of Chartered Accountants

* The Institute of ChaTtered Accouants of Ontario (ICAO)in Ieland

In Canada, each of the three main- T-he New Zlnd Society of accounting bodies has its own national body

ccountants vwhich is responsible for national examinationsand, in the case of the Canadian Institute of

- The hartered Association of certified Chartered Accountants (CICA), setftingAccouIntSIls saccounting and auditing guidelines. The day-

to-day runming of the accounting bodies is- TheIsiteEofCartered Aons delegated to the provinces. Programs such as

in England and Wales practice inspection are the responsibility of theprovincial insdtutes. The national bodies have

* The American InsdtLie of Certified not laid down any guidelines for the conductPublic Account of practice inspection and these programs can

vary from province to province. Practice* The Office of the Inspector General. inspection in Canada began in Quebec as a

result of conerns by the Quebec govenmmentthat professional bodies might not be serving

Te Australian Society of Certified the public interest. Legislation was passed in1actising Aocomntants (ASCPA) 1974 in Quebec to ensure that all professional

bodies established inspection programs forASCPA commenced its Quality their members. In 1980, ICAO became the

Assurance Program in January 1993. The second provincial body to introduce a practicePrgram has been introduced as part of the inspection program. The program of ICAOcontinuing self-regulatory practices of ASCPA has become the model for other reviewto enhance the qualirty of services provided by schemes.its members, and monitor compliance withprofessional stndards by members in practice. In 1972, CICA established aThe review is much broader than those of committee to consider professionalother bodies, and includes all areas of developmnt. The committee considered apractice: audit; taxation; accountg; financial number of areas for inclusion in a professional

49

Qualiy Review Schemes for Auditors in SSA

dwvelopment program, such as the need for did not seem to apply to all finns of CPAs. Inmembes in public pwactice to undergo a reWonse, the Council of the Society proposedquality review, and the need for a system of the introduction of practice review for twomandatory professional development. As self mnin reasons: (a) to enable HKSA to becomeregulaion of the Cnadian profession rests aware of any member who is not maintainingwith the provincial institutes, CICA referred high professional standards; and (b) to assurethe report to the provinces. ICAO considered users of financial statements that all CPAs arethe matter of mandatory professional of equal standing and that the same level ofdevelopment, and concluded that it offered no work would have been done by any auditor.

urawnce that a practitioner was observingprofessional standards. ICAO was, however, Furffer research was undertaken andinterested in the concept of practice inspection. an outline of the Practice Review scheme wasICAO spent some four years researching and produced as a consultative paper which wasdiscusing the subject with members before distributed to members in July, 1990.carrying out a formal nembership ballot in Members were given the opporunity to1980. Two-thirds of the membership voted in comment and some 200 (out of a totalfavor of the introduction of practice membership of 5,500) did. Most of those;ngpection, and the program's first four-year opposed the introduction of the scheme. Tocycle of inspection started in 1981. convert those members, the Society published

a response paper in November, 1990 dealingThe pmpose of the Institute's with the criticisns raised, and held two

mandatory progran is to assure the public that meetings to explain the background andall members engaged in public accounting, philosophy of Practice Review. In February,whether on a full or part-time basis, are 1991 HKSA held a ballot of members onmaintaining an appropriate level of whether to introduce a scheme. It waspesiona standards. All practitioners are supported by the majority of members votingsubject to practice inspection Even members and the resolution was passed. The firstwho only audit a charity for no fee are reviews were carried out in September, 1992.inspected. The main thrust of the program isaducational. Members are expected to maintain HKSA defines Practice Review astie stadards detailed in the CICA and ICAO a system to be operated by the Hong KongHandbools. Through a review of a sample of Society of Accounats whereby reviewerscanret acctng and auditing engagement engaged by the Society will visit the office offiles practice inspectors seek to identify a certfied public accountant to review thewhether members have adhered to those intemal controls and procedures adopted forstadards. ICAO has 24,000 members, 8,000 an audit by the practice so that the Society canof whom are in full-time practice and 1,000 in be generally satisfied that the member hasparttime. ICAO undertakes 700 inspections a properly performed and recorded his/her workyear. at the required level' (HKSA 1990). The main

objective of Practice Review is to ensure thatall numbers in public practice maintain,

The Hong Kong Society of Accoun observe and apply professional standards. In(EKSA) cases where a member is found not to be

ainaining professional standards, the SocietyHKSA is one of the latest accoung will work with the member to improve the

bodies to introduce a review scheme which it working procedus. The govermuent of Hongcalls Practice Review. HKSA first proposed Kong rcognizes that a high level of auditingbntroducing practice review in late 1989 as a standards is essential to the commercial andreut of criicism from the users of fmancial financial health of Hong Kong, and to itsatements that the same professional standards status and position as an itemational center

SO

Review Schemes

for financial and professional services. The * It will demonstrate to Government ourgovernment therefore supports the Practice intent to carry out our responsibilityReview program which it believes will make as a self-regulating body in ensuringa useful contribution to the stability and that established Accounting andprosperity of Hong Kong. Practice units will Auditing Standards are being adheredbe reviewed once every four years, and HKSA to by our members.hopes to complete between 100 to 150 reviewseach year. * It will put us in a stronger position to

influence the direction of regulatoryinvolvement by Government in the

The Institute of Chartered Accountants activities of our members, particularlyin Ireland (ICAI) as regards the audit fimction" (ICAI

1987).ICAI introduced its Practice Review

Program in 1987 after four years of Under the Institute's Practice Reviewconsideration. During the 1970s and 1980s, Prograrn menbers are reviewed at least oncemany new accounting and auditing standards every five years. ICAI has 1,700 practicingwere introduced, and ICAI believed that members to review in 1,100 firms. ICAIpractice review would be a way of ensuring undertakes about 300 reviews each year.that the new standards were being adhered to.The aim of the review process is to raisestandards by encouraging members and The New Zealand Society ofsupporting them in their endeavors. ICAI also Accountants (NZSA)sees the review program as an excellent wayto improve communication between the NZSA introduced Practice Review ininstitute and its members. When ICAI 1990 to monitor and improve professionalintroduced Practice Review in 1987, it stated standards. The emphasis of the program isMThe main purpose of practice review is to educational. Its objective is to ensure that

ensure that all chartered accountants in accounting and auditing standards are beingpractice are maintaining an appropriate level adhered to, and that auditors comply withof professional standards in the performance of statutory requirements regarding presentationaccounting and auditing standards. The system of accounts. The roviewer checks whether theis intended to achieve the following firm's internal controls can be relied upon,advantages: and tests the controls by reviewing at least one

audit, one compilation, and one review file per* It will be an educational and partner. NZSA has some 2,500 practicing

supportive service and will assist members in 1,160 firms to review, and by latepractitioners in mnOtaining and 1992 over half of the practitioners had beenimproving their professional reviewed. Reviews takeplace every five yeas.stndards.

* It will enhance our reputation with the The United Kingdompublic and business community in thatwe will be the only body of TheFinancialSericesAct, 1986. Theaccountants whose members subject United Kingdom is one of the few countries tothemselves to mandatory review of have regulation forced upon it. Two pieces oftheir standards. This competitive legislation have affected the U.K. accountingadvantage will be highlighted in profession; the Financial Services Act, 1986promoting the chartered accountant. and dt Companies Act, 1989. Under Section

51


3 of the Financial Services Act, 1986 "no RSBs are required to establish andperson shall carry on, or purport to carry on, maintain a register of individuals and firmsnestment business in thfe United Kingdom eligible to be company auditors, and monitorunless he is an authorised person ... or an and enforce compliance with the rules. Bothexempted person.." Both the Chartered ACCA and ICAEW have been approved byAssociation of Certified Accountants (ACCA) the DTI as RSBs. All those registered with aand the Institute of Chartered Accountants in RSB are entitled to use the descriptionEngland and Wales (ICAEW) have been 'Registered Auditor.' Part II of the Act, whichapproved by the Departnent of Trade and deals with the registration of auditors, cameIdustry (DTI) as recognized professional into effect on October 1, 1991. From thisbodies (RPB), under the Financial Services date, only a registered auditor is eligible toAct, and are able to authorize firms to carry accept appointment as company auditor. It isout investment business. In their capacity as a criminal offence for a person falsely toRPBs they are required to monitor the firms describe himself as a registered auditor. Thethat they have authorized and enforce DTI will review the monitoring procedures ofcompliance with their investment business ACCA and ICAEW after the first eighteenrles. The DTI is looking to raise audit months of operation.performance, and the obligation to undertakemonitoring visits is an important andcompulsory part of the self-regulatory system The Chartered Association of Certifiedcreated by the Act. Monitoring covers the Accountants (ACCA)eligibility of those firms and the investmentbusiness they carry out. For those firms ACCA and ICAEW have chosen to:uthorized to hold investmet business client follow different routes for registration undermoney or custodial investments, the Securities the Companies Act. ACCA registers bothand Investment Board (SIB) requires that they individuals and firms, whereas ICAEWare visited once every two years. Other firms registers only firms. All ACCA memabes whoare required to be visited only once every five hold U.X.h. practicing certificates and firmsyears. holding auditing certificates come within the

T7he Companies Act, 1989, which [o of the monitoring.implemented the EC Eighth Company Law Under the Comnpanies Act, ACCADirective on the Qualification of Auditors, mJnitors and enforces its bye-laws andintroduced changes in the authorization and regulations by analyzing practitioners' annualregulation of the audit function. Under the returns and carrying out monitoring visits.Act, an individual, partnership or body Monitoring visits take place normally oncecorporate is orny eligible to act as company every five years, although there may be moreauditor if it is registered with a recognized frequent visits in the event of complaints orsupervisory body (RSB). The function of a significant changes in a practice. AdditionalRSB is to lay down rules and practices visits or follow-up action may also result fromgoverning all key aspects of auditing and to a visit which revealed inadequacies. Theadminister and enforce them. The rules and principal checks are on the firm'spractices must cover (a) the management and arrangements to comply with the Association'scontrol of audit firms; (b) the fit and proper rules and guidance, and on practicests of audit firms; (c) the conduct of audit management to ensure that client's affairs canwork; (d) independence; (e) the maintenance be dealt with properly. For example, checksof competence; and (f) the ability to meet are made to verify that appropriate fileclaims arising from audit work. material exists for each client, that there is a

