Engagement-level quality (ISA 220) - Independence and accept...

Learning Outcomes

By the end of this article, you will be able to explain how engagement-level quality is achieved under ISA 220. You will know the auditor’s responsibilities for maintaining independence, the key steps for accepting and continuing audit engagements, and the importance of quality management systems. You should also be able to identify threats to independence, describe safeguards, and recognise quality deficiencies in audit scenarios.

ACCA Audit and Assurance (AA) Syllabus

For ACCA Audit and Assurance (AA), you are required to understand how engagement-level quality is managed and maintained. In particular, your revision should cover:

• The purpose and requirements of ISA 220 regarding quality management on audit engagements.
• The auditor’s responsibility to ensure independence, objectivity, and compliance with relevant ethical requirements during engagements.
• The process and criteria for accepting and continuing audit engagements, including considerations of ethical threats, management integrity, and firm competence.
• Safeguards to manage threats to independence and quality.
• Procedures for engagement resource allocation, performance review, and documentation.
• Actions to take when quality deficiencies or threats to independence cannot be addressed.
• The links between engagement-level quality, acceptance/continuance decisions, and overall audit quality.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Why must an audit firm evaluate independence before accepting or continuing an audit engagement?
2. List three key matters an auditor should consider during acceptance or continuance of a client relationship.
3. Which one of the following is a required action if an identified threat to independence cannot be reduced to an acceptable level? A. Continue the engagement as planned
   B. Disclose the threat to the client only
   C. Decline or withdraw from the engagement
   D. Perform extra substantive procedures
4. True or false? The engagement partner is responsible for overseeing quality management on the audit engagement.
5. What are two possible quality management deficiencies that might occur during an audit, and how should they be addressed?

Introduction

Audit quality at the engagement level is governed by ISA 220, which sets the requirements for managing and achieving quality throughout the audit engagement. The engagement partner must ensure that all work is performed in line with professional standards, legal requirements, and firm policies. Independence and objectivity must be maintained not just at the start, but throughout the engagement. Accepting a new client or deciding to continue with an existing one requires a structured evaluation of ethical, practical, and quality factors.

Key Term: engagement-level quality
The set of processes, responsibilities, and measures applied by the audit engagement team to achieve a high standard of work and compliance with professional standards throughout an audit.

Quality Management under ISA 220

ISA 220 requires the engagement partner to take overall responsibility for managing audit quality. This includes ensuring sufficient and appropriate resources are assigned, directing and supervising the team, and reviewing work at key stages.

Key Term: engagement partner
The audit firm member responsible for the direction, supervision, and achievement of quality on an individual audit engagement.

The quality management system covers:

• Leadership and tone at the top
• Ethical requirements and independence
• Acceptance and continuance procedures
• Management of resources
• Engagement performance, including supervision, consultation, and review
• Monitoring and remediation of quality issues

Independence: The Core of Quality

Auditor independence is the most critical ethical requirement for an assurance engagement. Independence means the audit team is free from influences, relationships, or situations that could impair objectivity or be seen as such by a reasonable and informed third party.

Key Term: independence
The freedom from circumstances and relationships that could impair the auditor’s objectivity or appear to do so.

Failing to maintain independence can undermine confidence in the audit and expose the firm to regulatory or reputational consequences.

Key Term: objectivity
The obligation to act fairly, impartially, and unbiased in all professional and business judgements.

Acceptance and Continuance Procedures

At both the start and each year of the client relationship, the firm must assess whether the audit should be accepted or continued. This involves evaluating:

• Threats to independence and safeguards needed
• Integrity of management and those charged with governance
• Firm competence (skills, time, specialist knowledge)
• Client’s reputation and risk profile
• Whether engagement resources are sufficient
• Legal or regulatory restrictions

If these requirements are not satisfied, the engagement must not be accepted or continued.

Worked Example 1.1

Scenario:
Your firm is approached to audit Delta Ltd, a fast-growing technology company. A partner at your firm has a close relative in Delta Ltd’s finance team, and Delta Ltd has a history of delayed fee payment to previous auditors.

