ISA (NZ) 220 (Revised)

1. This International Standard on Auditing (New Zealand) (ISA (NZ)) deals with the specific responsibilities of the auditor regarding quality management at the engagement level for an audit of financial statements, and the related responsibilities of the engagement partner. This ISA (NZ) is to be read in conjunction with relevant ethical requirements. (Ref: Para. A1, A38)

2. Under Professional and Ethical Standard 3¹, the objective of the firm is to design, implement and operate a system of quality management for audits or reviews of financial statements, or other assurance or related services engagements performed by the firm, that provides the firm with reasonable assurance that: (Ref: Para. A13–A14)

1. The firm and its personnel fulfil their responsibilities in accordance with professional standards and applicable legal and regulatory requirements, and conduct engagements in accordance with such standards and requirements; and

2. Engagement reports issued by the firm or engagement partners are appropriate in the circumstances.²

3. This ISA (NZ) is premised on the basis that the firm is subject to PES 3 and PES 4³ or to national requirements that are at least as demanding. (Ref: Para. A2–A3)

4. The engagement team, led by the engagement partner, is responsible, within the context of the firm’s system of quality management and through complying with the requirements of this ISA (NZ), for: (Ref: Para. A4–A11)

1. Implementing the firm’s responses to quality risks (i.e., the firm’s policies or procedures) that are applicable to the audit engagement using information communicated by, or obtained from, the firm;

2. Given the nature and circumstances of the audit engagement, determining whether to design and implement responses at the engagement level beyond those in the firm’s policies or procedures; and

3. Communicating to the firm information from the audit engagement that is required to be communicated by the firm’s policies or procedures to support the design, implementation and operation of the firm’s system of quality management.

5. Complying with the requirements in other ISAs (NZ) may provide information that is relevant to quality management at the engagement level. (Ref: Para. A12)

6. The public interest is served by the consistent performance of quality audit engagements through achieving the objective of this standard and other ISAs (NZ) for each engagement. A quality audit engagement is achieved through planning and performing the engagement and reporting on it in accordance with professional standards and applicable legal and regulatory requirements. Achieving the objectives of those standards and complying with the requirements of applicable law or regulation involves exercising professional judgement and exercising professional scepticism.

7. In accordance with ISA (NZ) 200,⁴ the engagement team is required to plan and perform an audit with professional scepticism and to exercise professional judgement. Professional judgement is exercised in making informed decisions about the courses of action that are appropriate to manage and achieve quality given the nature and circumstances of the audit engagement. Professional scepticism supports the quality of judgements made by the engagement team and, through these judgements, supports the overall effectiveness of the engagement team in achieving quality at the engagement level. The appropriate exercise of professional scepticism may be demonstrated through the actions and communications of the engagement team. Such actions and communications may include specific steps to mitigate impediments that may impair the appropriate exercise of professional scepticism, such as unconscious bias or resource constraints. (Ref: Para. A33–A36)

8. The requirements of this ISA (NZ) are intended to be applied in the context of the nature and circumstances of each audit. For example:

1. When an audit is carried out entirely by the engagement partner, which may be the case for an audit of a less complex entity, some requirements in this ISA (NZ) are not relevant because they are conditional on the involvement of other members of the engagement team. (Ref: Para. A13–A14)

2. When an audit is not carried out entirely by the engagement partner or in an audit of an entity whose nature and circumstances are more complex, the engagement partner may assign the design or performance of some procedures, tasks or actions to other members of the engagement team.

9. The engagement partner remains ultimately responsible, and therefore accountable, for compliance with the requirements of this ISA (NZ). The term “the engagement partner shall take responsibility for…” is used for those requirements that the engagement partner is permitted to assign the design or performance of procedures, tasks or actions to appropriately skilled or suitably experienced members of the engagement team. For other requirements, this ISA (NZ) expressly intends that the requirement or responsibility be fulfilled by the engagement partner and the engagement partner may obtain information from the firm or other members of the engagement team. (Ref: Para. A22–A25)

10. This ISA (NZ) is effective for audits of financial statements for periods beginning on or after 15 December 2022.

11. The objective of the auditor is to manage quality at the engagement level to obtain reasonable assurance that quality has been achieved such that:

1. The auditor has fulfilled the auditor’s responsibilities, and has conducted the audit, in accordance with professional standards and applicable legal and regulatory requirements; and

2. The auditor’s report issued is appropriate in the circumstances.

13. The engagement partner shall take overall responsibility for managing and achieving quality on the audit engagement, including taking responsibility for creating an environment for the engagement that emphasises the firm’s culture and expected behaviour of engagement team members. In doing so, the engagement partner shall be sufficiently and appropriately involved throughout the audit engagement such that the engagement partner has the basis for determining whether the significant judgements made, and the conclusions reached, are appropriate given the nature and circumstances of the engagement. (Ref: Para. A28–A37)

14. In creating the environment described in paragraph 13, the engagement partner shall take responsibility for clear, consistent and effective actions being taken that reflect the firm’s commitment to quality and establish and communicate the expected behaviour of engagement team members, including emphasising: (Ref: Para. A30–A34)

1. That all engagement team members are responsible for contributing to the management and achievement of quality at the engagement level;

2. The importance of professional ethics, values and attitudes to the members of the engagement team;

3. The importance of open and robust communication within the engagement team, and supporting the ability of engagement team members to raise concerns without fear of reprisal; and

4. The importance of each engagement team member exercising professional scepticism throughout the audit engagement.

15. If the engagement partner assigns the design or performance of procedures, tasks or actions related to a requirement of this ISA (NZ) to other members of the engagement team to assist the engagement partner in complying with the requirements of this ISA (NZ), the engagement partner shall continue to take overall responsibility for managing and achieving quality on the audit engagement through direction and supervision of those members of the engagement team, and review of their work. (Ref: Para. 9, A37)

16. The engagement partner shall have an understanding of the relevant ethical requirements, including those related to independence, that are applicable given the nature and circumstances of the audit engagement. (Ref: Para. A38–A42, A48)

17. The engagement partner shall take responsibility for other members of the engagement team having been made aware of relevant ethical requirements that are applicable given the nature and circumstances of the audit engagement, and the firm’s related policies or procedures, including those that address: (Ref: Para. A23–A25, A40–A44)

