Process and Implementation of External Quality Control

The audit subject of the external quality control is determining the adequacy and effectiveness of the established internal quality control system in the auditing company.³⁴⁴ The implementation of an internal quality control system is the auditor’s responsibility as he is the company’s owner. The respective implemented internal quality control system differs in each

338 Stefani; Gabor, 2004, p. 407

339 Marten, 2006, p. 1124

340 Paulitschek, 2009, pp. 97

341 Detailed in: Schmidt; Pfitzer, Lindgens, 2005 pp. 341

342 Institut der Wirtschaftsprüfer, 2012, Prüfungsstandard 140, p.4

343 For details see: Institut der Wirtschaftsprüfer, 2012, Prüfungsstandard 140, p.4

344 Institut der Wirtschaftsprüfer, 2012, Prüfungsstandard 140, Tz. 11,12

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company because of the individual sizes and the operating areas.³⁴⁵ The audit of the external quality control includes the organization of the audited company, the engagement review for official seals as well as the internal inspection. The audit of external quality control consists of a system – and a functional testing. ³⁴⁶ The targeted objects are the legal and statutory requirements, especially in dependence on the VO 1/2006. The involvement of the organizational practice presents the system testing, which is verified by functional tests, in particular through the engagement review and the internal inspection.³⁴⁷

The sequence of external quality control is as follows: Order placement and acceptance, audit planning, Engagement Review, documentation and reporting.³⁴⁸ After placing the order and order acceptance, the reviewer will first get a general idea of the audited company. Therefore the reviewer conducts a conversation with the company’s owner. Additionally he evaluates the company’s quality manual, the sealing list, list of employees including their qualifications and responsibilities as well as the client structure.³⁴⁹ The subsequent auditing planning considers factual, personal and temporal conditions.³⁵⁰ As mentioned above, the audit includes the fields of the organizational practice, the engagement review for sealing orders and the internal inspection. The audit of the organizational practice includes five major areas, namely the compliance with the five professional requirements as well as the order acceptance- and termination, employee training and development, planning process of all orders and handling with complaints and criticism.

 During reviewing the five professional requirements (which are: independence, conscientiousness, self-responsibility, confidentiality, worthy professional behavior), the reviewer needs to verify whether the company’s quality manual contains respective regulations and if these are fulfilled

 Throughout order acceptance it needs to be considered if there are existing regulations within the manual concerning the order acceptance. In detail it needs to cover the questions regarding the respective tools, are there temporal resources, technical competence, professional fees, order acknowledgement, and the audit independence during every duty.

345 Plendl, Schneiß, 2005, p. 548

346 Heininger, Bertram, 2003, p. 1055

347 Heininger, K.; Bertram, K., 2003, p. 1055

348 Meyer, S., 2003, p. 140

349 Deussen, R., 2007, p. 40

350 Institut der Wirtschaftsprüfer, 2012, Prüfungsstandard 140, Tz. 29

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 Additionally the reviewer must have a close look on employee development and training of the professionals: Is there a training and development plan and does the auditor fulfill his training obligations.

 Planning process of all order: does the planning process comply with temporal, human and technical resources.

 In the last area the reviewer looks at the complaint- and criticism handling approaches and if employees are involved in this process.

The reviewers’ objective of the external quality control is to make a statement on the adequacy and effectiveness of the company’s organization. The effectiveness will be examined and evaluated by one-time audits. ³⁵¹ When it comes to the engagement review, the reviewer has to examine the audit orders for which the company used their seal, according to risk factors. The reviewer needs to set the scope of orders he will examine in more detail.

Therefore he has to examine an adequate amount of orders in order to determine with reasonable certainty that implemented procedures and measures work effectively with the company.³⁵² Components of the Engagement Review are:

• Regulations for engagement review

• Organization of engagement review

• Compliance with statutory and professional requirements

• Audit strategy and audit program

• Definition of materiality regulations

• Consideration of specific risk areas (e.g. basic audit, going concern)

• Collection of appropriate and sufficient revision

• Ongoing monitoring of engagement review and inspection of working papers

• Order-related quality control and review report

• Order-related quality control through process-independent persons

• Resolving disagreements

• Completion of contract documentation

• Reporting. ³⁵³

351 Deussen, 2007, p. 41

352 Institut der Wirtschaftsprüfer, 2012, Prüfungsstandard 140, Tz 58

353 Institut der Wirtschaftsprüfer, 2013/2014, p. 12; Institut der Wirtschaftsprüfer 2006, Tz 91 – 155; §§ 4, 5, 6 Berufssatzung WP/vBP

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Objective of the internal inspection is to give a judgment on whether this allows an effective monitoring of compliance with the procedures and measures for quality control. ³⁵⁴ The internal inspection needs to be done at least every three years by the audit company itself. ³⁵⁵ The audit of the internal inspection covers following areas:

• Areas of internal inspection (organizational practice and Engagement Review)

• Employee requirements working on internal inspection

• Implementation of internal inspection

• Evaluating results and outcomes

• Reporting and documentation

• Measures for correcting deficiencies in the quality control system.³⁵⁶

After he has carried out his inspection, the Quality Control Reviewer has to document it, compile a report with his opinion (without deficiencies, with deficiencies or objection) and submit this quality control report to the Commission for Quality Control. In the report, the quality control system implemented in the auditing company is described, the type and extent of the inspection activities delineated and the conclusions of the inspection listed. After receiving the inspection report, the Quality Control Commission issues a preliminary certificate of participation. However, it can revoke it or retroactively issue a withheld certificate of participation, if it reaches a different opinion after the final assessment of the inspection report.³⁵⁷

Based on the opinion of the Quality Control Reviewer, the Commission for Quality Control can impose measures on the inspected auditing company or order a special inspection. The harshest result of external quality control is not to grant the certificate of participation or to revoke it, after a positive opinion has been refused. Thus, the inspected auditing company loses the right to perform statutory audits, which equals a prohibition of exercising one`s profession for this area.³⁵⁸ Auditing companies, which perform statutory audits for publicly traded companies, have to undergo external quality control every three years, for other companies a cycle of six years has been prescribed. In addition, since the introduction of the amendment of the Professional Regulatory Reform Law (Berufsaufsichtsreformgesetz/

BARefG) or the seventh amendment of the German Auditors Ordinance (WPO), auditing

354 Institut der Wirtschaftsprüfer, 2006, Tz 84 -155

355 Institut der Wirtschaftsprüfer, 2012, Prüfungsstandard 140, Tz 72

356 Institut der Wirtschaftsprüfer 2006, Tz 156 – 175, ³⁵⁶ Institut der Wirtschaftsprüfer 2013, p. 12

357 §57e Abs. 2 Wirtschaftsprüferordnung

358 Le Vourc’h; Morand, 2011, p. 14

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companies, which perform statutory audits for publicly traded companies, have to expect additional professional inspections, which can be carried out on a random basis and without specific cause, the so-called ad-hoc reviews.