Question:
What steps should you take before accepting this audit?

Answer:
Assess all threats to independence (the relationship between the partner’s relative and the client creates a familiarity threat). Investigate the reasons for previous auditors’ departure (potential management integrity risk). Obtain professional clearance from the outgoing auditor. Evaluate if your firm has both the specialist knowledge and sufficient resources for a technology client. If independence cannot be safeguarded, or management integrity is in doubt, you should decline the engagement.

Independence Threats and Safeguards

Typical threats include:

• Self-interest (e.g., outstanding fees, financial interests)
• Self-review (e.g., providing non-audit services)
• Familiarity (e.g., long association with client staff)
• Advocacy (e.g., promoting client interests)
• Intimidation (e.g., pressure from client to influence outcome)

ISA 220 and the Code of Ethics require you to identify, assess, and mitigate such threats through safeguards. If an unmanageable threat exists, you must withdraw or refuse the engagement.

Key Term: safeguard
An action or control that reduces an independence threat to an acceptable level.

Worked Example 1.2

Scenario:
You discover, after appointment, that the audit manager is engaged to the CFO of your client.

Question:
What action should you take regarding independence?

Answer:
Assess the relationship’s significance. Remove the audit manager from the engagement and assign an appropriate reviewer. Document the steps taken. If sufficient safeguards cannot be applied, consider withdrawal from the engagement.

Acceptance/Continuance Practical Steps

1. Obtain professional clearance from previous auditor.
2. Assess independence and potential threats.
3. Consider management integrity—check for litigation, fraud, or disputes.
4. Confirm that adequate resources and technical capability exist.
5. Ensure preconditions for audit are present (client agrees to responsibilities and access).
6. Evaluate the appropriateness of fees and the risk of overdue fees creating self-interest threats.
7. Document the decision process.

Engagement Performance and Quality Checks

The engagement partner must:

• Allocate work and monitor progress
• Supervise all stages of fieldwork
• Review working papers and critical judgements regularly—not just at the end
• Encourage an environment where team members raise concerns freely

Lack of supervision, delayed project reviews, or unaddressed team concerns are potential quality risks.

Exam Warning

Do not assume independence issues are self-evident; in the exam always state the relevant threat, explain its impact, and clearly propose a safeguard or action.

Monitoring and Remediation

If post-engagement review finds deficiencies—such as poor documentation or misapplied procedures—the engagement partner should:

• Address root causes (e.g., insufficient supervision, gaps in planning)
• Take corrective action (additional training, changes in team composition)
• Consider impact on audit report and quality management system

Worked Example 1.3

Scenario:
A post-audit review finds that control testing over purchases was skipped due to lack of time, and the audit file was not reviewed until just before signing the report.

Question:
What are the quality management implications?

Answer:
These are deficiencies in review and supervision. Increased substantive testing may now be needed to compensate for untested controls. Future audits should schedule interim reviews to ensure all planned procedures are complete, and documentation of work performed must be strengthened.

Summary

Engagement-level quality as defined by ISA 220 requires the engagement partner to manage and oversee all aspects of the audit—before, during, and after fieldwork. Independence must be achieved and actively maintained, with threats identified and safeguarded. Rigorous acceptance and continuance procedures protect the auditor and user alike. Ongoing supervision, regular review, sufficient resources, and a robust quality management culture are essential for audit quality and safeguard the profession’s reputation.

Key Point Checklist

This article has covered the following key knowledge points:

• Define engagement-level quality and the responsibilities of the engagement partner under ISA 220.
• Explain the importance of auditor independence and objectivity.
• Describe threats to independence and how safeguards are applied.
• List the steps and considerations in accepting or continuing an engagement.
• Identify key elements of a robust quality management system at engagement level.
• State procedures for addressing quality deficiencies in work supervision, review, and documentation.
• Recognise when to decline or withdraw from an engagement.

Key Terms and Concepts

• engagement-level quality
• engagement partner
• independence
• objectivity
• safeguard