Nest & Co., Chartered Accountants, while conducting an internal review of its system of quality control, identified certain deficiencies in its…

CA Final · Advanced Auditing, Assurance and Professional Ethics · MTP · November 2026
Nest & Co., Chartered Accountants, while conducting an internal review of its system of quality control, identified certain deficiencies in its monitoring process. The firm had not carried out any periodic inspection of completed audit engagements for the past two years, as the managing partner considered such inspections unnecessary in the absence of any major audit failure. Further, despite several amendments to professional standards and regulatory requirements during the year, the firm had not evaluated whether its quality control policies and procedures required modification. The responsibility for monitoring the system had been assigned to an inexperienced staff member who lacked sufficient authority to initiate corrective action. In addition, two complaints alleging non-compliance with professional standards were received during the year but were not formally investigated. In another engagement, a deficiency identified during a review was merely communicated to the personnel concerned, without taking remedial action or performing any follow-up. With reference to SQC 1, examine whether the firm's monitoring process is appropriate. Discuss the relevant requirements that the firm should consider.

Suggested Answer and Working Notes:

As per SQC 1, “Quality control for firms that perform audits and reviews of historical financial information, and other assurance and related services engagements", the firm should ensure that policies and procedures relating to the system of quality control are relevant, adequate, operating effectively and complied with in practice. Such policies and procedures should include an ongoing consideration and evaluation of the firm's system of quality control, including a periodic inspection of a selection of completed engagements. Quality control of engagements has to be monitored taking into account following factors: Deciding whether the quality control system of the firm has been appropriately designed and effectively implemented. Examining whether new developments in the professional standards, legal and regulatory requirements have been reflected in the quality control policies. Conducting monitoring by entrusting responsibility of monitoring process to a partner or other persons with sufficient and appropriate experience and authority in the firm. Dealing with complaints and allegations against the firm or any employees of it of non-compliance with professional standards or appropriate regulatory requirements by a person within or outside the firm. Taking appropriate remedial actions against the personnel who did not conform to quality control policies. Taking action when deficiencies in the design or operation of the firm's quality control policies and procedures, or non-compliance with the firm's system of quality control are identified. In the given case, Nest & Co. failed to conduct periodic inspections of completed audits and did not update its quality control policies for changes in professional standards and regulations. Further, complaints were not investigated, monitoring was assigned to inexperienced personnel, and identified deficiencies were not followed by appropriate corrective or remedial action. Thus, it can be concluded that Nest & Co. has not complied with the monitoring requirements of SQC 1. Also, the firm needs to strengthen its monitoring process so that deficiencies in the design or operation of its system of quality control are identified, investigated and appropriately addressed.

Topics: Standard on Auditing (SA)

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