52

Review Schemes

preview of each audit, that all relevant checks program whereby finms could obtainand verifications are carried out and that, confidential reviews of accounting and auditingdepending on the size of the client, a proper engagements. The reviews comnmenced inreview is undertaken and adequate internal 1971, and by 1976 AICPA had reviewed overcross-checks are made. Monitoring includes 300 finrs. In 1977, after much debate in theexamination of the working papers. The length Istitute, the Division for CPA Firms wasof the visit depends on the number and size of established. This resulted in the creation ofclients and other factors. two sections: the Private Companies Practice

Section (PCPS) and the SEC Practice Section(SECPS). Each section was given the authority

The Institute of Chartered Accountants to administer a peer review program. Thein England and Wales (ICAEW) voluntary program was continued for those

firms that did not wish to join the Division. InICAEW, through the Joint Monitoring 1990, after balloting its members, AICPA

Unit (which acts on behalf of the three introduced manatory peer reviews for firmsInstitutes of Chartered Accountants, of performing audits of SEC registrants. InEngland and Wales, Ireland and Scotland) addition to the peer review program, AICPAmonitors and registers finns, not individuals. established a Quality Review ExecutiveICAEW requires all firms to submit an annual Committee in 1988 after a membership ballotreturn for review, which checks whether the voted 76 percent in favor. The Quality Reviewfims continue to meet the eligibility criteria. Executive Committee issues guidelines,In addition, all firms who audit listed programs and checklists for use incompanies will be visited every five years. adminstering and carrying out qualityJMU will monitor all other firms on a test reviews. By 1990, over 38,200 firms hadbasis (about 150 firns per year will be visited enrolled in the quality review program, and byunder this regulation). JMU may also be asked the end of 1991, over 15,000 reviews hadto visit a firm which is the subject of a been undertaken. Periodic quality review ofcomplaint. Unlike ACCA, ICAEW will not accounting -and auditing practices is asee every firm once every five ears. JMU condition of AICPA memberip.monitors registered auditors as well asinvestment businesses. JMU will monitor some AICPA holds that if the profession can6,500 firms authorized to carry out investmnent show that peer and quality reviews protect thework, and some 10,000 fims seeking public interest, then those interested inregistration as conmpany auditors. The work of government control can be deterred. TheJMU focuses on the way that firms control the review focuses on the four main elements ofquality of their audit work, including quality control: independence; supervision;compliance with auditing standards, the consultation; professional development.pmcedures used to maintain integrity, Quality and peer reviews are principally aindependence and competence of audit partners learning experience. The improvements manyand audit. By September, 1992, 300 visits had firms have made between their initial and mostbeen sed. recent reviews have demonstrated that firms

can and have raised their performance.Independent reviews have been effective in

The American Institute of Certfifed identifying substandard practice and helpingPublic Accountants (AICPA) firms to improve their quality.

In 1968, the Council of AICPAapproved the establishment of a voluntary

53


Office of the Inspector Genera (OIG) level of professional care as well as thestandard of audit planning, supervision and

The inspector General Act of 1978 quality controls. Policy, procodural andrequires the Office of the Inspector General to tedhnical guidance is provided to the regionalensure that the nonfederal audits of the staff from the headquarters of the Office of theprograms and operations of the Federal Inspector General to guarantee consistency.Deparunents, which are carried out by state or The work of the Office of the Inspectorlocal auditors and individual private auditors, General is the only example of govermentare conducted in accordance with the auditors being reviewed. Surprisingly, OIGgovernment Auditing Standards. To ensure has found litfle opposition. The auditors arethat this happens, reviews are conducted of the aware that their reports will be reviewed andaudit report and the working papers by staff in are cooperative. In fact, the reviewers havethe regional offices of OIG. Reviewers check found that the state and local auditors do athe auditor's qualifications, independence and better job than private accountants.

54

Annex C. Reviewers

The Australian Socdty of Cerdtled are also held for existing inspectors. Initially,PVatlg Accountants (ASCPA) new inpectors undertake desk reviews of part-

time practices, which are reviewed by theASCPA will be producing a Institute's full-time inspectors, before they

professional standard outlining the undertake on-site office inspections. ICAO hasrequirements for appointing reviewers, and the developed its own practice inspection mamnalconduit of reviews. Reviewers will be which gives the inspector an overview of themembers of ASCPA or the Institute of inspection process. Full-time members of staffawtered Accountants in Australia. All and technical reviewers assist in ensuringreviewers will be members currently working consiEteicy.in or recently retired fromn a practicing firm.Reviewers will be required to undergo a The assignment of inspectors is thecourse on conducting quality assurance responsibility of the director of practicereviews. ASCPA will draw up a list of inspection. Wben the initial n arereviewers from which firms will be able to made, the practitioner is asked to indicate achowse. The reviewers are not members of the preference for a full- or part-time inspector.Society's staff. Where a part-time inspector is requested, an

attempt is made to assign an inspector who hasa practice of a similar size and type of

The Institute of Chartered Accon clientde as that of the practitioner beingof Ontario (ICAO) inspected. Where possible, a part-time

inspector is not assigned to an inspection in hisThe Institute has four full-timc or her community. The name and brief resum6

inspeiors. thirty-two partime inspectors, of the assigned inspector is sent to thethree part-time inspectors and two part-time io with a letter c thedetailed reviewers. Full-time practice pt . The practioner has ten days ininspetors are members of the wstitute staff, hich to object to the proposed inspector.part-time inspectors are usually members In choosing part-tim inspectors ICAOengaged in full-time practice at a senior level. lookcs for:Part-time inspectors and reviewers serve forterms of up to five years, and undertake Amng, whoisinbetwoen ten to thirty days of inspection work i-time practice, witd a ndinimum ofeach year. There is a reasonable tun-over in three to five years emience at ainspectors, and ICAO recruits between eight senior level.and ten new inspectors each year. Interestedmembers are required to undergo a thorough Een cion sklls withscreenmg. In order to assess an applicant's particular emphasis on an ability totechical skills, a review is made during the pxiua mhsso naiiytUwJmcal ldlb a rviewis mde dringtheuse tact and diplomacy when dealinginterview of a set of financial statements and wiut fellow members.a working paper file for which the applicant isresponsible. Before being given any practiceinspections, all new inspectors undertae a Strong teadmcal proficiency inthree day training course, where they complete auditing and accounting witha difficult case study, before being given a flexibilit to adapt to varyncgone-year contract. One-day refresher courses

55


The Hong Kong Socdety of Accountants Reviewers serve for only a two-year(EKSA) term as after this period they could become

institutionalized, and lose touch with currentIn order to ensure confidentiality and developments in accounting and auditing.

independence, HKSA will be appointing twofull-time reviewers who will be members ofthe Society's staff. In Hong Kong, many The New Zealand Society ofpractitioners know each other, and most of Accountants (NZSA)them are direct competitors. It was realizedthatusing local practitioners might cause concerns NZSA has appointed two full-timeover lack of independence. To avoid this issue employees to act as Director ardand to ensure that the Society had control over DeputyDirector of the Society's Pract;cethe quality and consistency of the reviewers Review Program. In addition to the full-timework, the Society decided to employ its own members of staff, NZSA has appointed fourreviewers. These reviewers will be subject to members who will um .rtake the reviews on avery strict confidentiality requirements. Under contract basis. The Society expects that two ofthe Professional Accountants (Amendment) these will work full-tirne. All reviewers haveOrdinance, 1992, reviewers may be subject to had substantial experience in a practicinga fine of HK$100,000 (US$12,850) plus accounting firmn.imprisoment for six months if found guilty ofcontravening the security provisions.

The Chartered Association of CerffiedMembers of HKSA were particularly Accountants (ACCA)

concerned about the quality of the reviewers.To allay members' fears, the Society agreed to ACCA currently has six complianceestablish a selection panel for recruiting officers in its Practice Regulation Department,reviewers consisting of a cross-section Of and intends recruiting another three. ACCApractitioners, including smaller practitioners. has not introduced any formal staff training inThe panel's broad objective is to select review procedures. Training is on-the-job, andindividuals who have gained experience in a new compliance officer attends severalboth small and large finrns. The reviewer's monitoring visits wi;h an experienc:dpersonal characteristics will also be important compliance officer before undertaking a solobecause of the type of work involved, and the visit. The head of department undertakes apanel will exercise judgement in this area. technical review of the compliance officers

findings to ensure consistency.

The Institute of Chartered AccountantsIn Ireand (ICA) The nstitute of Chartered A

in England and Wales (ICAEW)Currently, the Institute has four full-

time reviewers, including the head of JMU has a team of forty inspectorsdepartment. All reviewers are members of the (including eight senior inspectors and fourInstitute, with substantial experience in regional controllers) and ten technicalpractice. Given the size of the country, the reviewers to assist in the monitoring process.Institte decided to appoint full-time All inspectors are full-time erployees. JMUreviewers, for greater independence. ran two three-week residential courses for new

56

Reviewes

inspectors to introduce them to the review Firm-on-Firm Reviewmethods and to ensure that they have thepersonal skills needed to undertake an Under this option, the firm beingeffective review. reviewed arranges for another qualified firm to

perform its review. This option gives the firma degree of personal assurance that the

The American Institute of Certified reviewer wiDl provide the firm with helpfulPublic Accountants (AICPA) inputs, and it gives the firn more direct

control over the cost. It can also minimizeA review may be conducted by: possible concerns over competition

fromreviewers, and reduce the danger that the* A team formed by a CPA State reviewers may use their knowledge to attempt

Society or AICPA Quality Review a merger or acquisition. State CPA societiesDivision (a coninittee appointed and AICPA maintain lists of firms interestedreview team or CAR). in performing firm reviews.

e A firm engaged by the firm under Assoiaaion Reviewreview ( a firm-on-firm review).

