Ensuring Compliance with SQC 1: Key Observations and Recommendations by the AASB

Standard on Quality Control 1 (SQC 1) outlines critical guidelines that audit firms must follow to establish and maintain a robust system of quality control. The compliance of SQC 1 helps to ensure high audit quality and minimize legal and reputational risks. Since, the Institute of Chartered Accountants of India (ICAI) expects the auditing firm to maintain high level of quality while performing the audit, it evaluates the quality standard of the firm at reasonable interval of time. Recently, the Auditing and Assurance Standards Board (AASB) of the Institute of Chartered Accountants of India (ICAI) has highlighted concerns over the declining quality of audits due to breaches of SQC 1 by audit firms. Below are some instances of such non-compliance, along with the AASB’s recommended guidelines for addressing these issues:

1. Non-compliance in retaining audit documentation post-audit completion

The Standard on Quality Control 1 (SQC 1) mandates that audit firms establish policies and procedures for retaining engagement documentation for a duration that satisfies the firm’s needs or complies with legal or regulatory requirements.

The AASB identified that many audit firms lack structured policies and procedures for the retention of audit documentation. It is often found that firms do not retain these documents for an adequate duration after completing an audit engagement, thereby violating Paragraphs 82 and 83 of SQC 1.

While addressing this issue the AASB recommended that the audit firms establish robust policies and procedures to support the organization and archiving of audit files by using secure electronic archiving tools and implementing appropriate measures to safeguard manual working papers. It is hereby important to note that the retention period should generally be no less than seven years from the date of the audit report or, if later, the date of the group audit report.

2. Failure to assemble final audit file within the stipulated time

SQC 1 mandates that firms establish policies and procedures ensuring that engagement teams promptly complete the assembly of final engagement files after the engagement reports are finalized. The AASB has noted that many firms lack established policies and procedures for timely assembling the final audit file after the audit report is finalized, leading to non-compliance with SQC 1 and SA 230.

The AASB recommends that firms adhere to any time limits for assembling the final audit file specified by law or regulation for certain types of engagements. Where no such limits are prescribed firms should set their own reasonable deadlines, considering the nature of the engagement and current circumstances. However, it is critical to know that, the time limit for assembling the final audit file should not exceed 60 days from the date of the auditor’s report.

To know about the other generally observed non-compliances of SQC 1 highlighted by AASB.

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