1. Identifying, evaluating and addressing threats to compliance with relevant ethical requirements, including those related to independence;

2. Circumstances that may cause a breach of relevant ethical requirements, including those related to independence, and the responsibilities of members of the engagement team when they become aware of breaches; and

3. The responsibilities of members of the engagement team when they become aware of an instance of non-compliance with laws and regulations by the entity.⁹

18. If matters come to the engagement partner’s attention that indicate that a threat to compliance with relevant ethical requirements exists, the engagement partner shall evaluate the threat through complying with the firm’s policies or procedures, using relevant information from the firm, the engagement team or other sources, and take appropriate action. (Ref: Para. A43–A44)

19. The engagement partner shall remain alert throughout the audit engagement, through observation and making inquiries as necessary, for breaches of relevant ethical requirements or the firm’s related policies or procedures by members of the engagement team. (Ref: Para. A45)

20. If matters come to the engagement partner’s attention through the firm’s system of quality management, or from other sources, that indicate that relevant ethical requirements applicable to the nature and circumstances of the audit engagement have not been fulfilled, the engagement partner, in consultation with others in the firm, shall take appropriate action. (Ref: Para. A46)

21. Prior to dating the auditor’s report, the engagement partner shall take responsibility for determining whether relevant ethical requirements, including those related to independence, have been fulfilled. (Ref: Para. A38 and A47)

22. The engagement partner shall determine that the firm’s policies or procedures for the acceptance and continuance of client relationships and audit engagements have been followed, and that conclusions reached in this regard are appropriate. (Ref: Para. A49–A52, A58)

23. The engagement partner shall take into account information obtained in the acceptance and continuance process in planning and performing the audit engagement in accordance with the ISAs (NZ) and complying with the requirements of this ISA (NZ). (Ref: Para. A53–A56)

24. If the engagement team becomes aware of information that may have caused the firm to decline the audit engagement had that information been known by the firm prior to accepting or continuing the client relationship or specific engagement, the engagement partner shall communicate that information promptly to the firm, so that the firm and the engagement partner can take the necessary action. (Ref: Para. A57)

25. The engagement partner shall determine that sufficient and appropriate resources to perform the engagement are assigned or made available to the engagement team in a timely manner, taking into account the nature and circumstances of the audit engagement, the firm’s policies or procedures, and any changes that may arise during the engagement. (Ref: Para. A59–A70, A73–A74, A78)

26. The engagement partner shall determine that members of the engagement team, and any auditor’s external experts and internal auditors who provide direct assistance who are not part of the engagement team, collectively have the appropriate competence and capabilities, including sufficient time, to perform the audit engagement. (Ref: Para. A62, A71–A74)

27. If, as a result of complying with the requirements in paragraphs 25 and 26, the engagement partner determines that resources assigned or made available are insufficient or inappropriate in the circumstances of the audit engagement, the engagement partner shall take appropriate action, including communicating with appropriate individuals about the need to assign or make available additional or alternative resources to the engagement. (Ref: Para. A75‒A77)

28. The engagement partner shall take responsibility for using the resources assigned or made available to the engagement team appropriately, given the nature and circumstances of the audit engagement. (Ref: Para. A63–A69)

29. The engagement partner shall take responsibility for the direction and supervision of the members of the engagement team and the review of their work. (Ref: Para. A79)

30. The engagement partner shall determine that the nature, timing and extent of direction, supervision and review is: (Ref: Para. A80–A88, A93–A96)

1. Planned ¹⁰ and performed in accordance with the firm’s policies or procedures, professional standards and applicable legal and regulatory requirements; and

2. Responsive to the nature and circumstances of the audit engagement and the resources assigned or made available to the engagement team by the firm.

31. The engagement partner shall review audit documentation at appropriate points in time during the audit engagement, including audit documentation relating to: (Ref: Para. A89– A92)

1. Significant matters;¹¹

2. Significant judgements, including those relating to difficult or contentious matters identified during the audit engagement, and the conclusions reached; and

3. Other matters that, in the engagement partner’s professional judgement, are relevant to the engagement partner’s responsibilities.

32. On or before the date of the auditor’s report, the engagement partner shall determine, through review of audit documentation and discussion with the engagement team, that sufficient appropriate audit evidence has been obtained to support the conclusions reached and for the auditor’s report to be issued. (Ref: Para. A89–A93)

33. Prior to dating the auditor’s report, the engagement partner shall review the financial statements and the auditor’s report, including, if applicable, the description of the key audit matters¹² and related audit documentation, to determine that the report to be issued will be appropriate in the circumstances.¹³

34. The engagement partner shall review, prior to their issuance, formal written communications to management, those charged with governance or regulatory authorities. (Ref: Para. A97)

35. The engagement partner shall: (Ref: Para. A98–A101)

1. Take responsibility for the engagement team undertaking consultation on:

   1. Difficult or contentious matters and matters on which the firm’s policies or procedures require consultation; and

   2. Other matters that, in the engagement partner’s professional judgement, require consultation;

2. Determine that members of the engagement team have undertaken appropriate consultation during the audit engagement, both within the engagement team, and between the engagement team and others at the appropriate level within or outside the firm;

3. Determine that the nature and scope of, and conclusions resulting from, such consultations are agreed with the party consulted; and

4. Determine that conclusions agreed have been implemented.

36. For audit engagements for which an engagement quality review is required, the engagement partner shall: (Ref: Para. A102)

1. Determine that an engagement quality reviewer has been appointed;

2. Cooperate with the engagement quality reviewer and inform other members of the engagement team of their responsibility to do so;

3. Discuss significant matters and significant judgements arising during the audit engagement, including those identified during the engagement quality review, with the engagement quality reviewer; and

4. Not date the auditor’s report until the completion of the engagement quality review. (Ref: Para. A103–A105)

37. If differences of opinion arise within the engagement team, or between the engagement team and the engagement quality reviewer or individuals performing activities within the firm’s system of quality management, including those who provide consultation, the engagement team shall follow the firm’s policies or procedures for dealing with and resolving such differences of opinion. (Ref: Para. A106–A107)

38. The engagement partner shall:

1. Take responsibility for differences of opinion being addressed and resolved in accordance with the firm’s policies or procedures;

2. Determine that conclusions reached are documented and implemented; and

3. Not date the auditor’s report until any differences of opinion are resolved.

39. The engagement partner shall take responsibility for: (Ref: Para. A108‒A111)

1. Obtaining an understanding of the information from the firm’s monitoring and remediation process, as communicated by the firm including, as applicable, the information from the monitoring and remediation process of the network and across the network firms;

2. Determining the relevance and effect on the audit engagement of the information referred to in paragraph 39(a) and take appropriate action; and

3. Remaining alert throughout the audit engagement for information that may be relevant to the firm’s monitoring and remediation process and communicate such information to those responsible for the process.