A firm may ask an association of CPAe An association of CPA firms that is firms of which it is a member to form its

authorized to form review teams (an review team or to assist it in finding a memberassociation review). of the association inrested and qualified to

perform its review. An association that wishesWhatever the team, the review format does not to assist its members in arranging and carryingdiffer. out quality reviews must be authorized by

AICPA.CART

When the Quality Review ProgramCommittee Appointed Review Teams was established, AICPA initially asked all

are formed randomly by accessing the database members who were partners in accountingof reviewers maintained by AICPA. The finns whether they would be interested incomputer matches a firm's specialties with becoming reviewers. Since then, AICPA hasthose of potential reviewers. The reviewers advertised in its journal for inerestedwill not be from the same geographic area as members to become reviewers. Reviewersthe firm being reviewed unless the firm must be CPAs and AICPA members with atrequests otherwise. Under this option, the least five years experience in accounting andadministrating entity is responsible for auditing. They must be good with details andselecting the review team. If there are have excellent conmunication and peopleadequate reasons, however, the firm being skills. AICPA has found that members whoreviewed may reject the chosen reviewers. have successful practices are good reviewers.Once the review team is chosen, the firm AICPA does not use full-time reviewers orbeing reviewed is asked to sign an agreement academics as it feels tby are out of twuch withletter which includes an estimate of the current developments in practice. AICPA hasnumber of hours to perform the review and a bank of some 7,000 reviiewers of whomthe billing rate of the reviewers. Rates are set about 50 pert were used during 1991. Newby the administering entity, not the reviewer. reviewers attend a two day introductoyThis type of team gives the firm the course; an annual one day refresher course isopporunity to get a cross-section of ideas held for existing reviewers.from several CPA firms.

57

Quality Review Schemes fbr Auditors in SSA

The Office of the Inspector Genea headquaters staff provide policy, proceduraland technial guidance to the regional staff.

All reviews are caried out by full- Meetings are held once a year with alltim auditors in the regional offices of the headquaters and regional staff to discussInspector General. To help ensue consistency, problems that have arisen during the year.

58

Annex D: The Review Process

The Austrlian Society of Certifled quality controls. Although documentation isPractising Accountants (ASCPA) strongly recommended by ICAO, the cost of

imposing documentation in all cases is seen toUntil the confidentiality issue is exceed the benefits. The number of files

resolved, the review will primarily be based inspected is based on guidelines established byon the Society's standards 'Statement of the Practice Inspection Committee. TheQuality Control Standards' and 'Quality specific files inspected are determined by theControl Policies and Procedures', as they inspector.relate to the practice as a whole as well asother specific standards that relate to The inspector will have an initialindividual areas of public practice. Once meeting with the practicing unit'saccess to working papers is available, the representative to explain the objectives of thereviewer will undertake an inspection of a program and the details of the inspection visit.sample of working files. Where reviews result The inpector will review financial statementin an unsatisfactory finding, remedial action presentation, performance of audit and non-will be recommended, and the practitioner will audit engagements, the quality control systemsbe subject to a re-review. Where serious of the firm, and its staffing. The inspector willdeficiencies are found further disciplinary undertake compliance tests to see whether theprocedures will be undertaken. unit's quality controls are sufficient. Where

quality controls are insufficiently documented,each practicing member is considered

The Institute of Chartered Accountants separately. The number of current engagementof Ontario (ICAO) files to be reviewed will depend on the results

of the compliance tests and the number of

All members in an office are inspected nxeibers.at the same time. The practicing unit is given On completion of the visit, theat least thirty days written notice of theinspection. Before the inspection, a ispector prepares a draft report of findingsquestionnaire is sent to the practicing uni together wth any suggestions forrequesting basic data, including an outline of improvement, and discusses them with theits quality controls. Tbe progn for the visit member. The member's comments are addedits quaeltyped from the information in the to the report. The inspector advises thequestionnaire. Wfen an inspection is being member of the recommendation that will beqsranged, the inspectee is given the made to the Practice Inspection Committee. Ifoppoturndty to indicate a preference for a ftll the unit agrees with the findings, any intent to

opportutytorindicate anspreferetor Noal ful remedy the deficiency is also recorded. Theor part-time practice inspector. National firms isetrcnrcmedta:()n utetend to prefer the Istitute's full-time pactice sPector can recormend thate (a) no fibeherinspectors. Many firms will have established action be taken; () the member shouId be repolicies and procedures for maintenance of inspected in one year to see whether thestandards. The inspctor will assess these to problems identified have been rectified; or (c)determine the number of engagement fes to the member should be reported to thereviewr The munber to be reviewed can be Institute's Professional Conduct Committee.reduced if quaT r controls are in ple; thee During the visit, the inspector also makes anis no requirement for a member to docuent assessment of the offce's thority to train

59


students. An average inspection for a sole independent investigation. In the vast majoritypractitioner takes an inspector one day, and of cases, no further action is required. Onfor a larger firm, two inspectors will spend completion of this process, the Director of theabout one and a half weeks. For small firms Practice Inspection Program writes to theor part-time practitioners, ICAO may member with the decision of the Comnittee.undertake an off-site desk inspection after The practice inspection program is separatereviewing the firm's list of clients. from the Institute's disciplinary process. The

Practice Inspection Conunittee is not a tribunalWithin a week of completing the work and does not impose sanctions. Its role is to

the inspector will send the material to ICAO. help protect the public interest throughA copy of the report is sent to the member education. Only when the Practice Inspectionwho has twenty-one days to review the report Committee finds that the professionaland make any additional comments. The competence of a member is in doubt does itinspector prepares a final report in the light of refer the matter to the Professional Conductthe comments made by the practicing unit. Committee. Since the practice inspectionAfter any additional comments by the process is investigative, not a tribunalpracticing unit have been received (or the requiring a hearing and not resulting intwenty-one day period has elapsed) the possible sanctions, there is no appeal process.inspection file and report are reviewed indetail by one of the full-time practice The name of the practicing unit is keptinspectors or part-time detailed reviewers to from the Practice Inspection Committee.ensure consistency. As a result of a detailed When an inspection has been reviewed, and noreview, items may be considered for addition further action is required, all inspectionor deletion. Changes will only take place after material is destroyed. The only data retainedconsultation with the inspector. Where is evidence that an inspection took place, andadditions or deletions are made, the inspector that no further action was required. Wherewill contact the practicing unit to review the further action is required, the files are retainedpoints raised and obtain conments. After the for as long as necessary. The whole processdetailed review, the report and file are given can take up to six months. Any problems cana final review by at least one member of the be followed up by the Institute's PracticePractice Inspection Committee who Advisory Service which can assist members torecommends the action the Committee should make any necessary improvements. If notake. improvement is made, the Comnittee will

refer the member to the Professional ConductWhere there is a recommendation for Committee.

re-inspection or referral to the ProfessionalConduct Cormnittee, the file is sent to asecond comnmittee member for a further The Hong Kong Society of Accountantsrecommendation. The report is presented to (HKSA)the Practice Inspection Committee. Where theConmittee determines that a significant Every accouuning firm, part-time, soleimprovrement is needed, it may decide that re- proprietor or partnership is considered ainspection is required within one year. If practice unit. All partners in a practice unithowever, the Conmiittee fnds that failure to active in carrying out audits are reviewed atmaintain professional standards is sufficiently the same time. A practice unit is reviewedserious, the Comnnittee will report the member every four years. The ptupose of Practiceto the Professional Conduct Committee for its Review is to ensure that the audit has been

60

The Review Process

carried out in accordance with Auditing reviewer has assessed that these controls doStandards and Guidelines. operate effectively are the working papers

reviewed to establish that the appropriate testsPractice review is intended to be have been performed, and that (from the

educational and to help practicing members evidence on file) a valid conclusion andimprove their professional standards. It is not opinion has been reached. Once the review hasthe intention to challenge the auditor's been completed, the reviewer evaluates thejudgement over the audit conclusions reached. eleven control areas that HKSA has identified.Tax and other records are not reviewed. Thefirm may remove from the audit file anydocuments considered non-essential for audit The reviewer writes a report on thepurposes. The files are selected by the findings of the review. The draft report will bereviewer from a coded client list provided by presented to the practice unit, and thethe practice unit. Firms found to be practitioner has the opportunity of commentingunsatisfactory are subject to a follow-up on it and discussing with the reviewer anyreview six to twelve months after the initial points raised, before the report is made final.review. The report contains a summary of the

reviewer's findings, suggestions andThe Registrar makes an annual random recommendations, any corrective action

seection of practice units to be reviewed. Six required, and the conunents, if any, of theweeks before the review is scheduled, the practice unit. If the unit disagrees with thepractice unit is asked to complete and return a findings, its views are taken into considerationPractice Profile Questionnaire giving basic by the Practice Review Committee. The reportdata about the practice and an Intenal Control is then submitted, having been duly renderedQuestionnaire which covers the controls and anonymous and coded, to a Practice Reviewaudit procedures of the practice. The practice Conmnittee. The anonymous reports areunit is given two weeks notice of the audit maintained separately from the practice unit'sfiles that will be selected. The selection is other files within the Society.made by the Practice Review Director fromthe dient list provided by the practice unit. The Practice Review Committee isThe reviewer visits the practice unit andI appointed by Council. The Committeereviews the administrative and enviromental recommends to the Council policiesaspects of the practice and selected audit files. concerning Practice Review, monitor theThe number of files to be reviewed will operation and effectiveness of the system,depend upon the degree of reliance, if any, consider the reviewers' reports, and determinethat can be placed on the internal quality cases that warrant follow-up review and casescontrols and the size of the practice unit. that should be reported to the Council. The

