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and staff performing the engagement and any individuals engaged by the firm or a network firm who perform audit procedures on the engagement. This excludes an auditor's external specialist engaged by the firm or a network firm.

      The term engagement team also excludes individuals within the client's internal audit function who provide direct assistance on an audit engagement when the external auditor complies with the requirements of Section 610, Using the Work of Internal Auditors.6

      Firm. A form of organization permitted by law or regulation whose characteristics conform to resolutions of the Council of the AICPA and which is engaged in the practice of public accounting.

      Monitoring. A process comprising an ongoing consideration and evaluation of the firm's system of quality control, including inspection or a periodic review of engagement documentation, reports, and clients' financial statements for a selection of completed engagements, designed to provide the firm with reasonable assurance that its system of quality control is designed appropriately and operating effectively.

      Network. An association of entities, as defined in ET Section 92, Definitions.

      Network firm. A firm or other entity that belongs to a network, as defined in ET Section 92.

      Partner. Any individual with authority to bind the firm with respect to the performance of a professional services engagement. For purposes of this definition, partner may include an employee with this authority who has not assumed the risks and benefits of ownership. Firms may use different titles to refer to individuals with this authority.

      Personnel. Partners and staff.

      Professional standards. Standards promulgated by the AICPA Auditing Standards Board or the AICPA Accounting and Review Services Committee under Rule 201, General Standards (ET sec. 201 par.01), or Rule 202, Compliance with Standards (ET sec. 202 par.01), of the AICPA Code of Professional Conduct, or other standards-setting bodies that set auditing and attest standards applicable to the engagement being performed and relevant ethical requirements.

      Relevant ethical requirements. Ethical requirements to which the engagement team and engagement quality control reviewer are subject, which consist of the AICPA Code of Professional Conduct together with rules of applicable state boards of accountancy and applicable regulatory agencies that are more restrictive.

      Staff. Professionals, other than partners, including any specialists that the firm employs.

      Suitably qualified external person. An individual outside the firm with the competence and capabilities to act as an engagement partner (for example, a partner of another firm).

      Objectives of AU-C Section 220

      AU-C Section 220.08 states that:

      …the objective of the auditor is to implement quality control procedures at the engagement level that provide the auditor with reasonable assurance that

      a. the audit complies with professional standards and applicable legal and regulatory requirements and

      b. the auditor's report issued is appropriate in the circumstances.

      Requirements

      Quality Control Standards

      The engagement partner is responsible for the overall quality of the engagements to which the partner is assigned. An audit firm should establish a quality control system to provide it with reasonable assurance that its staff meets the requirements of professional standards and applicable legal and regulatory requirements and that reports are appropriate. (AC 220.03)

      System of Quality Control

      The nature and extent of a firm's quality control policies and procedures depend on the following five factors:

      1. Firm size and the number of its offices

      2. The degree of autonomy of personnel and practice offices

      3. The knowledge and experience of its personnel

      4. The nature and complexity of the firm's practice

      5. The cost of developing and implementing quality control policies and procedures in relation to the benefits provided

      When a firm establishes quality control policies and procedures, it should do the following:

      1. Assign responsibilities to qualified personnel to implement quality control policies and procedures.

      2. Communicate quality control policies and procedures to personnel (see below).

      3. Monitor the effectiveness of the quality control system. The purpose is to determine that policies and procedures and the methods of implementing and communicating them are still appropriate.

      NOTE: Flaws in, or a violation of, a firm's quality control do not necessarily indicate that an audit was not performed in accordance with GAAS.

      Elements of Quality Control

      When establishing its quality control policies and procedures, a firm should consider the elements of quality control:

      ● Leadership responsibilities for quality

      ● Ethical requirements

      ● Acceptance and continuance of clients

      ● Assignment of engagement terms

      ● Engagement performance

      ● Monitoring

      NOTE: CPA firms or individuals that are enrolled in an AICPA-approved practice-monitoring program are obligated to adhere to quality control standards. In addition, the Principles of Professional Conduct indicate that members should practice in firms that have in place quality control procedures to provide reasonable assurance that services are competently delivered and adequately supervised. The Statements on Quality Control apply to a CPA firm's accounting, auditing, and attest practices.

      Independence7

      The engagement partner is responsible for the independence requirements for each audit and ensuring that these requirements are met. The engagement partner should:

      ● Evaluate the threats to independence,

      ● Evaluate any breaches, and

      ● Take appropriate action to eliminate or reduce threats to an appropriate level. If that cannot be done, the firm may have to withdraw from the engagement. (AU-C 220.13)

      To be independent, auditors must be intellectually honest; to be recognized as independent, they must be free from any obligation to or interest in the client, its management, or its owners. For specific guidance, the auditor should look to AICPA and the state society codes of conduct and, if relevant, the requirements of the Securities and Exchange Commission (SEC).

      Acceptance and Continuance of Client Relationships

      The engagement partner must be satisfied that appropriate procedures regarding acceptance and continuance of clients have been performed and that appropriate conclusions were reached. (AU-C 220.14)

      Policies and procedures should provide reasonable assurance that the firm will not be associated with clients whose management lacks integrity. A firm should:

      ● Undertake only engagements that can be completed with professional competence,

      ● Consider the client's integrity,

      ● Ensure that ethical requirements can be met, and

      ● Evaluate significant issues during current or previous audits and their implications for continuance.

      (AU-C 220.A7)

      Assignment of Engagement Teams

      The engagement partner must be comfortable that the engagement team and external specialists are capable and have the appropriate

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