40. Prior to dating the auditor’s report, the engagement partner shall determine that the engagement partner has taken overall responsibility for managing and achieving quality on the audit engagement. In doing so, the engagement partner shall determine that: (Ref: Para. A112–A115)

1. The engagement partner’s involvement has been sufficient and appropriate throughout the audit engagement such that the engagement partner has the basis for determining that the significant judgements made and the conclusions reached are appropriate given the nature and circumstances of the engagement; and

2. The nature and circumstances of the audit engagement, any changes thereto, and the firm’s related policies or procedures have been taken into account in complying with the requirements of this ISA (NZ).

41. In applying ISA (NZ) 230,¹⁴ the auditor shall include in the audit documentation: (Ref: Para. A116–A119)

1. Matters identified, relevant discussions with personnel, and conclusions reached with respect to:

   1. Fulfillment of responsibilities relating to relevant ethical requirements, including those related to independence.

   2. The acceptance and continuance of the client relationship and audit engagement.

2. The nature and scope of, and conclusions resulting from, consultations undertaken during the audit engagement and how such conclusions were implemented.

3. If the audit engagement is subject to an engagement quality review, that the engagement quality review has been completed on or before the date of the auditor’s report.

A1. This ISA (NZ) applies to all audits of financial statements, including audits of group financial statements. ISA (NZ) 600 (Revised)¹⁵ deals with special considerations that apply to an audit of group financial statements and when component auditors are involved. ISA (NZ) 600 (Revised), adapted as necessary in the circumstances, may also be useful in an audit of financial statements when the engagement team includes individuals from another firm. For example, ISA (NZ) 600 (Revised) may be useful when involving such an individual to attend a physical inventory count, inspect property, plant and equipment, or perform audit procedures at a shared service centre at a remote location.

A2. PES 3 deals with a firm’s responsibilities for designing, implementing and operating its system of quality management.

A3. Firms or national requirements may use different terminology or frameworks to describe the components of the system of quality management. National requirements that deal with the firm’s responsibilities to design, implement and operate a system of quality management are at least as demanding as PES 3 when they address the requirements of PES 3 and impose obligations on the firm to achieve the objective of PES 3.

A4. Quality management at the engagement level is supported by the firm’s system of quality management and informed by the specific nature and circumstances of the audit engagement. In accordance with PES 3, the firm is responsible for communicating information enables the engagement team to understand and carry out their responsibilities relating to performing engagements. For example, such communications may cover policies or procedures to undertake consultations with designated individuals in certain situations involving complex technical or ethical matters, or to involve firm-designated experts in specific engagements to perform audit procedures related to particular matters (e.g., the firm may specify that firm- designated credit experts are to be involved in auditing expected credit loss allowances in audits of financial institutions).

A5. Firm-level responses may include policies or procedures established by a network, or by other firms, structures or organisations within the same network (network requirements or network services are described further in [PES 3 within the “Network Requirements or Network Services” section).¹⁶ The requirements of this ISA (NZ) are based on the premise that the firm is responsible for taking the necessary action to enable engagement teams to implement or use network requirements or network services on the audit engagement (for example, a requirement to use an audit methodology developed for use by a network firm). Under PES 3, the firm is responsible for determining how network requirements or network services are relevant to, and are taken into account in, the firm’s system of quality management.¹⁷

A6. Some firm-level responses to quality risks are not performed at the engagement level but are nevertheless relevant when complying with the requirements of this ISA (NZ). For example, firm-level responses that the engagement team may be able to depend on when complying with the requirements of this ISA (NZ) include:

A7. Due to the specific nature and circumstances of each audit engagement and changes that may occur during the audit engagement, a firm cannot identify all quality risks that may arise at the engagement level or set forth all relevant and appropriate responses. Accordingly, the engagement team exercises professional judgement in determining whether to design and implement responses, beyond those set forth in the firm’s policies or procedures, at the engagement level to meet the objective of this ISA (NZ).¹⁸

A8. The engagement team’s determination of whether engagement level responses are necessary (and, if so, what those responses are) is influenced by the requirements of this ISA (NZ), the engagement team’s understanding of the nature and circumstances of the engagement and any changes during the audit engagement. For example, unanticipated circumstances may arise during the engagement that may cause the engagement partner to request the involvement of appropriately experienced personnel in addition to those initially assigned or made available.

A9. The relative balance of the engagement team’s efforts to comply with the requirements of this ISA (NZ) (i.e., between implementing the firm’s responses and designing and implementing engagement specific responses beyond those set forth in the firm’s policies or procedures) may vary. For example, the firm may design an audit program to be used in circumstances that are applicable to the audit engagement (e.g., an industry-specific audit program). Other than determining the timing and extent of procedures to be performed, there may be little or no need for supplemental audit procedures to be added to the audit program at the engagement level. Alternatively, the engagement team’s actions in complying with the engagement performance requirements of this ISA (NZ) may be more focused on designing and implementing responses at the engagement level to deal with the specific nature and circumstances of the engagement (e.g., planning and performing procedures to address risks of material misstatement not contemplated by the firm’s audit programs).

A10. Ordinarily, the engagement team may depend on the firm’s policies or procedures in complying with the requirements of this ISA (NZ), unless:

A11. If the engagement partner becomes aware (including through being informed by other members of the engagement team) that the firm’s responses to quality risks are ineffective in the context of the specific engagement or the engagement partner is unable to depend on the firm’s policies or procedures, the engagement partner communicates such information promptly to the firm in accordance with paragraph 39(c) as such information is relevant to the firm’s monitoring and remediation process. For example, if an engagement team member identifies that an audit software program has a security weakness, timely communication of such information to the appropriate personnel enables the firm to take steps to update and reissue the audit program. See also paragraph A70 in respect of sufficient and appropriate resources.