Practice Review Committee may:It is expected that one file per partner

will be selected for review, and that a sample * If a report is wholly satisfactory,of about four files per practice unit will form agree with the reviewer's findings a;.dthe basis of the substantive tests on files. The approve the report for issue to thereviewer does not expect to see the same level firm.of iernal control in a small firm as in a largefirm. The reviewer performs a compliance test * When recomendations are made.of selected audit fies to establish that the audit consult with the firm through thecontrol procedures operate. Only when the reviewer to agree the implemnentation

61


of the improvements and approve the and the size of the practice. If the reviewerreport for issue. finds that reliance on internal controls is

possible, at least one audit and one non-audit* If it considers the deflcit.'cies or non- file per partner will be selected to test that the

adherence to standards significant, controls are being consistently adhered todirect that a follow-up review take throughout the firm. If the reviewer decidesplace no earlier than six months after not to place reliance on quality controls, fourthe unsatisfactory review. files of limited companies and one non-audit

file for each member with signing* If there is indication of fraud, responsibility will be reviewed. If reliance is

misrepresentation or flagrant disregard placed on the internal quality controls, theof standards or where a follow-up nmber of files selected for review may bereview reveals inability or less.unwillingness to take corrective actionpreviously indicated, refer the case to On comnpletion of the review, thethe Society's Council. reviewer will go through all the queries with

the member concerned. The reviewer will holdExcept in cases of serious professional a wrap-up meeting to explain what was found,miisconduct, no punitive action is taken against and ask for comments. At the conclusion ofany mernber for a first offence, as the the review, the reviewer prepares a draftobjectives of Practice Review are educational. report including any suggestions andEighty-five percent of the Society's practicing recommendations for improvement. Themembers are sole practidoners, and the review findings are discussed with the memberSociety estmates that the reviews will take one and the member's comments are included inday to complete. the report. The reviewer will issue the

completed report which is sent to the memberfor fiuther comment. The report of the

The Institute of Chartered Accountants reviewer and the member's comments arein Ihland (ICAI) considered by the Institute's Practice Review

Committee. The Committee may recommendA member is selected at random, and that: (a) no further action be taken; (b) the

a letter is sent to the member about the member needs to improve in certain areas andreview. Two weeks after the letter has been that a letter is required confirming the actionsent, the Head of the Practice Review Program that wi0 be talen to achieve this; (c) a follow-will telephone the member to obtain ftuther up visit will be needed; or (d) the case shoulddetails about the firm, and arrange a suitable be referred to the Institute's Investigationsdate for the review (normally in about six to Cdmmittee. A letter is sent to the thumbereight weeks time). The Head of the Practice detailing the recommendaions of theReview Program provides the reviewer with a Committee.background note on the member and fim In persuading members to accept theidentifying the tye of clients the member has review program, ICAI emphasized theand the size of the firm. confidentiality of the review process. All

The reviewer will spend the fis part reviews are given a confidential nuw;bar, andof the meeting with the member explaining the when they are considered by the Committee,review process, and discussing the infonnation neither the memnber's nor the firm's nme issubmitted in the questionnaire. The number of divulged. If the member has a clean review,current engagement files reviewed will depend and no fuirther action has been recommended,on the reliance placed on the intemal controls all documents are destroyed. Only the final

62

The Review Prcs

letter to the member is kept on file. In The report is finalized by the reviewercarrying out inspecdons, the Isitute has and a copy is forwarded to the practidoner forfound Inadequate documentation to be the further comment. The practitioner has ten day.greatest problem. In most of the caes the in which to reply. The report is thenreviewes have found that this is because considered by the Society's Practice Reviewpractitioners are not writing down the Boad. The Board may recommend: (a) noinformation, rather than not carrying out the further action; (b) that a declaration ofwork. compliance with stundards is required within

six mondts; (c) that there should be a follow-up review within a year; or (d) that the matter

The New Zealand Society of should be referred to the InvestigationAccoutants (NZSA) Committee. The Society has agreed that there

will be no referrals to the InvestigationThe main purpose of Practice Review Committee in the fist cycle of reviews until at

is to esre that all chartered accounants in least one follow-up review has taken place.practice are maintaining an appropriate levelof professional standards in the performance of The Society has taken a nmmber oftheir accntng and auditing stadads. This steps to ensure confidentiality. All reviewersis achieved through examinig a cross-section are required to sign a dedaration ofof current engagement files in every practice. confidentiality. The idendty of the practidonerAll puarts arereviewed at the sam time.In being reviewed is kept from the Practicethe first part of the visit, the reviewer Review Board. Once the review is complete,discusses with the practitione, thc da all the records relating to clients aresubmitted to the Society in the information destroyed, even though they are anonymous.questionmaire. If, after this discussion, the The only information retained are details onreviewer determines that reliance can be the pracdtc and the result of the review.placed on the intemal controls, at least oneaudit, one compilation and one review file perparmer are reviewed to test the controls. If the The Chartered Association of Certifiedrviewer decides not to place any reliance on Accountants (ACCA)the internal controls, about four files perpartner are seected for substantive testing. For audit reguladon purposes, the

monitoring visit reviews the individual's orAfter the review has been completed, firm's eligibility for registration and the

the reviewer prepares a draft report which is procedures and controls within the practice todiscussed with the practitioner or partners in ensure that audit work is carried out properlythe practice. The report may include and with integrity. In particular, thesuggestionsand recommendations to improve compliance officers inspect professionalstandards. It may also include a ls of indbemnity insurance documents, arrangementsdeficiencies in financial statement presentadon, for continuity of practice (where appropriate),performance of audit engagements, and records of continuing profasional

formc of compilaton mens and education. Quality control proceduresperformac of review engagements. As a governing ethics and independence,resut of the discussion, the reviewer may maintenance of technical skdlls andamend or delete some of the findigs. The competence, and the approach to audit workpartner has the opportunity to have comments are also examined. The compliance officersrecorded. inspect a selection of completed audits to

63

Quality Review Sdcemes for Auditors in SSA

enure tha the 'Auditors Operational ACCA intends to visit all registeredStandard' has been followed and that the work auditors once every five years, and in theperformed and recorded supports the auJit irnerests of efficiency combined audit andopinion. The majority of practicing menbers investment business visits are undertakenare either mole practitioners or partners in where appropriate. In the case of firmssmall finns. The review process has therefore authorized to conduct investment business,to be suitable for the type of firm being compliance officers also review the firms'sreviewed, and the sophistication of a large procedures for ensuring compliance with thefirm is not expected of a small firm. Although 'Investment Business Rules' and examine aACCA is tough on seeking adherence to selection of relevant files. Under the Financialauditin sandards, i is reasonably flexible on Services Act, ACCA has some 1,065 firmstheir implemnetation. which are authorized. To date, ACCA has

visited over 800 of these firms. Under theSome four to six weeks before the Companies Act ACCA will visit some 3,000

visit, the Practice Regulation Departnent finrs. The average length of a visit for a smallsends the member a Pre-Visit Questionnaire to firm will be one day. Since the relevantcomplete. At the conclusion of the visit, the section of the Companies Act only came intocompliance officer brings to the attention of effect on October 1, 1991, it is too early tothe practitioner all matters arising including draw any conclusions on the success of theany unsatisfactory findings. The findings of visits, and the problems the compliancethe visit are discussed at the time with the officers will find. The compliance officerspractitioner to ensure factual accuracy. No expect that the biggest problem they will comeoverll conclusion, however, is expressed until across to be failure to document informationthe monitoring report has been received. and the consequent lack of data to support theWhere appropriate, objectives and a timetable audit opinion. The compliance officer willfor corrective action will be agreed and have to investigate further to ascertain whethersubsequently confirmed in writing. After the this is a simple recording problem or a morevisit, the compliance officer prepares a letter serious audit problem. Although a monitoringveporting on the visit and this is reviewed by visit must confirm that rles are compliedanother mmber of the Practice Regulation with, equally important will be the advisoryDepartment before being sent to the role of the Compliance Officer by providing,practitioner. The review is intended both as a an opportunity for an independent review of aquality control measure and to ensure sole practitioner's work. The reviewer will beconsistency. There should not br any matters someone with whom a practitioner can discussof significance in the leter which the worries and concerns and reduce professionalpractitioner receives, which were not brought isolation.to his or her attention during the visit. Allbreaches of the regulations, deficiencies inquality control or audit work, and other The Institute of Chartered Accountantsmatters requirn attertion are recorded in the in England and Wales (ICAEW)report. The findings of the compliance officerand the comments of the practitioner are then Before the visit, a questionnaire is sentconsidered by the Authorization Committee to the firm. This is required to be returnedwhich is responsible for the issue of within twenty-one days. The number ofinvestment business certificates and monitoring inspectors for each review depends on the sizecompliance.

