Two of the engagement performance objectives in SQMS 1 paragraph 32 are about what happens when a team hits something hard. Objective 32d: consultation on difficult or contentious matters is undertaken, and the conclusions agreed to are implemented. Objective 32e: differences of opinion within the engagement team, or between the team and the engagement quality reviewer or individuals performing activities within the system of quality management, are brought to the attention of the firm and resolved.
The firm writes the policy. The engagement partner carries it out under AU-C 220. This post covers both sides, with a consultation log and an escalation example. For the engagement quality review itself, see the engagement quality review guide, and for how SQMS 1 objectives become risks and responses, see quality objectives and the risk assessment process.
What does SQMS 1 say about consultation?
A83 describes consultation as a discussion at the appropriate professional level with individuals inside or outside the firm who have specialized expertise on difficult or contentious matters. An environment that encourages consultation supports a culture of quality. A84 says the firm may specify the matters that need consultation, the engagement team may identify others, and the firm may specify how conclusions are agreed and implemented.
A small firm may have no one with the right expertise in-house. A104 of AU-C 220 recognizes this: the team may consult outside the firm, for example where the firm lacks internal resources, using advisory services from firms, professional and regulatory bodies, or commercial organizations that provide relevant quality management services. An outside consultant is a service provider under the resources component; see SQMS 1 resources.
What must the engagement partner do?
AU-C 220 paragraph .35 requires the engagement partner to:
- Take responsibility for the team consulting on difficult or contentious matters, matters the firm's policies require consultation on, and other matters the partner's judgment says require it.
- Determine that appropriate consultation took place, both within the team and with others at the appropriate level inside or outside the firm.
- Determine that the nature, scope and conclusions of the consultation are agreed with the party consulted.
- Determine that the conclusions agreed have been implemented.
A102 lists matters where consultation may be appropriate or required: complex or unfamiliar issues (the example is an accounting estimate with a high degree of estimation uncertainty), significant risks, significant transactions outside the normal course of business or otherwise unusual, limitations imposed by management, and noncompliance with laws or regulations. A105 adds that needing to consult outside the team on a difficult matter can indicate the matter is a key audit matter.
A103 says consultation works when those consulted are given all the relevant facts and have appropriate knowledge, seniority and experience. A consultation that rests on a partial summary produces advice nobody can rely on.
What must the policy say about differences of opinion?
A86 suggests the firm may encourage identifying differences at an early stage and may specify the steps for raising and dealing with them, including how the matter is resolved and how conclusions are implemented and documented. Resolution may involve consulting another practitioner or firm, or a professional or regulatory body.
At the engagement level, AU-C 220 paragraph .37 requires the team to follow the firm's policies for dealing with and resolving differences within the team, or between the team and the engagement quality reviewer or individuals performing activities in the system, including those who provide consultation. Paragraph .38 puts three duties on the engagement partner:
- Take responsibility for differences being addressed and resolved under the firm's policies.
- Determine that the conclusions reached are documented and implemented.
- Not date the auditor's report until any differences of opinion are resolved.
The third duty is the control point. An unresolved disagreement with the EQR blocks the report date, just as an incomplete EQR blocks release (paragraph .36d).
A111 covers the case where the partner is not satisfied with the resolution. Appropriate actions may include seeking legal advice or withdrawing from the engagement, when withdrawal is possible under applicable law or regulation.
What goes in the audit file?
AU-C 220 paragraph .41 requires that, in applying AU-C 230, the audit documentation includes the nature and scope of, and conclusions resulting from, consultations undertaken during the audit, and how those conclusions were implemented. A123 says documentation of consultations on difficult or contentious matters that is sufficiently complete and detailed contributes to understanding the nature and scope of the issue and the results, including decisions taken, the basis, and how they were implemented.
AU-C 230 A18 connects the two topics: documentation of an inconsistency can include consultations on, or resolutions of, differences in professional judgment among team members or between the team and others consulted. See significant findings and departures documentation.
Consultation memo outline
- Matter and engagement. Client, period, the accounting or auditing question, and why it is difficult or contentious.
- Facts provided. What was given to the consultee, with the date and the documents attached.
- Consultee. Name, role, and why that person has the knowledge and seniority needed.
- Conclusion of the consultee. In the consultee's words, with the date.
- Agreement. Confirmation that the consultee agrees the memo reflects the nature, scope and conclusion of the consultation (paragraph .35c).
- Implementation. What the engagement team did as a result, with workpaper references (paragraph .35d).
- Partner determination. Engagement partner sign-off and date.
Implementation example: a small firm
The firm has six professionals and no technical specialist. It writes the following into its quality management documentation under objectives 32d and 32e.
Required consultation matters: going concern conclusions that differ from management's, any departure from a presumptively mandatory requirement, noncompliance with laws or regulations, and related-party transactions outside the normal course of business. Engagement teams may consult on anything else.
Consultation sources: the quality partner for firm-policy and independence questions; a designated outside technical advisor for accounting and auditing matters; a professional body's technical advisory service for standards questions (A104 names professional and regulatory bodies as sources).
Differences of opinion: raise in writing to the engagement partner within the engagement; if the difference is with the partner, or between the team and the EQR, escalate to the managing partner and the quality partner; resolution is documented in a one-page memo signed by those involved; the engagement partner does not date the report until the memo is signed.
Evidence the policy operates: a firm-wide consultation log (engagement, date, matter, consultee, conclusion, workpaper reference). The annual monitoring process samples entries from the log and tests the memos. If the log is empty at year-end across all audits, that is a finding for the monitoring process: either no hard matters arose, which is implausible, or the policy is not being followed.
A short escalation timeline
An audit report is targeted for April 9. On March 30, the senior and the manager disagree on whether to record an impairment. The manager escalates to the engagement partner the same day, who requests a consultation with the outside advisor on March 31 and gives the advisor the contract, forecast and impairment model. The advisor responds on April 2. The partner and manager agree on April 3, the entry is posted April 5, and the memo is signed April 6. The report is dated April 9, after resolution. If the advisor's response had not arrived, the date would have moved.
Frequently asked questions
Is a hallway conversation consultation?
Only if it meets paragraph .35: the right level of knowledge, all the relevant facts given, a conclusion agreed with the party consulted, and implementation. And only if it is documented under paragraph .41.
Does a difference with the client count?
No. Paragraphs .37 and .38 address differences within the team, with the EQR, or with individuals performing system activities, including those who provide consultation.
Sources
- AICPA, Statement on Quality Management Standards No. 1, A Firm's System of Quality Management (QM Section 10), paragraphs 32d, 32e and application material A83, A84, A86: https://www.aicpa-cima.com/resources/landing/aicpa-professional-standards
- AICPA, AU-C Section 220, Quality Management for an Engagement Conducted in Accordance With GAAS (paragraphs .35 to .38, .41, A102 to A105, A111, A123): https://a-us.storyblok.com/f/1015104/x/32853782b6/aicpa-sas-146.pdf
- AICPA, AU-C Section 230, Audit Documentation (A18): https://www.aicpa-cima.com/resources/landing/aicpa-professional-standards
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