A12. Complying with the requirements in other ISAs (NZ) may provide information that is relevant to quality management at the engagement level. For example, the understanding of the entity and its environment required to be obtained under ISA (NZ) 315 (Revised 2019)¹⁹ provides information that may be relevant to complying with the requirements of this ISA (NZ). Such information may be relevant to the determination of:

A13. In a smaller firm, the firm’s policies or procedures may designate an engagement partner, on behalf of the firm, to design many of the responses to the firm’s quality risks, as doing so may be a more effective approach to designing and implementing responses as part of the firm's system of quality management. Additionally, a smaller firm’s policies or procedures may be less formal. For example, in a very small firm with a relatively small number of audit engagements, the firm may determine that there is no need to establish a firm-wide system to monitor independence, and rather, independence will be monitored at the individual engagement level by the engagement partner.

A14. The requirements relating to direction, supervision and review of the work of other members of the engagement team are only relevant if there are members of the engagement team other than the engagement partner.

A15. The engagement team may be organised in a variety of ways. For example, engagement team members may be located together or across different geographic locations and may be organised in groups by the activity they are performing. Regardless of how the engagement team is organised, any individual who performs audit procedures²⁰ on the audit engagement is a member of the engagement team.

A16. The definition of an engagement team focuses on individuals who perform audit procedures on the audit engagement. Audit evidence, which is necessary to support the auditor’s opinion and report, is primarily obtained from audit procedures performed during the course of the audit. ²¹ Audit procedures comprise risk assessment procedures ²² and further audit procedures. ²³ As explained in ISA (NZ) 500, audit procedures include inspection, observation, confirmation, recalculation, reperformance, analytical procedures and inquiry, often performed in some combination. ²⁴ Other ISAs (NZ) may also include specific procedures to obtain audit evidence, for example, ISA (NZ) 520.²⁵

A17. Engagement teams include personnel and may also include other individuals who perform audit procedures who are from:

1. A network firm; or

2. A firm that is not a network firm, or another service provider.²⁶

For example, an individual from another firm may perform audit procedures on the financial information of a component in a group audit engagement, attend a physical inventory count or inspect physical fixed assets at a remote location.

A18. Engagement teams may also include individuals from service delivery centres who perform audit procedures. For example, it may be determined that specific tasks that are repetitive or specialised in nature will be performed by a group of appropriately skilled personnel and the engagement team therefore includes such individuals. Service delivery centres may be established by the firm, the network, or by other firms, structures or organisations within the same network. For example, a centralised function may be used to facilitate external confirmation procedures.

A19. Engagement teams may include individuals with expertise in a specialised area of accounting or auditing who perform audit procedures on the audit engagement, for example, individuals with expertise in accounting for income taxes, or in analysing complex information produced by automated tools and techniques for the purpose of identifying unusual or unexpected relationships. An individual is not a member of the engagement team if that individual’s involvement with the engagement is limited to consultation. Consultations are addressed in paragraphs 35 and A98–A101.

A20. If the audit engagement is subject to an engagement quality review, the engagement quality reviewer, and any other individuals performing the engagement quality review, are not members of the engagement team. Such individuals may be subject to specific independence requirements.

A21. An internal auditor providing direct assistance and an auditor’s external expert whose work is used in the engagement are not members of the engagement team. ²⁷ ISA (NZ) 610 (Revised) 2013 and ISA (NZ) 620 provide requirements and guidance for the auditor when using the work of internal auditors in a direct assistance capacity or when using the work of an external expert, respectively. Compliance with these ISAs (NZ) requires the auditor to obtain sufficient appropriate audit evidence on the work performed by an internal auditor providing direct assistance and perform audit procedures on the work of an auditor’s expert.

A21A. When joint auditors conduct an audit, the joint engagement partners and their engagement teams collectively constitute the “engagement partner” and “engagement team” for the purposes of the ISAs (NZ). This ISA (NZ) does not, however, deal with the relationship between joint auditors or the work that one joint auditor performs in relation to the work of the other joint auditor.

A22. When this ISA (NZ) expressly intends that a requirement or responsibility be fulfilled by the engagement partner, the engagement partner may need to obtain information from the firm or other members of the engagement team to fulfil the requirement (e.g., information to make the required decision or judgement). For example, the engagement partner is required to determine that members of the engagement team collectively have the appropriate competence and capabilities to perform the audit engagement. To make a judgement on whether the competence and capabilities of the engagement team is appropriate, the engagement partner may need to use information compiled by the engagement team or from the firm’s system of quality management.

A23. Within the context of the firm’s system of quality management, engagement team members from the firm are responsible for implementing the firm’s policies or procedures that are applicable to the audit engagement. As engagement team members from another firm are neither partners nor staff of the engagement partner’s firm, they may not be subject to the firm’s system of quality management or the firm’s policies or procedures. Further, the policies or procedures of another firm may not be similar to that of the engagement partner’s firm. For example, policies or procedures regarding direction, supervision and review may be different, particularly when the other firm is in a jurisdiction with a different legal system, language or culture than that of the engagement partner’s firm. Accordingly, if the engagement team includes individuals who are from another firm, different actions may need to be taken by the firm or the engagement partner to implement the firm’s policies or procedures in respect of the work of those individuals.

A24. In particular, the firm’s policies or procedures may require the firm or the engagement partner to take different actions from those applicable to personnel when obtaining an understanding of whether an individual from another firm:

A25. When firm policies or procedures require specific activities to be undertaken in certain circumstances (e.g., consultation on a particular matter), it may be necessary for the firm’s related policies or procedures to be communicated to individuals who are not personnel. Such individuals are then able to alert the engagement partner if the circumstance arises, and this enables the engagement partner to comply with the firm’s policies or procedures. For example, in a group audit engagement, if a component auditor is performing audit procedures on the financial information of a component and identifies a difficult or contentious matter that is relevant to the group financial statements and subject to consultation²⁸ under the group auditor’s policies or procedures, the component auditor is able to alert the group auditor about the matter.

A26. The definition of “firm” in relevant ethical requirements may differ from the definition set out in this ISA (NZ).

A27. The definitions of “network” or “network firm” in relevant ethical requirements may differ from those set out in this ISA (NZ). Professional and Ethical Standard 1 also provides guidance in relation to the terms “network” and “network firm.” Networks and the other network firms may be structured in a variety of ways, and are in all cases external to the firm. The provisions in this ISA (NZ) in relation to networks also apply to any structures or organisations that do not form part of the firm, but that exist within the network.