64

The Review Proceu

of the firm. For snall firms, only one made, or may seek written conformation frominspector is needed for the review. A senior the firm of the steps taken to achieve theinspector however, attends the closing undertakings. If a firm does not agree with themeeting, and take notes. A review normally decision of ARC, it may apply to the Reviewtakes one and a half days for the office, plus Commnittee for a rehearing.one day for each responsible individual (anindividual authorized by the firm to sign audit The American Instkute of Certedreports). The Inspector reviews about three Public Accountants (AICPA)files for each responsible individual, and looksat the capability, independence and integrity of In its own interest, the professionthe firm. took steps to maintain and improve the quality

of accounting and auditing services providedThere is a meeting at the end of the by AICPA members. As experience had

review. The practicing firm is requlired to send shown that complaint-based systems were notto JMU a report detailing the findings of the effective, theCouncil of AICPA recomnmendeddosing meeting, and the action that has been that the profession adopt a practice monitoringagreed. After the review, the senior inspector requirement. The Council maintained that itsends the findings to the regional controller was ber for a practice to find out that it hadwho reviews them for consistency among the problems in a review, than in court. AICPAreviews in the region. The findings are then has three different review programs:sent to JMU Headquarters where the review isscrutinized by a technical reviewer whose role . The Securities Exchange Commissionis to ensure technical competence and (SEC) Practice Section peer reviewconsistency. The Head of JMU undertakes one progTam (SECPS) for fims whichfinal review before the report is considered by audit one or more SEC clirms.the Audit Registration Committee. JMUreports only ethical breaches to ICAEW. * The Private Companies Practice

Secdon (PCPS).The Audit Registration Connmittee

(ARC) is made up of members of the Institute . The AICPA Quality Review Programand four independent non-accountant (QRP).members. It considers all applications forregistration. It is the responsibility of ARC, Qalt Rev.ewnot JMU, to make a decision on a firm'sregistration. A key area the Committee looks During the last quarter of each year,at is the firm's conpetence to undertake adit the managing partner or owner of a CPA firmwork. Where the Conmmittee believes that it is contacted by the participatng state CPAneeds more information before registering or society or AICPA. Each firm is asked torefusing to register a firm, it may ask JMU to complete a request for scheduling, and statecarry out a pre-registration visit. In making a whether it performs accounting or auditingdecision, ARC considers the JMU report, the egagements and the areas in which itclosing meeting notes, and any coninments the practices. Before the review, it is importantfirm may wish to make on the JMU report and that the tiE is mady and AICPA provides aits ronmendations. Where a fim is required cheddist of the steps the firm should taketo give undertakdngs on imnprovements, ARC before the review team arrives. Beforemay ask JMU to undertake a follow-up visit to carryng out a review the firm will complete aconfirm that the ipmrovements have been

65


quesdonndre(s) outlining its quality control objectives are applicable to thepolicies and procedures. The review twan reviewed firm's practice.captain and the fim agree on the reviewperiod to be covered. The review period * Whether the reviewed firm compliedshould cover one year and should generally be widi its quality control policies andwithin three to five months of the date of the procedures during the year underreview. For firms with more than one office, review to -the extent necessary tothe revieing team will vsit a cross-section of provide the frm with reasonablete firm's accountrig and auditing pralctie. assurance of confonning with profies

sional standards.In selecting files to review, the teamn

review all the services provided including * Whether the reviewed firm compliedaudits, reviews, and compilations of historical with the membership requirements ofand prospective fmancial infornation. To PCPS and/or SECPS (Division forassist in making the sdection the team captain CPA Firm members only).obtains a listing of the firm's clients, the typeof services provided, the type of industries For each engagement reviewed, theserved by those clients, and the size of the review team must decide from its review ofengagements. Depending on the type of the engagement working papers andreview, SECPS, PCPS or QRP, AICPA has representations from the reviewed firm'slaid down guidelines on the type of personnel whether anything caused it toengagements that must be reviewed. The team beieve that the:captain malces a preliminary selection beforethe review so that the reviewed firm can * Financial statements were notgather the files before the review; additional presented in all material respects inengagements are selected afRer the remiew team accordance with generally acceptedarnves. acconting principles.

AICPA has identified mnne areas that * Firm did not have a reasonable basisshould be covered by a quality control system: under the applicable professionalindependence; consultation; assigning standards for the report issued.persomel to engagements; supervision; hiring;professional development; adn ; * Docwntation on the engagement didacceptance and continance of clients; and not support the report issued.inspection. Although a reviewer may notactually test all nine elements of quality * Firm did not comply with its qualitycontrol, a firm is sdll required to address each control policies and procedures in allof these issues. In reviewing a small firm, the material respects (AICPA 1991).reviewer will not expect to see the samedetailed policies and procedures that wiUl be The reviewer will look atfod in a large firm. The objectives of docentation regarding the resolution ofrevewig eggements are to obtain evidence independence questions and will expect to seeof the following: that annual independence representations are

obtained from the professionals in the firm.* Whether the reviewed fium's quality The reviewer will check the forms and

control system for its accountng and manuals used in carrying out engagments toauditing practice met the objectives of see that they ar appropriate and curt. Thequality control standards established reviewer will discuss some of the moreby AICPA to the exent that such difficult enggements, find out whether outside

66

The Review Proc.s

sources were consulted and read memos on To ensure consistency, AICPA stdaffsoame of these consultations. The reviewer will undertake a technical exination of thecheck the library and CPE records. With reviewers findings before the Peer or Qualityrespect to the other elemerts of quality Review Committee reviews the case. The Peercontrol; hiring, assigning personnel, or Quality Review Division also attends aadvancement, acceptance, and continuance of random selection of one to two percent of thedients, the reviewer will read the responses in reviews and runs a national conference forthe questionnaire. In the absence of significant Peer and Quality Review Chairmen of CPAor pervasive deficiencies in the engagements State Societies. Although peer and qualityreviewed, a smaller firm's quality control reviews have pinpointed important areas ofsystem however informal is apparently improvement for most firms, overal quality inadequate and working because the objective of the vast majority of firms provided reasonablequality control standards - conformity with assurance that their accounting and auditingprofessional standards is being achieved. engagements conform to professional

sandards. The lessons peer and qualityAt the end of the review, an exit reviews have provided have helped firms

conference is held where the team captain improve the quality of their accounting anddiscusses the findings of the team with the auditing services.firm. Within thirty days of the exitconference, the team is required to prepare awritten report and letter of comments. A The Offi'ce of the Inspector Generalreview team may issue an unqualified orqualified report. The firm provides a written The Office of the Inspector Generalreport and letter of comments in response to has produced detailed review guides for thethe review team's findings. The quality review Uniform Quality Control Review and theprogram is intended to be both positive and Uniform Desk Review. Reviews areremedial, and a likely action that reviewers undertaken of audits of Federal activitiesmay recommend is that members are required performed by independent public accountantsto take CPE courses. After the report, a letter or non-Federal government auditors. Briefly,of comments and letter of response are the reviewer will look at a number of areassubmitted by the reviewed firm and, after the including: (a) whether the adit was carriedapplicable working papers are submitted by out in accordance with the Single Audit Act ofthe team captain, a technical review is 1984 andlor OMB Circular A-128, generallyundertaken. The technical reviewer checks the accepted audited standards and Governmentwork of the review team to see if all problems Auditing Standards; (b) the auditor'shave been clearly identified. The peer or qualifications, independence and level ofquality review documents are then submitted professional care; and (c) the standard of theto the applicable report acceptance body planning, supervision, workdng papers, and(RAB) which considers whether the review has intemal control strures (OMB 1987).been carried out in accordance with theapplicable standards. It also considers whether The reviewer can make one of threeany additional corrective action should be recommendations, that the audit is: (a)carried out, and monitors all corrective action acceptable, and requires no or only minorcarried out by the firm. If firms refuse to corrections; (b) substandard and requires thecooperate, or in situations in which corrective correction of one or more major auditaction is not adequate or where the deficiencies; or (c) significanly inadequate andpractitioner's work is fraudulent. discplinarY should be considered for referral. Theaction will be taken. reviewer may recomnend that follow-up audit

67


work should be carried out. In addition, the undertaken by unqualified personnel,desk reviewer may recommend that a quality insufficient working paper documentation orcontrol review should be scheduled. Over 85 work performed departing from generallypercent of OIG reports are issued without accepted govermnent auditing standards.) OIGchange or with minor changes. Only a very has found that state or local auditors performsmall percentage of the reviews (less than 3 considerably better than independent publicpercent) revealed significant inadequacies. accountants as they are more familiar with the(Significant inadequacies would include audits audit requirements.

68

Annex E: Education and Reaction ofMembers

The Australan Socidety of Cerdfied Service. The inspections have identifiedPractising Accountants (ASCPA) weaknsses at an early stage which members

have been able to rectify before they haveThe Society will not intoduce its become serious problems. The stitute finds

Quality Assurance Program until 1993. It is that because of the assistance offered throughtoo early to say what will be the reaction of its practice inspection program, it can reducemembers. The Societv has kept its members the volume of disciplinary cases againstinformed about the program through articles in members. By having all members in practicethe ASCPA Journal, production of an conform to a single standard, ICAO hopes toexplanatory booklet, professional development increase public confidence in the quality of itsseminars, and the. introduction of a module on members' services, mininize governmentquality assurance in the pubtic practice intervention in the regulatory process andprogram. enhance public relations.

After the inspection deails have beenThe Institute of Chartered Accountants confinned, a survey is sent to the inspectee.of Ontario (ICAO) -is survey, which can be completed

anonymously, is designed to monitor the

Iitially there was some hoslity from peformance and progress of the inspectionmembers, especally from small practitioners program- The results of the proglam havewho felt threatened by the program. The helped the Institute's ProfessionalInstitute emphasized the educational benefits of Development Committee in designing orthe program and tis helped alleviate the strengthening courses for members. ICAO hasconcerns. Ihe Istitute had previously reported to the Auditg and Accontingestablished a practice advisory service, which Stndards Committee of CICA areas whereprovided expert advice on a wide range of members are experiencing difficulties inmatters on a no-cost, confideat basis. his understanig and complying with standards.established trust between members and the Today the program is well received byInstitute and eased the introduction of practice members, who find the reviews beneficial.inspection. There was some criticism thatpractice inspection was unfair in that memberswhose weaknesses are brought to light as a The Hong Kong Socty of Accoresult of a complaint are subject to the full (iSA)disciplinary procedures, whereas weakessesdiscovered through practice inspection HKSA has held workshops to educategenerally only result in a re-inspection. members. The workshops which started in

June 1991 last for half a day, and haveInspectors can assist members to approximately thirty participants. The format

maintain professional standards, and may is a mixture of lecture presentation of thesuggest that members seek further assistance scheme and discussion group case sudy workfm the Institute's (free) Practice Advisory dealing with practical problems of document-

69


ing and evaluatng a firm's systems. The On the matter of internal confidendality, theSociety has published a workshop manual, and Society agreed to code all files relating to awill be running on-going training programs for practice unit. The identity will only benew practitioners. Members expressed concern revealed to the Practice Review Committeeover whether the introduction of the Practice should the practice unit dispute theReview Program could be interpreted by the reconmendations of the Comnmittee or shouldpublic and governent as meaning that follow-up action be required when the practiceprofessional standards are lower in Hong Kong unit does not take steps to rectify deficienciesthan in other countries. The Society pointed noted by the Committee. All detailed files willout existing schemes, and the interest of IFAC be destroyed after completion of the reviewin this matter. By adopting Practice Review, process. It is too early to say what the benefitsHong Kong can show that it is at the forefront will be. HKSA hopes that they will improveof the profession. The Council advised its the image of menbers of the Society.members that self-regulation was preferable togovernment regulation.

