Proposed Statement on Quality Control Standards, A Firm’s System of Quality Control (Redrafted)

Introduction
This memorandum provides background to the proposed Statement on Quality Control Standards (SQCS), A Firm’s System of Quality Control (Redrafted).This proposed SQCS would supersede SQCS No. 7, A Firm’s System of Quality Control (AICPA, Professional Standards, vol. 2, QC sec. 10). The accompanying proposed SQCS represents the redrafting of SQCS No. 7 to apply the Auditing Standards Board’s (ASB’s) clarity drafting conventions and to converge with International Standards on Quality Control (ISQC) No. 1, Quality Control For Firms That Perform Audits And Reviews Of Financial Statements, And Other Assurance And Related Services Engagements, as discussed in the following sections.

Background

Clarity
To address concerns over the clarity, length, and complexity of its standards, the ASB is currently making a significant effort to clarify its standards.¹The ASB issued a discussion paper, Improving the Clarity of ASB Standards,²in March 2007. In response to the feedback received on the discussion paper and subsequent discussions with interested parties, the ASB has established clarity drafting conventions and has undertaken to revise all of its standards in accordance with those conventions. The proposed SQCS has been drafted in accordance with the ASB’s clarity drafting conventions, which include the following:

Establishing objectives for each of the standards
Including a definitions section, if relevant, in each standard
Separating requirements from application and other explanatory material
Numbering application and other explanatory material paragraphs using an A-prefix and presenting them in a section following the requirements section
Using formatting techniques, such as bulleted lists, to enhance readability
Including, where appropriate, special considerations relevant to audits of smaller, less complex entities within the text of the standards
Including, where appropriate, special considerations relevant to audits of governmental entities within the text of the standard

Convergence
Consistent with the ASB’s strategy to converge its standards with those of the International Auditing and Assurance Standards Board (IAASB),³ the proposed SQCS has been drafted using ISQC No. 1, Quality Control For Firms That Perform Audits And Reviews Of Financial Statements, And Other Assurance And Related Services Engagements, as a base. There are no differences between this proposed SQCS and ISQC No. 1 other than those for which the ASB believes compelling reasons exist. Differences in objectives, definitions, or requirements between the proposed SQCS and ISQC No. 1 are identified in the exposure draft’s exhibit.

The ASB has made various changes to the language of the ISQC to use terms or phrases that are more common in the United States, and to tailor examples and guidance to the U.S. environment. The ASB believes that such changes will not create differences between the application of ISQC No. 1 and the application of the proposed SQCS.

Effective Date
The proposed SQCS would be effective for audits of financial statements for periods beginning on or after December 15, 2010. This effective date is provisional but will not be earlier than December 15, 2010.

Changes from Existing Standards
The proposed SQCS does not change or expand SQCS No. 7 in any significant respect. To reflect a more principles-based approach to standard setting, certain requirements that are duplicative of broader requirements in SQCS No. 7 have been moved to application and other explanatory material, consistent with ISQC No. 1. In the ASB’s view, this has not changed the overall effectiveness of the proposed SQCS.

Paragraph 46 of the proposed SQCS contains a requirement that procedures established for dealing with differences of opinion should enable a member of the engagement team to document that member’s disagreement with the conclusions reached after appropriate consultation. This requirement was included in Statement on Auditing Standards No. 108, Planning and Supervision (AICPA, Professional Standards, vol. 1, AU sec. 311 par. .32). The ASB believes that this requirement is more appropriately placed at the firm level for all engagements.

Issue for Consideration

Engagement Quality Control Review
Although the ASB’s standards do not apply to the audits of issuers, in converging with the ISAs, the ASB wishes to avoid unnecessary differences with the standards of the Public Company Accounting Oversight Board (PCAOB). ISQC No. 1 contains requirements relating to engagement quality control review that apply only to listed entities (issuers). The proposed SQCS does not include such requirements. The PCAOB has a proposed standard Proposed Auditing Standard—Engagement Quality Review, which contains requirements relating to engagement quality control reviews that apply only to audits of issuers. Certain of these requirements are not included in the proposed SQCS. The ASB is interested in hearing from respondents about whether additional requirements relating to engagement quality control review should be included in the proposed SQCS.

Guide for Respondents
The ASB is seeking comments specifically on changes resulting from applying the clarity drafting conventions and converging with the ISQC and their effect on the content of the proposed SQCS. Respondents are asked to respond, in particular, to the following questions:

Are the objectives of the firm appropriate?
Are the revisions made to converge the existing standard with ISQC No. 1 appropriate?
Are the differences between the proposed SQCS and ISQC No. 1 identified in the exhibit, and other language changes, appropriate?
Have considerations for audits of smaller, less complex entities and governmental entities been dealt with appropriately?

Comments are most helpful when they refer to specific paragraphs, include the reasons for the comments, and, where appropriate, make specific suggestions for any proposed changes to wording. When a respondent agrees with proposals in the exposure draft, it will be helpful for the ASB to be made aware of this view, as well.

Written comments on the exposure draft will become part of the public record of the AICPA and will be available for public inspection at the offices of the AICPA after August 31, 2009, for one year. Responses should be sent to Sherry Hazel at shazel@aicpa.org and received by August 31, 2009.

Supplements to the Exposure Draft
To assist respondents in identifying changes and in responding to this request to comment on the proposed SQCS, the Audit and Attest Standards staff has prepared the following supplementary materials:

A matrix document, which compares ISQC No. 1, the proposed SQCS, and extant SQCS No. 7. The schedule has five columns containing the following:
- ISQC No. 1
- The proposed SQCS, marked to show differences in language between the ISQC and the proposed SQCS (new and deleted material are shown in colored track changes)
- The proposed SQCS, marked to show differences between SQCS No. 7 and the proposed SQCS (new and deleted material are shown in colored track changes)
- The requirements and guidance in extant SQCS No. 7, mapped against the proposed SQCS, to demonstrate how the material in extant SQCS No. 7 has been reflected in the proposed SQCS
- Comments and rationale

This staff-prepared supplementary material is available below. It is for informational purposes only and does not form part of the exposure draft; however, it may be useful for respondents in formulating comments.

Comment Period
The comment period for this exposure draft ends on August 31, 2009.

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Download the Exposure Draft

Download the Supplementary Material

¹ The pamphlet Clarification and Convergence provides information about the Auditing Standards Board’s (ASB) clarity project.

² The discussion paper is available online at "Improving the Clarity of ASB Standards."

³ The ASB’s convergence paper, "AICPA’s Auditing Standards Board International Convergence Plan."