A28. PES 3 requires the firm to establish quality objectives that address the firm’s governance and leadership that supports the design, implementation and operation of the system of quality management. The engagement partner’s responsibility for managing and achieving quality is supported by a firm culture that demonstrates a commitment to quality. In addressing the requirements in paragraphs 13 and 14 of this ISA (NZ), the engagement partner may communicate directly to other members of the engagement team and reinforce this communication through personal conduct and actions (e.g., leading by example). A culture that demonstrates a commitment to quality is further shaped and reinforced by the engagement team members as they demonstrate expected behaviours when performing the engagement.

A29. The nature and extent of the actions of the engagement partner to demonstrate the firm’s commitment to quality may depend on a variety of factors including the size, structure, geographical dispersion and complexity of the firm and the engagement team, and the nature and circumstances of the audit engagement. With a smaller engagement team with few engagement team members, influencing the desired culture through direct interaction and conduct may be sufficient, whereas for a larger engagement team that is dispersed over many locations, more formal communications may be necessary.

A30. Being sufficiently and appropriately involved throughout the audit engagement may be demonstrated by the engagement partner in different ways, including:

A31. Communication is the means through which the engagement team shares relevant information on a timely basis to comply with the requirements of this ISA (NZ), thereby contributing to the achievement of quality on the audit engagement. Communication may be between or among members of the engagement team, or with:

1. The firm, (e.g., individuals performing activities within the firm’s system of quality management, including those assigned ultimate or operational responsibility for the firm’s system of quality management);

2. Others involved in the audit (e.g., internal auditors who provide direct assistance²⁹ or an auditor’s external expert³⁰); and

3. Parties that are external to the firm (e.g., management, those charged with governance or regulatory authorities).

A32. The nature and circumstances of the audit engagement may affect the engagement partner’s decisions regarding the appropriate means of effective communication with the members of the engagement team. For example, to support appropriate direction, supervision and review, the firm may use IT applications to facilitate the communication between the members of the engagement team when they are performing work across different geographical locations.

A33. The engagement partner is responsible for emphasising the importance of each engagement team member exercising professional scepticism throughout the audit engagement. Conditions inherent in some audit engagements can create pressures on the engagement team that may impede the appropriate exercise of professional scepticism when designing and performing audit procedures and evaluating audit evidence. Accordingly, when developing the overall audit strategy in accordance with ISA (NZ) 300, the engagement team may need to consider whether such conditions exist in the audit engagement and, if so, what actions the firm or the engagement team may need to undertake to mitigate such impediments.

A34. Impediments to the exercise of professional scepticism at the engagement level may include, but are not limited to:

A35. Unconscious or conscious auditor biases may affect the engagement team’s professional judgements, including for example, in the design and performance of audit procedures, or the evaluation of audit evidence. Examples of unconscious auditor biases that may impede the exercise of professional scepticism, and therefore the reasonableness of the professional judgements made by the engagement team in complying with the requirements of this ISA (NZ), may include:

A36. Possible actions that the engagement team may take to mitigate impediments to the exercise of professional scepticism at the engagement level may include:

A37. Being sufficiently and appropriately involved throughout the audit engagement when procedures, tasks or actions have been assigned to other members of the engagement team may be demonstrated by the engagement partner in different ways, including:

A39. Based on the nature and circumstances of the audit engagement, certain law, regulation or aspects of relevant ethical requirements, such as those pertaining to non-compliance with laws or regulations, may be relevant to the engagement, for example laws or regulations dealing with money laundering, corruption, or bribery.

A40. The firm’s information system and the resources provided by the firm may assist the engagement team in understanding and fulfilling relevant ethical requirements applicable to the nature and circumstances of the audit engagement. For example, the firm may:

A41. The engagement partner may take into account the information, communication, and resources described in paragraph A40 when determining whether the engagement partner may depend on the firm’s policies or procedures in complying with relevant ethical requirements.

A42. Open and robust communication between the members of the engagement team about relevant ethical requirements may also assist in:

A43. In accordance with PES 3, the firm’s responses to address the quality risks in relation to relevant ethical requirements, including those related to independence for engagement team members, include policies or procedures for identifying, evaluating and addressing threats to compliance with the relevant ethical requirements.

A44. Relevant ethical requirements may contain provisions regarding the identification and evaluation of threats and how they are to be dealt with. For example, Professional and Ethical Standard 1 explains that a self-interest threat to compliance with the fundamental principle of professional competence and due care may arise if the fee quoted for an audit engagement is so low that it might be difficult to perform the engagement in accordance with professional standards.³²

A45. In accordance with PES 3, the firm is required to establish policies or procedures for identifying, communicating, evaluating and reporting of any breaches of relevant ethical requirements and appropriately responding to the causes and consequences of the breaches in a timely manner.

A46. Appropriate actions may include, for example:

A47. ISA (NZ) 700 (Revised) requires that the auditor’s report include a statement that the auditor is independent of the entity in accordance with the relevant ethical requirements relating to the audit, and that the auditor has fulfilled the auditor’s other ethical responsibilities in accordance with these requirements.³³ Performing the procedures required by paragraphs 16–21 of this ISA (NZ) provides the basis for these statements in the auditor’s report.

A48. Statutory measures may provide safeguards for the independence of public sector auditors. However, public sector auditors or audit firms carrying out public sector audits on behalf of the statutory auditor may, depending on the terms of the mandate in a particular jurisdiction, need to adapt their approach to promote compliance with paragraph 16. This may include, where the public sector auditor’s mandate does not permit withdrawal from the audit engagement, disclosure through a public report of circumstances that have arisen that would, if they were in the private sector, lead the auditor to withdraw.

A49. PES 3 requires the firm to establish quality objectives that address the acceptance and continuance of client relationships and specific engagements.

A50. Information such as the following may assist the engagement partner in determining whether the conclusions reached regarding the acceptance and continuance of client relationships and audit engagements are appropriate:

A51. Under PES 3, for acceptance and continuance decisions, the firm is required to make judgements about the firm’s ability to perform the engagement in accordance with professional standards and applicable legal and regulatory requirements. The engagement partner may use the information considered by the firm in this regard in determining whether the conclusions reached regarding the acceptance and continuance of client relationships and audit engagements are appropriate. If the engagement partner has concerns regarding the appropriateness of the conclusions reached, the engagement partner may discuss the basis for those conclusions with those involved in the acceptance and continuance process.