The Institute of Chartered AccountantsOne area of concem to members of in Ireland (CAC)

HKSA was the possible breach of the duty ofconfidentiality that members owe to their Brochums explaining Practice Reviewclients by revealing audit files to reviewers. were sent to all members in practice. InMembers also raised the potential problem that addition, a number of members' meetingsmay arise should a riewer, having gained were held to launch the scheme. In persuadingconidential infomation, leave the Socidety and members to accept the review program ICAItake this information to be used to unfair empasized the confidentialiq of die reviewadvantage. The security of the information process. To enable ICAI to monitor reaction towithin the Society and the keeping the identity the reviews, members are given a briefof the firm anonymous during deliberations of questionnaire to complete. The results of thesethe Practice Review Committee was also quesdonnaires have shown that most membersquestioned. see the reviews as a positive exercise from

which they have benefitted. ICAI will start itsTle Council of the Society is aware Of second cycle of practice reviews in 1992, and

the need for confidentiality. All the individuals it expects to be looking for higher standardsinvolved in Practice Review are members of frn its members.HKSA and are bound by the Statements ofProfessional Ethics with regard toconfidetity. There is legal precedent in The New Zealand Society ofHong Kong to show that in complying with AceoXXts (NZSA)professional rules, a professional will not bebreaching a confidence if he or she discloses The Society inrduced Practiceinformation respecfting a client's affairs to a The Society in t acticecommittee or agent of the concerned Review in 1990. The Society spent almost twoprofessionalmbody To counter the problemof years considering the introduction of itsa rviewr leaving the Society and using the prowm. Three information booklets werearewela ving the Society proposed ug - sent to members and discussed at lengdtinformation, the S ety to an thubgh local group meetings. A small number

amenmentto its enabling legislaton to make o rciinr eitdtervesbit an offence for the reviewer to reveal of practoners resisted the reniews by raisindgconfidential inomation except when rekiird conens over client confidentalty, and theby law. The Society reassured wnequieds t right of the Society to have access to clientbly lawTet Society filaswould be reviewed, records. Once the Practice Umt pointed outonly completed audit files wouldbereviewd that the Rules and the Act contain the

70

Education and Reaction of Member

horit needed, and that each reviewer is President of the Board of Trade for the yearrequired to sign a declaration of ending September 30, 1992. The report stae:confidentiality, the concerns vanished. " The experience of the first 300 monitoring

visits suggests that the advent of auditFor some members, the Practice regulation has already led to significant

Review progran has been traumatic. This is iWrovement in the quality of audit workthe firt time they have had their work carried out by firms registered by theexamined. Once members have understood Asociation. The standards observed duringthat the Reviewers' role is educational, the the first year, particularly in the area ofmajority have welcomed the potmuity to recording of audit work, have varied fromdiscuss profeisional matters with an very poor to excellent. However, probablyindependent third party. A feature of the because of the certainty of monitoring, mostSociety's Practice Review program is that firms visited have been found to be in thepractitioners are asked to complete an course of a major overhaul of their auditevaluation of the reviewer and the review procedures, documentation and controls.process. Although less than 18 percent Wherever possible, the opportunity has boencomplete these, the results show that most taken to provide constructive advice and topractitionrs reviewed believe they have help with the process of improvement alreadybenefitted from the process. In addition, those under way. The Association expects that,who were skeptical of the educational value of through a combination of guidance and athe review beforehand, felt afkerwards that progressive tightening of enforcementthey had learnt something of value from it. procedures, the existing regulatory

arrangents wll achieve a mujor andAlthough not the purpose of the continmg improvement in standards" (ACCA

review, the Society has been able to ue the 1992).reviews to help improve practic management.Reviewers common across a vanety ofdifferent mnagemen and file systems and are The Instite of Chartered Accountantable to pass on best practice. In addition, the in England and Wales (ICAEW)Society publishes a number of standardcheclists, program and worksheets which it ICAEW, through its 'Audit News' andcan distribute to auditing firms needg 'Audit Regulations and Guidance' bookletsassistance. Many members have taken keeps its practitioners up-to-date with the

advnage of the information available. requirem o' the Companies Act and thereview process. The Institute has alsopublished articles in its journal to firther

The Chartered Assocaion of Certfied explain the process. JMU has participated incountants (ACCA) p=tations, discussions, articles, and in

consulting and advising firms, local soctiesACCA has isud a number of and taiing groups. It also handles daily

brochures to its members explaiig the teWephone calls frm firms seekLig help orintroducton of the review program; what it guidance. The initial reaction was mixed.will contain, and the reason why it is being Some practitioners felt that the reviews hadintroduced. ACCA has also held meetings with been introduced as a result of a few highits practicing members to explain the review profile company colapses and associatedprm. The United Kingdom Departmeat of alleged audit filures. Others welcomed theTrade and Indusry is hoping that the review reviews as a meas of weeding out the weakerprogram will raise auditing stadards. In 1992, auditors- An initial complaint, and one thatACCA issued its fist anna report to the still remains, was the cost of the review.

71


Some firms found that they neded to ments and unnecesary paperwork orintroduce new office procedures or revise their dowmentation is not required. AICPAprocedurs to meet the review requirements. regularly publishes articles in its journal onThese changes add to the time taken to peer and quality reviews and talks are given tocomplete an audit, and must be recouped from CPA societies to try to allay members feas.the client or bome by the firm.

AICPA wishes all members toOverall, the contact with JMU has led understand what they are being measured

to a greater awareness of the requirements of against and why before they have a review.the auditing standards and guidelines, and an AICPA has a number of programs that canacceptance that compliance is essential if a assist members to prepare for a review:firm wishes to retain its registration.Practitioners are taking seriously the need to * A self-study program on preparing forcomply with audit regulations, and where review.improvements are required, they areimplementing the necessary changes. * A confidential risk-free consulting

review program developed by PCPS(a reviewer visits the firm, usually for

The American Institute of CertiSed one day and undertakes a review ofPblic Accountants (AICPA) procedures and selected engagements).

When AICPA first proposed a review * A guide for performing inspectionssystem in the mid 1960s, there was much that helps firms carry out their ownopposition and the idea was dropped. In 1987, review of accounting and auditingthe AICPA Council approved a membership practice to identify matters that needballot on mandatory SECPS membership for to be corrected.firms performing audits of SEC registrants,but the proposal received insufficient votes for Conslidng Reuewits introduction and was achieved only in1990. Members contended that they did A consulting review is a confidential,quality work, and that they did nt need an high-spot one day review of quality controloutside agency to verify it. The introduction of Procedures and selected engagements thatthe quality review scheme was imposing tames place before the official review. Theanother layer of bureaucracy, especiafly for consulting review is confidential and helpful insmall firms. Many members, especially sole revealing before the review problems a firmpractitioners, fear the reviews. The cost of the might encounter. At the end of the review, thereviews, between $3,000 and $15,000 for a reviewer gives the firm an oral report andsmall firm, is also a principal complaint. makes suggestions for improvement. AICPAAICPA took this observation seriously, and offers various training courses on review. Theexplained to members that it was not the goal review process has been beneficial forof the Institute to require small firms to members. It has helped them to improve theirintoduce superfluous procedures. Of the firms' image and staff morale, quality controltwelve practitioners on the AICPA Quality procdures and systems, planing and workReview Committee, three are sole program schdUlng. Clients have norepractitioners. In reviewing the work of small confidence in a firm's professional ability,firms, the focus is on the quality of engage- knowing that it is adhering to professional

72

Education and Reaction of Members

standrd. Many members see review as the duction of the Uniform Quality Controlcomerstone of thre profession. Review. The state and local auditors and the

independent practicing accountants know thattheir reports will be reviewed by the Office of

The Offke of te Inspector General the OIG when they prepare them. The OIGhas found that most auditors want to do a good

The Office of the Inspector General job, and are willing to correct any deficienciesha not experienced problem with the intro- found.

73

Annex F: Tanzania Pilot Quality ReviewGuide for Auditors: Your Questions

Answered

What is a Quality Review? high professional standards. Independentreviews of audit and accounting practices have

1. A quality review is an independent been shown to be effective in helping firmsreview of a firm's auditing practices (The identify and correct substandard practices.word 'firm' has been used throughout toindicate all types of auditing entity. A typical 3. The International Federation ofreview would include reviewers visiting a Accountants (IFAC) encourages memberfirm, obtaining an understanding of how its bodies to introduce reviews. In Decemberquality control systems work, and testing some 1990, its Council issued an Exposure Draft ofrelevant records and files. On cc mpletion of a Proposed Statement of Policy of the Council;the review a report would be written 'Assuring the Quality of Audit and Relatedincluding, if applicable, a letter of comments Services'. The Draft asked that over a periodndicating where the fim needs improvement of time [FAC member bodies: (a) adopt or

It is not the intention of the review to develop quality control standards andchallenge the auditor's judgement over the guidance; (b) develop quality assuranceaudit condusions reached: it is a review of the programs; and (c) require finns to makework performed and whether the work improvements to quality control policies andrecorded supports the audit opinion. A quality procedures when necessary. The Draft wasreview is not a re-audit of completed audits. issued to all member bodies of IFAC forIt is a check that the systems in place are consideration, and the response was favorable.adequate. A re-audit can only provide The Draft was considered by the Council ofassurance that a particular audit has been IFAC in May 1992, and a final Statement ofcarried out satisfactorily. It does not provide Policy was issued by the Council.assurance that future audits would beacceptable.

What is the Purpoe of a Quality2. The concept of review of auditors first Review?arose in the 1960s and 1970s in the UnitedStates when there was widespread scrutiny of 4. A quality review ascertains whether anthe practicing accounting profession. In 1969 auditor's system of quality control providesthe American lnstitute of Certified Public reonable assurance of conforming withAccountants (AICPA) recommended that a professional standards. A quality reviewscheme be set up to provide accong firms should result in increased user confidence inwith an opportumity to have objective cross- the reliability of financial statements, as thereviews of their auditing work. Since then user can be assured that the auditors haveCanada, Hong Kong, reland, New Zealand adhered to professional standards. A qualitand more recently Austalia, France and the review can also identify weaknesses in theUnited Kingdom have decided to introduce audit process and so provide technicalsimilar schmes. The main purpose of a assistance to aid professional development.review scheme is to test whether auditors are One advantage of the schemes in the countriesdoing their jobs properly and are observing that have already adopted them has been the

75


educational benefit. It is a learrnng experience * Compliance with auditing standards.for the practicing accontant. The reviewshave drawn attention to problems which the * Audit planning, including assigrnentauditor has been able to address. of personnel.

S. The National Board of Accountants * Accounting and auditing hours andand Auditors (NBAA) is a member of IFAC. client lists to ensure that there is notThe Board of NBAA is considering the over programming, and that the workintroduction of a review scheme for auditors. is fairly distributed between theUnder the Bank financed Financial and Legal parters.Management Upgrading Project (FILMUP)funding will be provided for technical * The client list to see whether there isassistance to help NBAA introduce its review over-reliance on one client, or whetherscheme. Your participation in this pilot there are dient debts.exercise will assist NBAA in deciding whatform its review exercise should take. It will * CPE, audit manuals and otheralso prepare you for a NBAA review. documentation.

0 Consultation with partners or otherWhat Does a Qualiy Review Involve? experts.

6. A meeting will be held between the * Hiring and advancement.reviewers and the senior partner(The word'partner' has been used throughout to indicate * Acceptance and continuae.'practitioner', 'partner' or 'director.' toexplain the objectives of review, the details of The reviewers will be looking to see whetherthe review process and to discuss the the audit has been carried wut in accordanceinformation submitted in the questionnaire (see with auditing standards and guidelines and thatparagraph 12). The reviewers will assess first there is adequate documentation to support thethe level of quality controls in place. The opinion of the auditor. It is nor the intendonreviewers will not expect to see the same level of the reWiews to calenge the opinion of theof quality controls in a small firm as in a large audtor. The review will place in earlyfirm. For the purpose of the pilot review the Febmary and will last no more than two daysreviewers will just look at audit engagements, per firm. You are welcome to observe thethey will not review non audit engagements. work of the reviewers. If you are unclear onThe number of files to be reviewed may be any part of the process the reviewers will bereduced if adequate quality controls are in pleased to answer your questions.place.

7. The reviewers will look at: Who Wil Undertake the Review?

The indepedence of the auditor, and 8. The TaskManager for the reviews willwhat is done to ensure inddence be Mrs. SoniaJohnson. In addition, there will

be four reviewers, IMir. Colin Lyle, FCA,The number of staff employed, their Senior Accounting and Auditing Specialist,qualifications, and staff supervision. Mrs. Judy Makanda, ACA, AccounDi dnd

76

Guide for Auditors

Auditing Specialist, Mrs. Mercy Sabai, only completed audit files will be reviewed, soCPA(T) of the Bank and a consultant with it is less likely that sensitive information willexperience of undertaking quality reviews. be revealed to the reviewers.The National Board of Accountats andAuditors (NBAA) will have a representativeobserving the review process. What WIl Happen After I Have Been

Reviewed?

What Information Will I Have to 11. After the review there will be aProvlde? meeting to discuss the findings, and any

suggestions made to improve working9. So that the reviewers have a profile of methods. If there are any suggr ;ions foryour firm before they visit Tanzania you improvements these will be agreed with you.should complete the attached questionnaire and The reviewers will help you draw up a timedretum it to NBAA by December 15, 1992. action plan for improvement. This will beThis will provide the Bank with basic your opportunity to discuss with the reviewersinformation about the finn and its internal your reaction to the review process and tocontrols and audit procedures. You are not make any suggestions as to how it can berequired to provide lengthy replies. A few improved. NBAA has agreed that nocomnents however, will be very helpful and disciplinary action will be taken against anywill reduce the amount of time the reviewer member, as a result of any deficiencies foundwill have to spend with you. At the same time during the pilot reviews. Members will beNBAA will ask you to provide a list of clients, given a year to improve before beingwith an indication of the responsible partner. reassessed by NBAA.From this list three to four files wiU beselected. You wili be infonned of two of 12. The reviewers will prepare a writtenthese in advance of the review, and one to two report after the review. The report willwhen the review takes place. In addition to contain a sumniary of the reviewers' fndingsthe above ther is attached a list of material and suggestions for improvements, and yourwhich you should make available during the cormnents, if any. This will be sent to youreview. for your information and comments. The final

report, which will include your responses, willbe sent to you and to NBAA which will follow

How Will the Confidentiaity of Client up on any suggestions made by the reviewers.Files be Ensured?

10. All reviewers are nembers of 13. As mentioned earlier the purpose ofprofessional accounting bodies which have the pilot is to find out the reaction to therules of professional conduct with regard to review process, and whether it is appropriate.confidentiality. You can assume that the The reviews are intended to be educational, toreviewers will stricdy abide by these rules and help you identify deficiencies which you canwill not reveal information to the wrong overcme. As such all worling papers will besources. As it is the intention of this pilot to destroyed. The individual auditor reviews willtest the process, not to test the auditor, all emain confidential, and they will not bedetailed rworking files will be destroyed after rculated within the Bank.completion of the review process. In addition,

77

Quality Review Schenes for Auditors in SSA

14. After the pilot reviews have been the review process, and a recotmendationcarried out in Tanzania and Senegal the asto whether auditor reviews should befindings will be published. What will implemented throughout Sub-Saharan Africa.bedescribed in the final report are the generic No auditor will be mentioned without expressproblems that were discovered, the reaction of permission.auditors, any changes that should be made to

78

Annex G. Pilot Quality ReviewQuestionnaire

1. NameofFirn .............................................

2. AddressofFirm .

Telephone no. .............................................

3. Name of parter who will coordinate the review

......................................................

4. Please list on a separate sheet all professional staff employed in your office, giving theirjob tides and qualifications.

S. Please give your best estimate as to your firm's chargeable hours in the areas listed belowfor the last financial year.

Audit ..................................................

Review .................................................

Compiation ..............................................

Other ..................................................

Total ..................................................

79


A. Independence

6. Do all professional staff adhere to the independence rules of NBAA? YESJNO

7. How are professional staff informed about the independence rules? For example, throughan audit manual, training, meetings etc.

......................................................

8. How are the independence rules monitored by the firm. Does the firm obtain writtenstatements from all professional staff on an annual basis?

9. Who is responsible for resolving independence issues and are staff aware whv this personis?

......................................................

10. What outside sources does your firm consult with in resolving independenc issues? Forexample, NBAA or other fms.

80

Quesdonnaire

B. Accepane and Contlnuanoe of C:lents

11. Has the firm established any procedures for the evaluation of prospective/existing clientsand for their approval as clients? YES/NO If YES what are they?

......................................................

......................................................

C. Assning Staff

12. Who is responsible for assigning staff?

......................................................

13. Describe the method the firm uses to assign staff to engagements, including how far inadvance assignments are made and what type of information is given to the menber ofstaff respomible for the assignment.

14. Does the firm maintain personnel files? YES/NO If YES what do they contain?

81

Qualiy Review Schem for Auditors in SSA

D. Supwuidlln

IS. Does the firm follow documented procedures for plaming audit and accountingengagemnts YESMNO? If YES please describe briefly and indicate where can theseprocedures be found. Please make these available during the review.

................................ ~ . .. .. .. .. .. .. . . . ....

16. If the answer to the above is no briefly describe the procedures the firm follows inplawning an audit and accounting engagement.

17. Does the firm use any written checklists or questionnaires? YES/NO If YES pleaseattach a copy

82

t @@S @i* * * aM~~~~~~~U * * * * 0

e . * . . . . .*

... ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

s * . . . *

a:~~~~~~~ : * : :3 : *

0%~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ os.S~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.

Quality Review Schmes for Auditors in SSA

E. dmi'-1r -

21. What procedures has the firm etablished for file reention?

F. Hhing and Advanemnt

22. Describe how the finn identifies professional personnel needs and how recruianent isundertakcen.

23. Does the firm regularly evaluate staf YES/NO If YES what does this entail?

......................................................84. . . . . . . . .. . . . . . . . . .. . . . . . . . .

Questionmaire

G. Profudowd Dwdopeat

24. How do pofessional staff keep up-to-daze with professional devdopment?

......................................................

25. How are professional staff made aware of dhanges in accowunting and auditing standards?For example through in-use meetings, distribution of standards etc.