A52. If the engagement partner is directly involved throughout the firm’s acceptance and continuance process, the engagement partner will be aware of the information obtained or used by the firm, in reaching the related conclusions. Such direct involvement may also provide a basis for the engagement partner’s determination that the firm’s policies or procedures have been followed and that the conclusions reached are appropriate.

A53. Information obtained during the acceptance and continuance process may assist the engagement partner in complying with the requirements of this ISA (NZ) and making informed decisions about appropriate courses of action. Such information may include:

A54. Information obtained during acceptance and continuance may also be relevant in complying with the requirements of other ISAs (NZ), as well as this ISA (NZ), for example with respect to:

A55. Law, regulation, or relevant ethical requirements may require the successor auditor to request, prior to accepting the audit engagement, the predecessor auditor to provide known information regarding any facts or circumstances that, in the predecessor auditor’s judgment, the successor auditor needs to be aware of before deciding whether to accept the engagement. In some circumstances, the predecessor auditor may be required, on request by the proposed successor auditor, to provide information regarding identified or suspected non-compliance with laws and regulations to the proposed successor auditor. For example, if the predecessor auditor has withdrawn from the engagement as a result of identified or suspected non- compliance with laws and regulations, Professional and Ethical Standard 1 requires that the predecessor auditor, on request by a proposed successor auditor, provide all relevant facts and other information concerning such non-compliance that, in the predecessor auditor’s opinion, the proposed successor auditor needs to be aware of before deciding whether to accept the audit appointment.

A56. In circumstances when the firm is obligated by law or regulation to accept or continue an audit engagement, the engagement partner may take into account information obtained by the firm about the nature and circumstances of the engagement.

A57. In deciding on the necessary action, the engagement partner and the firm may conclude that it is appropriate to continue with the audit engagement and, if so, determine what additional steps are necessary at the engagement level (e.g., the assignment of more staff or staff with specific expertise). If the engagement partner has further concerns or is not satisfied that the matter has been appropriately dealt with, the firm’s policies or procedures for resolving differences of opinion may be applicable.

A58. In the public sector, auditors may be appointed in accordance with statutory procedures and the public sector auditor may not need to establish all policies or procedures regarding the acceptance and continuance of audit engagements. Nevertheless, the requirements and considerations for the acceptance and continuance of client relationships and engagements as set out in paragraphs 22–24 and A49–A57 may be valuable to public sector auditors in performing risk assessments and in carrying out reporting responsibilities.

A59. Under PES 3, the resources assigned or made available by the firm to support the performance of audit engagements include:

A60. Resources for an audit engagement are primarily assigned or made available by the firm, although there may be circumstances when the engagement team directly obtains resources for the audit engagement. For example, this may be the case when a component auditor is required by statute, regulation or for another reason to express an audit opinion on the financial statements of a component, and the component auditor is also appointed by component management to perform audit procedures on behalf of the group auditor. In such circumstances, the firm’s policies or procedures may require the engagement partner to take different actions, such as requesting information from the component auditor, to determine whether sufficient and appropriate resources are assigned or made available.

A61. A relevant consideration for the engagement partner, in complying with the requirements in paragraphs 25 and 26, may be whether the resources assigned or made available to the engagement team enable fulfillment of relevant ethical requirements, including ethical principles such as professional competence and due care.

A62. Human resources include members of the engagement team (see also paragraphs A5, A15– A21) and, where applicable, an auditor’s external expert and individuals from within the entity’s internal audit function who provide direct assistance on the audit.

A63. The use of technological resources on the audit engagement may assist the auditor in obtaining sufficient appropriate audit evidence. Technological tools may allow the auditor to more effectively and efficiently manage the audit. Technological tools may also allow the auditor to evaluate large amounts of data more easily to, for example, provide deeper insights, identify unusual trends or more effectively challenge management’s assertions, which enhances the ability of the auditor to exercise professional scepticism. Technological tools may also be used to conduct meetings and provide communication tools to the engagement team. Inappropriate use of such technological resources may, however, increase the risk of overreliance on the information produced for decision making purposes, or may create threats to complying with relevant ethical requirements, for example, requirements related to confidentiality.

A64. The firm’s policies or procedures may include required considerations or responsibilities for the engagement team when using firm approved technological tools to perform audit procedures and may require the involvement of individuals with specialised skills or expertise in evaluating or analysing the output.

A65. When the engagement partner requires individuals from another firm to use specific automated tools and techniques when performing audit procedures, communications with those individuals may indicate that the use of such automated tools and techniques needs to comply with the engagement team’s instructions.

A66. The firm’s policies or procedures may specifically prohibit the use of certain IT applications or features of IT applications (e.g., software that has not yet been specifically approved for use by the firm). Alternatively, the firm’s policies or procedures may require the engagement team to take certain actions before using an IT application that is not firm-approved to determine it is appropriate for use, for example by requiring:

A67. The engagement partner may exercise professional judgement in considering whether the use of an IT application on the audit engagement is appropriate in the context of the engagement, and if so, how the IT application is to be used. Factors that may be considered in determining whether a particular IT application, that has not been specifically approved for use by the firm, is appropriate for use in the audit engagement include whether:

A68. Intellectual resources include, for example, audit methodologies, implementation tools, auditing guides, model programs, templates, checklists or forms.

A69. The use of intellectual resources on the audit engagement may facilitate the consistent application and understanding of professional standards, law and regulation, and related firm policies or procedures. For this purpose, the engagement team may be required, in accordance with the firm’s policies or procedures, to use the firm’s audit methodology and specific tools and guidance. The engagement team may also consider whether the use of other intellectual resources is appropriate and relevant based on the nature and circumstances of the engagement, for example, an industry specific methodology or related guides and performance aids.

A70. In determining whether sufficient and appropriate resources to perform the engagement have been assigned or made available to the engagement team, ordinarily the engagement partner may depend on the firm’s related policies or procedures (including resources) as described in paragraph A6. For example, based on information communicated by the firm, the engagement partner may be able to depend on the firm’s technological development, implementation and maintenance programs when using firm-approved technology to perform audit procedures.

A71. When determining that the engagement team has the appropriate competence and capabilities, the engagement partner may take into consideration such matters as the team’s:

A72. Internal auditors and an auditor’s external expert are not members of the engagement team. ISA (NZ) 610 (Revised 2013)³⁸ and ISA (NZ) 620³⁹ include requirements and guidance relating to the assessment of the competence and capabilities of internal auditors and an auditor’s external expert, respectively.

A73. In situations where there are many engagement team members, for example in an audit of a larger or more complex entity, the engagement partner may involve an individual who has specialised skills or knowledge in project management, supported by appropriate technological and intellectual resources of the firm. Conversely, in an audit of a less complex entity with few engagement team members, project management may be achieved by a member of the engagement team through less formal means.

A74. Project management techniques and tools may support the engagement team in managing the quality of the audit engagement by, for example:

A75. PES 3 addresses the firm’s commitment to quality through its culture that exists throughout the firm, which recognises and reinforces the firm’s role in serving the public interest by consistently performing quality engagements, and the importance of quality in the firm’s strategic decisions and actions, including the firm’s financial and operational priorities. PES 3 also addresses the firm’s responsibilities for planning for resource needs, and obtaining, allocating or assigning resources in a manner that is consistent with the firm’s commitment to quality. However, in certain circumstances, the firm’s financial and operational priorities may place constraints on the resources assigned or made available to the engagement team. In such circumstances, these constraints do not override the engagement partner’s responsibility for achieving quality at the engagement level, including for determining that the resources assigned or made available by the firm are sufficient and appropriate to perform the audit engagement.

A76. The engagement partner’s determination of whether additional engagement level resources are required is a matter of professional judgement and is influenced by the requirements of this ISA (NZ) and the nature and circumstances of the audit engagement. As described in paragraph A11, in certain circumstances, the engagement partner may determine that the firm’s responses to quality risks are ineffective in the context of the specific engagement, including that certain resources assigned or made available to the engagement team are insufficient. In those circumstances, the engagement partner is required to take appropriate action, including communicating such information to the appropriate individuals in accordance with paragraph 27 and paragraph 39(c). For example, if an audit software program provided by the firm has not incorporated new or revised audit procedures in respect of recently issued industry regulation, timely communication of such information to the firm enables the firm to take steps to update and reissue the software promptly or to provide an alternative resource that enables the engagement team to comply with the new regulation in the performance of the audit engagement.

A77. If the resources assigned or made available are insufficient or inappropriate in the circumstances of the engagement and additional or alternative resources have not been made available, appropriate actions may include:

A78. In the public sector, specialised skills may be necessary to discharge the terms of the audit mandate in a particular jurisdiction. Such skills may include an understanding of the applicable reporting arrangements, including reporting to the legislature or other governing body or reporting in the public interest. The wider scope of a public sector audit may include, for example, some aspects of performance auditing.

A79. When an audit is not carried out entirely by the engagement partner, or in an audit of an entity whose nature and circumstances are more complex, it may be necessary for the engagement partner to assign direction, supervision, and review to other members of the engagement team. However, as part of the engagement partner’s overall responsibility for managing and achieving quality on the audit engagement and to be sufficiently and appropriately involved, the engagement partner is required to determine that the nature, timing and extent of direction, supervision and review is undertaken in accordance with paragraph 30. In such circumstances, personnel or members of the engagement team, including component auditors, may provide information to the engagement partner to enable the engagement partner to make the determination required by paragraph 30.

A80. Under PES 3, the firm is required to establish a quality objective that addresses the nature, timing and extent of the direction and supervision of engagement teams and review of their work. PES 3 also requires that such direction, supervision and review is planned and performed on the basis that the work performed by less experienced members of the engagement team is directed, supervised and reviewed by more experienced engagement team members.

A81. Direction and supervision of the engagement team and the review of the work of the engagement team are firm-level responses that are implemented at the engagement level, of which the nature, timing and extent may be further tailored by the engagement partner in managing the quality of the audit engagement. Accordingly, the approach to direction, supervision and review will vary from one engagement to the next, taking into account the nature and circumstances of the engagement. The approach will generally include a combination of addressing the firm’s policies or procedures and engagement specific responses.

A82. The approach to the direction and supervision of the members of the engagement team and the review of their work provides support for the engagement partner in fulfilling the requirements of this ISA (NZ), and in concluding that the engagement partner has been sufficiently and appropriately involved throughout the audit engagement in accordance with paragraph 40.

A83. Ongoing discussion and communication among members of the engagement team allows less experienced engagement team members to raise questions with more experienced engagement team members (including the engagement partner) in a timely manner and enables effective direction, supervision and review in accordance with paragraph 30.

A84. Direction of the engagement team may involve informing the members of the engagement team of their responsibilities, such as:

A85. Supervision may include matters such as:

A86. Review of the engagement team’s work provides support for the conclusion that the requirements of this ISA (NZ) have been addressed.

A87. Review of the engagement team’s work consists of consideration of whether, for example:

A88. The firm’s policies or procedures may contain specific requirements regarding:

A89. As required by ISA (NZ) 230, the engagement partner documents the date and extent of the review.⁴¹

A90. Timely review of documentation by the engagement partner at appropriate stages throughout the audit engagement enables significant matters to be resolved to the engagement partner’s satisfaction on or before the date of the auditor’s report. The engagement partner need not review all audit documentation.

A91. The engagement partner exercises professional judgement in identifying the areas of significant judgement made by the engagement team. The firm’s policies or procedures may specify certain matters that are commonly expected to be significant judgements. Significant judgements in relation to the audit engagement may include matters related to the overall audit strategy and audit plan for undertaking the engagement, the execution of the engagement and the overall conclusions reached by the engagement team, for example:

A92. The engagement partner exercises professional judgement in determining other matters to review, for example based on:

A93. The nature, timing and extent of the direction, supervision and review are required to be planned and performed in accordance with the firm’s policies or procedures, as well as professional standards and applicable legal and regulatory requirements. For example, the firm’s policies or procedures may include that:

A94. The approach to direction, supervision and review may be tailored depending on, for example:

A95. Identification of changes in the engagement circumstances may warrant re-evaluation of the planned approach to the nature, timing or extent of direction, supervision or review. For example, if the assessed risk of material misstatement at the financial statement level increases because of a complex transaction, the engagement partner may need to change the planned level of review of the work related to the transaction.