26. Is thee a writen record of professional development undertaken? YES/NO If YESplea make it available during the review

85

Annex H: Quality Review Scheme Checklist

The review schemnes that have been standards before a quality review scheme isintroduced have taken a substanial amount of introduced.time to implenent. All the accounting bodiesthat have introduced such schemes spent Checklistconsiderable tm discussing the idea, drawingup the scheme, and educating their members A checldist should be developed whichabout the purpose of the scheme. Before a should list the mininmu standards that must benational accounting body in SSA introduces a followed by an auditor with respect toquality review scheme, there are a mmber of professional conduct, the execution andsteps that need to be considered. documentation of an audit, the issue of the

auditor's report and the fmancial statementObjective disclosure. This checldist should be used by

the reviewer to deternine whether an auditor'sIn considering whether to introduce a audit files, report and financial statements

quality review scheme an accounting body has comply with the standards set by the body.to decide what the objective of the review willbe. Table 2.1 in the main body of the text and Legal ImplicaionsAnnex B summarize the different reviewschemes that have been introduced and their The accounting body should ascertainpuTpose. The body also has to decide whether wl' Jer there are any legal obstacles tothe emphasis of the review scheme will be reviewing client files, without prior clienteducational or punitive. The latter is important permission.because it will affect the follow-up action thebody will have to provide. Rewewers

Standards The accounting body must establishwho will perform the reviews. In selecting a

The mnum professional accounting reviewer, the body should look for qualitiesand auditing stndards that must be adhered to such as independence and integrity,by auditors should be established. In carrying professional competence, attention to detail,out a quality review, the reviewer must have and excellent interpersonal sldls. In addition,a set of accounting and auditing standards to all bodies that have introduced schemes haveuse as a guide in detming whether a chosen to appoint as reviewers members withpractitioner's audit files and financial considerable audit experience. The body maystaements are in compliance. Not all countries wish to draw up a checlist against whichin SSA have their own national standards. potental reviewers can be measured. In alWhere this is the case, the national accountg countries the body should take steps to ensurebody may wish to adopt intemational standards that the reviewer will be independent, and willor prepare its own accounting and auditing be able to keep the information they receive

87

Qualty Rview Sch for Auditorsin SSA

coid-ntal. Tbis may involve he body be financed. The costs could be incorporatedappointing its own fuill-time rceviwer. To in the anual fees of dil nmem or the wostofensure that the review are carried out to the each review could be directly charged to thebody's specifications and are applied member being reviewed. The body may wishconsitendy, the national body nay wish to to consider the implications of the auditorgive the reviewers trainig, and undertake a passing onto the client the cost of the qualitydesk review of the reviewers' work. reviews.

Follow-up Acton Government Audiors

The body must have a plan to handle In mny countries in SSA, govermentthe outcome of the reviews. The body must auditors are not required to adhere to the samedecide what action wil be taken against stmdards as private sector auditors. It must beauditors who do not meet the minimum decided whether goverment auditors shouldstandards. This could be reinspection within a participate in the scheme as a way to improvecoin time period or referral to the body's the quality of the work of their offices. If tisprofessional conduct committee. There should is not feasible or desirable, govementbe sufficient incentive for members to take the auditors could be reviewed against INTOSAIreview process seriously and ensure that they standards,national legislation, and governmentare adhering to accountig and auditing regulations.standards. If technical advice is needed to helpmembers improve, the body will have to M berhpSupportdecide whether it will provide such assistance,or whether it will use the services of other If a scheme is to be successfullymembers or another agency. The reviews may intduced, there must be support from theidentify deficiencies that can be rectified by members. Members should be kept informedtraig. The accounting. body should be of all steps in the introduction of a reviewprepared to help its members gain this scheme, and should be given the opportunitytraihng, either by offering it itself, or by to voice their concerns and fears. Memberspersuading other bodies to offer courses. If the must know the criteria against which they willbody canot do this it should seek assistanc be measured. The body may like to considerfrm government or external donors. having a membership vote on whether a

review scheme should be inroduced.Fmwance

The body must ascertain how much thereview process will cost and decide how it will

88

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ACCA. 1998. Members'G"ide to 7he Findcl Ser.'ca Act 1986. 2nd ed. London, UK.

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Botwin, Bmce S. December 1989. 'Arranging for a Successfil Review', Journal ofAccountancy.New York, USA. P. 72.

British Counc;l. 1992. Accownany Development in Slerra Leone. London, UK.

DRT Intenaonal. 1991. rTe DRT Irnational Practice Review Monual. New York, USA.

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Gray, P. November1992. "Practice Review - Is it Working?" Accountn'Jlo,rnal. P.20.

Holden, Jo. November 1991. "Te JMU Makes a Successl Start, Acoacy.P. 117.

HKSA. 1990. Consulttive Paper, Practce Review. Hong Kong.

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1992. Statmn 1.400 Prcice Rewiew Expl9atoy Foreword. Hong Kong.

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Huff, Bruce N. and Thomas P. Kdely. Februay 1989. 'Qualiy Review and You', Jonal ofAccoutancy. New York, USA. P. 34.

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-. 1992. Audit Reguladon. Report to the DT7for the Year Ended 30 September1992. London,UK.

ICAI. 1987. Practice Review - Your Questions Answered. Dublin, Ireland.

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Johnson, Sonia. 1992. "Quality Scheme for Auditxrs: Their Potential for Sub-Saharan Africa -A Discussion Draft.' Africa Technical Department, World Bank. Washington, D.C.

Macklin, Marie. June 1989. 'How Three Finns Beefitted From Peer Review", Jkurilof Accouttancy. New York, USA. P. 87.

- David C. Stauffer and Dale E. Rafel. August 1989. "How to Prepare for Your FirstReview", Jounal ofAccountancy. New York, USA. P. 80.

McCabe, R.K. September 1990. " A Quality Review Checldist", Journal ofAccounancy. NewYork, USA. P. 69.

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ODA. 1991. Tanania FInancial Sector Restuturing. Strengthening tIe Accounting andAuditing Function. U.K.

OMB. 1987. Office of Management and Budget Circuar A-128. Audits of State and LocalGovenmnts. Washington, D.C.

Pickering, Bruce. August 1991. "Audit Regulation: The Wider Inplications", Accountcy.London, UK. P. 91.

Rafel, Dale E. December 1990. "Questions and Answers, Quality Review", Jounal ofAccountancy. New York, USA. P. 118.

-, Edith Melnick. September 1991. "Questions and Ansers, Quality Review", Joumnal ofAccountancy. New York, USA. P. 135.

Stone. Mikc. Novem-. 1991. "Quality Review: From Skptic to Convert", Journal ofAccounancy. New York, USA. P. 124.

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91.

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RECENT WORLD BANK TECHNICAL PAPERS (continued)

No. 228 Webster and Charap, The Emergence of Private Sector Manufacturing in St. Petersburg: A Survey of Firms

No. 229 Webster, he Emergence of Private Sector Manufacturing in Hungary: A Survey of Firms

No. 230 Webster and Swanson, The Emergnce of Private Sector Manufacturing in the Former Czech and Slovak FederalRepublic: A Survey of Firms

No. 231 Eisa, Bargbouti, Gillham, and Al-Saffy, Cotton Production Prospects for the Deca to 2005: A Global Overview

No. 232 CreightneY, Transport and Economic Performance A Survey of Dedloping Countries

No.233 Frederiksen, Berkoff, and Barber, Principles and Practices for Dealing with Water Resources Issues

No.234 Ancondo-Callao and Faiz, Estimating Vehicle Operating Costs

No.235 Claessens, Risk Management in Developing Countries

No. 236 Bennett and Goldber, Providing Enterprise Developmnt and Financial Services to Women: A Decade of BankExpernc in Asia

No.237 Webster, The Emergence of Private Sector Manufacturing in Poland: A Survey of Firms

No.238 Heath, Land Rights in C6kte d'Ivire. Surmey and Prospectsfor Proect Intervention

No. 239 Kirmani and Rangeley, International Inland Waters: Conceptsfor a Morm Active World Bank Role

No. 240 Ahmed, Renewabk Energy Technologies: A Review of the Status and Costs of Seleded TechnologiesNo. 241 Webster, Newly Privatized Russian Enterprises

No. 242 Barnes, Openshaw, Smith, and van der Plas, What Makes People Cook with Improved Biomass Stoves?:A Comparative Interntional Revw of Stoe Prograns

No. 243 Menke and Fazzari, Improving Electric Power Utility Efficiency: Issues and RecommendationsNo. 244 Liebenthal, Mathur, and Wade, Solar Energy: Lessons fom the Padfic Island Erperience

No. 245 Klein, External Debt Management: An Introduction

No. 246 Plusquellec, Burt, and Wolter, Modern Water Control in Irrigatioan- Concepts, Issues, and Applications

No. 247 Ameur, Agriultural Extension. A Step beyond the Next Step

No. 248 Malhotra, Koenig, and Sinsukprasert, A Survey of Asia's Energy Prices

No. 249 Le Moigne, Easter, Ochs, and Giltner, Water Policy and Water Markets: Selected Papers and Proceedingsfrom theWorld Bank's Annual Imgation and Drainage Seminar, Annapolis, Maryland., December 8-10,1992

No. 250 Rangeley, Thiam, Andersen, and Lyle, Internaonal Rirer Basin Organzations in Sub-Saharan Africa

No. 251 Sharma, Rietbergen, Heino, and Patel, A Strategyfor the Forest Sedor in Sub-Saharan Africa

No. 252 The World Bank/FAO/UNIDO/Industry Fertilizer Worldng Group, World and Regional Supply and DemandBaancesfor Nitrogen, PhosphatE, and Potash, 1992193-1998199

No. 253 Jensen and Malter, A Global Reviw of Protected Agriculture

No. 254 Frischtak, Governance Capacity and Economic Reform in Developing Countnes

No. 255 Mohan, editor, Bibliography of Publications: Technical Departmnt, Africa Region, July 1987 to April 1994

No. 256 Campbell, Design and Opertion of Smalholder Irrigation in South Asia

No. 257 Malhotra, Sinsukprsert, and Eglington, Thc Per e of Asia's Energy Sector

No. 258 Willy De Geyndt, Managing the Quality of Health Care in Developing Countries

No. 259 Chaudry, Reid, and Malik, editors, Civil Service Refom in Latin America and the Cribbean: Proceedings of a Conference

No. 260 Humphrey, Payment Systems: Principles, Practice, and Imromements

No. 261 Lynch, Phrvision jbr Chilren with Special Educational Needs in the Asia Region

No. 262 Lee and Bobadilla, Health Statisticsfor the Americas

No. 263 LeMoigne, Subramanian, Xie, and Giltner, editors, A Guide to the Formulation of Water Resources Strategy

No. 264 Miller and Jones, Organic and Compost-Based Growing Mediajfor Tree Seedling Nurseries

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