A96. In accordance with paragraph 30(b), the engagement partner is required to determine that the approach to direction, supervision and review is responsive to the nature and circumstances of the audit engagement. For example, if a more experienced engagement team member becomes unavailable to participate in the supervision and review of the engagement team, the engagement  partner may need to increase the extent of supervision and review of the less experienced engagement team members.

A97. The engagement partner uses professional judgement in determining which written communications to review, taking into account the nature and circumstances of the audit engagement. For example, it may not be necessary for the engagement partner to review communications between the engagement team and management in the ordinary course of the audit.

A98. PES 3 requires the firm to establish a quality objective that addresses consultation on difficult or contentious matters and how the conclusions agreed are implemented. Consultation may be appropriate or required, for example for:

A99. Effective consultation on significant technical, ethical and other matters within the firm or, where applicable, outside the firm may be achieved when those consulted:

A100. It may be appropriate for the engagement team, in the context of the firm’s policies or procedures, to consult outside the firm, for example, where the firm lacks appropriate internal resources. The engagement team may take advantage of advisory services provided by firms, professional and regulatory bodies or commercial organisations that provide relevant quality control services.

A101. The need for consultation outside the engagement team on a difficult or contentious matter may be an indicator that the matter is a key audit matter.⁴²

A102. PES 3 contains requirements that the firm establish policies or procedures addressing engagement quality reviews in accordance with PES 4, and requiring an engagement quality review for certain types of engagements.⁴³ PES 4 deals with the appointment and eligibility of the engagement quality reviewer and the engagement quality reviewer’s responsibilities relating to performing and documenting an engagement quality review.

A103. ISA (NZ) 700 (Revised) requires the auditor’s report to be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial statements.⁴⁴ If applicable to the audit engagement, PES 4 and this ISA (NZ) require that the engagement partner be precluded from dating the engagement report until notification has been received from the engagement quality reviewer that the engagement quality review is complete. For example, if the engagement quality reviewer has communicated to the engagement partner concerns about the significant judgements made by the engagement team or that the conclusions reached thereon were not appropriate then the engagement quality review is not complete.⁴⁵

A104. An engagement quality review that is conducted in a timely manner at appropriate stages during the audit engagement may assist the engagement team in promptly resolving matters raised to the engagement quality reviewer’s satisfaction on or before the date of the auditor’s report.

A105. Frequent communications between the engagement team and the engagement quality reviewer throughout the audit engagement may assist in facilitating an effective and timely engagement quality review. In addition to discussing significant matters with the engagement quality reviewer, the engagement partner may assign responsibility for coordinating requests from the engagement quality reviewer to another member of the engagement team.

A106. PES 3 requires the firm to establish a quality objective that addresses differences of opinion that arise within the engagement team, or between the engagement team and the engagement quality reviewer or individuals performing activities within the firm’s system of quality management. PES 3 also requires that differences of opinion are brought to the attention of the firm and resolved.

A107. In some circumstances, the engagement partner may not be satisfied with the resolution of the difference of opinion. In such circumstances, appropriate actions for the engagement partner may include, for example:

A108. PES 3 sets out requirements for the firm’s monitoring and remediation process. PES 3 requires the firm to communicate to engagement teams information about the firm’s monitoring and remediation process to enable them to take prompt and appropriate action in accordance with their responsibilities.⁴⁶ Further, information provided by members of the engagement team may be used by the firm in the firm’s monitoring and remediation process, and exercising professional judgement and professional scepticism while conducting the audit may assist the members of the engagement team in remaining alert for information that may be relevant to that process.

A109. Information provided by the firm may be relevant to the audit engagement when, for example, it relates to findings on another engagement performed by the engagement partner or other members of the engagement team, findings from the local firm office or inspection results of previous audits of the entity.

• An auditor’s expert is needed; or

• The nature, timing and extent of direction, supervision and review needs to be enhanced in an area of the audit where deficiencies have been identified.

A111. An identified deficiency in the firm’s system of quality management does not necessarily indicate that an audit engagement was not performed in accordance with professional standards and applicable legal and regulatory requirements, or that the auditor’s report was not appropriate in the circumstances.

A112. PES 3 requires the firm to establish a quality objective addressing the engagement team’s understanding and fulfilment of their responsibilities in connection with the engagement. PES 3 further requires that the quality objective include the overall responsibility of engagement partners for managing and achieving quality on the engagement and being sufficiently and appropriately involved throughout the engagement.

A113. Relevant considerations in addressing paragraph 40 include determining how the engagement partner has complied with the requirements of this ISA (NZ), given the nature and circumstances of the audit engagement and how the audit documentation evidences the engagement partner’s involvement throughout the audit engagement, as described in paragraph A118.

A114. Indicators that the engagement partner may not have been sufficiently and appropriately involved include, for example:

A115. If the engagement partner’s involvement does not provide the basis for determining that the significant judgements made and the conclusions reached are appropriate, the engagement partner will not be able to reach the determination required by paragraph 40. In addition to taking account of firm policies or procedures that may set forth the required actions to be taken in such circumstances, appropriate actions that the engagement partner may take, include, for example:

A116. In accordance with ISA (NZ) 230,⁴⁷ audit documentation provides evidence that the audit complies with the ISAs (NZ). However, it is neither necessary nor practicable for the auditor to document every matter considered, or professional judgement made, in an audit. Further, it is unnecessary for the auditor to document separately (as in a checklist, for example) compliance with matters for which compliance is demonstrated by documents included within the audit file.

A117. Documentation of the performance of the requirements of this ISA (NZ), including evidencing the involvement of the engagement partner and the engagement partner’s determination in accordance with paragraph 40, may be accomplished in different ways depending on the nature and circumstances of the audit engagement. For example:

A118. When dealing with circumstances that may pose risks to achieving quality on the audit engagement, the exercise of professional scepticism, and the documentation of the auditor’s consideration thereof, may be important. For example, if the engagement partner obtains information that may have caused the firm to decline the engagement (see paragraph 24), the documentation may include explanations of how the engagement team dealt with the circumstance.

A119. Documentation of consultations with other professionals that involve difficult or contentious matters that is sufficiently complete and detailed contributes to an understanding of: