PSA 220 (Revised) Notes (Quality Management for an Audit of Financial Statements)

Scope and Overview

PSA 220 (Revised) is the Philippine adaptation of ISA 220 (Revised), Quality Management for an Audit of Financial Statements, issued by the IAASB in December 2020.
Adopted by the Auditing and Assurance Standards Council (AASC) on February 1, 2021 as PSA 220 (Revised).
Effective for audits of financial statements for periods beginning on or after December 15, 2022.
ISAs related to quality management at the engagement level: PSA 220 (Revised) complements firm-level quality management (ISQM 1) and network/firm-wide considerations (ISQM 1 and ISQM 2). ISAs may also interplay with other ISAs for information relevant to quality management at the engagement level.
Scope: Applies to all audits of financial statements, including group audits (ISA 600 concepts may apply for group situations).
The document is structured to mirror the ISA 220 (Revised) with national adaptations (A–explanatory material) to support understanding of how quality is managed at the engagement level within Philippine practice.

The Firm’s System of Quality Management and Role of Engagement Teams (ISQM 1 context)

ISQM 1 establishes the firm’s system of quality management, including governance, policies, and procedures to design, implement and operate the system.
The firm’s system supports engagement-level quality management by providing information and actions that enable engagement teams to perform in accordance with professional standards and regulatory requirements.
Communications flow from the firm to engagement teams about policies and procedures, including how to handle complex technical or ethical matters and when to involve firm-designated experts (e.g., credit experts for ECL in financial institutions).
Firm-level responses may be provided by a network or other firms within the same network (network requirements/services).
Engagement teams may rely on both firm-level responses and engagement-level responses designed to meet the ISA 220 (Revised) objective.
The balance between applying firm-level responses and engagement-level responses is influenced by the nature and circumstances of the engagement and may require professional judgment to determine what is needed beyond the firm’s standard policies.
Engagement teams should be aware that information from the firm’s system of quality management enables them to perform their responsibilities effectively.

Definitions (Key Terms used in PSA 220 Revised)

Engagement partner: The partner or individual who is responsible for the audit engagement and its performance, and for the auditor’s report issued on behalf of the firm.
Engagement quality review; Engagement quality reviewer: An objective evaluation of significant judgments made by the engagement team and conclusions, performed by the engagement quality reviewer and completed by the date of the engagement report.
Engagement team: All partners and staff performing the audit engagement, plus other individuals who perform audit procedures on the engagement (excluding external experts and internal auditors providing direct assistance).
Firm: A sole practitioner, partnership, corporation, or other entity of professional accountants, or public sector equivalent.
Network firm; Network: A firm/entity that belongs to the firm’s network; a larger structure aimed at cooperation and/or common ownership/brand/quality policies.
Partner; Personnel; Professional standards; Relevant ethical requirements: As defined, including components of independence and ethics under IESBA Code plus national requirements.
Response (in relation to a system of quality management): Policies or procedures designed and implemented by the firm to address one or more quality risks.
Staff: Professionals other than partners, including any experts the firm employs.

Leadership Responsibilities for Managing and Achieving Quality on Audits (PSA 220 Revised, paras. 13–15)

The engagement partner shall take overall responsibility for managing and achieving quality on the audit engagement, including creating an environment that reflects the firm’s culture and expected engagement-team behavior.
The engagement partner must stay sufficiently involved throughout the engagement to form a basis for evaluating whether significant judgments and conclusions are appropriate given the engagement’s nature and circumstances.
The engagement partner shall create an environment that emphasizes:
- Everyone on the engagement team contributes to quality at the engagement level.
- Importance of professional ethics, values, and attitudes.
- Open and robust communication within the team and the ability to raise concerns without reprisal.
- Exercise of professional skepticism throughout the engagement.
If the engagement partner assigns design or performance of procedures to others, the engagement partner retains overall responsibility for managing and achieving quality, including direction and supervision of those team members and review of their work.

Relevant Ethical Requirements, Including Those Related to Independence (Paras. 16–21)

The engagement partner must understand the relevant ethical requirements applicable to the engagement, including independence.
The engagement partner must ensure other engagement-team members are aware of applicable ethical requirements and firm policies, addressing threats to compliance, independence, and responses to breaches or potential breaches (including non-compliance with laws and regulations by the entity).
The engagement partner shall evaluate threats to compliance with ethical requirements and take appropriate action when threats exist (per firm policies, information from the firm or others).
The partner shall remain alert for breaches of ethical requirements or policies during the engagement.
If information indicates ethical requirements have not been fulfilled, the partner, in consultation with the firm, shall take appropriate action.
Before dating the auditor’s report, the engagement partner must determine whether relevant ethical requirements, including independence, have been fulfilled.

Acceptance and Continuance of Client Relationships and Audit Engagements (Paras. 22–24)

The engagement partner shall ensure policies for acceptance and continuance of client relationships and audits have been followed and conclusions are appropriate.
The engagement partner shall consider information obtained in the acceptance/continuance process when planning and performing the engagement.
If information arises that would have caused the firm to decline the engagement prior to acceptance/continuance, the engagement partner shall communicate promptly to the firm so action can be taken.

Engagement Resources (Paras. 25–28)

The engagement partner shall determine that sufficient and appropriate resources are assigned or made available to perform the engagement in a timely manner.
Ensure that engagement-team members and any external experts or internal auditors providing direct assistance have the necessary competence and capabilities, including sufficient time.
If resources are insufficient or inappropriate, the engagement partner shall take appropriate action, including requesting additional or alternative resources.
The engagement partner is responsible for using the resources appropriately given the engagement’s nature and circumstances.

Engagement Performance (Paras. 29–38)

Direction, Supervision, and Review (Paras. 29–34)
- The engagement partner is responsible for directing and supervising the engagement team and reviewing their work.
- Nature, timing, and extent of direction/supervision/review should be planned and performed in accordance with firm policies, standards, and legal/regulatory requirements, and tailored to the engagement’s circumstances.
- The engagement partner shall review audit documentation at appropriate times for significant matters, significant judgments, and other material matters.
- Before issuing the auditor’s report, the partner must assess whether sufficient appropriate audit evidence has been obtained.
- Prior to dating the auditor’s report, the engagement partner must review the financial statements and the auditor’s report to ensure appropriateness.
Consultation (Paras. 35–35d; A99–A102)
- The engagement partner is responsible for ensuring appropriate consultation on difficult or contentious matters and other matters requiring consultation.
- Ensure consultations are appropriately designed, and that conclusions are agreed and implemented.
Engagement Quality Review (Paras. 36–36d; A103–A106)
- For engagements requiring an engagement quality review, appoint a quality reviewer; discuss significant matters and judgments with the reviewer; do not date the report until QI review is complete.
Differences of Opinion (Paras. 37–38; A107–A108)
- If differences arise, follow firm policies for resolution; ensure conclusions are documented and implemented; do not date the report until differences are resolved.

Monitoring and Remediation (Paras. 39; A109–A112)

The engagement partner shall obtain and consider information from the firm’s monitoring/remediation process.
Determine relevance/effects of the monitoring/ remediation information on the audit engagement and take appropriate action.
Remain alert for information relevant to the firm’s monitoring and remediation process and communicate it as appropriate.

Taking Overall Responsibility for Managing and Achieving Quality (Paras. 40; A113–A116)

Before dating the auditor’s report, determine that the engagement partner has taken overall responsibility for managing and achieving quality.
Demonstrate sufficient and appropriate involvement throughout the engagement; consider changes to the engagement or firm policies that affect compliance with the requirements.
Indicators that the engagement partner’s involvement may be insufficient include lack of timely review, insufficient communication of responsibilities, and lack of evidence of direction/supervision.
If insufficient involvement is identified, actions may include updating the audit plan, adjusting the review approach, or consulting with responsible firm personnel; withdrawal from the engagement may be considered where allowed by law/regulation.

Documentation (Paras. 41; A117–A120)

Audit documentation should include matters identified and discussions regarding ethical requirements, acceptance/continuance decisions, consultations, and the completion of engagement quality review if applicable.
Documentation should evidence the involvement of the engagement partner and the engagement partner’s determination under paragraph 40.
Documentation need not detail every matter considered; instead, it should capture important processes, conclusions, and how they were implemented (e.g., signoffs, meeting minutes, working paper reviews).

Application and Other Explanatory Material (ISAs and Explanatory Additions)

Scope of this ISA (A1): Applies to all audits of financial statements, including group audits; ISA 600 deals with group audits and component auditors.
The Firm’s System of Quality Management and Role of Engagement Teams (A2–A14): ISQM 1 governs the firm’s system; engagement teams are supported by firm communications, including network-level actions and other firm-level processes.
The Engagement Team’s Responsibilities Relating to the Firm’s System (A4): Engagement teams must implement firm responses and communicate information to support the system of quality management.
Firm-level responses (A5–A7): Some firm-level responses may be performed at the engagement level due to circumstances; engagement teams must exercise professional judgment to determine engagement-level responses beyond firm policies.
Information for engagement-level quality management (A12–A13): Information from other ISAs (e.g., ISA 315 risk assessment) can inform engagement-level decisions such as resource allocation and review sufficiency; smaller firms may have more streamlined or partner-centric processes (A13–A14).
Definitions (A15–A27): Expanded details on engagement-team composition, use of external experts, service delivery centers, network considerations, and how to treat non- engagement-team personnel (e.g., internal auditors providing direct assistance).
The Engagement Partner’s Responsibilities (A22): The partner may need information from the firm or other team members to fulfill certain duties; the partner remains ultimately responsible.
Application of Firm Policies by Engagement Team Members (A23–A25): In cross-firm engagements, actions may vary due to different policies; communication channels must be maintained so issues (like difficulties in obtaining independence confirmations or competence assessments) can be raised.
Network and Network Firm (A27): Networks and related firm structures are external to the firm; the ISA 220 Revised provisions apply to networks as appropriate.
Leadership and Culture (A28–A34): ISQM 1-based governance/leadership style; engagement partner creates a culture of quality; scalable actions depending on firm size and engagement complexity.
Involvement and Communication (A30–A34): Engagement partner involvement can be demonstrated through direction, supervision, review, and continuous communication; professional skepticism must be encouraged throughout the engagement.
Professional Skepticism (A33–A36): The partner emphasizes skepticism; impediments may include budget/time pressures, lack of environment for questioning, management pressures, access limitations, or overreliance on automation; examples of cognitive biases and mitigation actions are provided (A35–A36).
Impediments to Skepticism (A34–A36): Unconscious biases such as availability, confirmation, groupthink, overconfidence, anchoring, automation bias; mitigation includes alerting the team, adjusting team composition, involving experts, reallocating resources, and adjusting procedures.
Consultation outside the firm (A101–A102): The engagement team may consult outside the firm when internal resources are insufficient; such consultations can be indicators of a Key Audit Matter (KAM) consideration.
Engagement Quality Review (A103–A106): Engagement quality reviews are part of ISQM 1/ISQM 2 framework; timely engagement with the reviewer improves quality control.
Differences of Opinion Resolution (A107–A108): Strategies to resolve differences, including seeking legal advice or withdrawal when necessary.
Monitoring and Remediation (A109–A112): Use of firm monitoring/ remediation findings to adjust audit procedures and resources; linkages with the audit engagement.
Documentation specifics (A117–A120): Documentation of consultations, ethical considerations, engagement quality review, and other aspects of the quality management process to support quality conclusions.

Connections to Foundational Principles and Real-World Relevance

Quality management is integrated from the top: firm governance (ISQM 1/ISQM 2) informs engagement-level quality management (PSA 220 Revised).
Ethical considerations, independence, and threats are intrinsic to quality management and are embedded in planning and execution.
Professional skepticism and judgment are foundational to quality and are explicitly reinforced by leadership and training requirements.
Resource allocation and scalability reflect the practical realities of audits across small to large firms and varied complexity engagements.
Public sector considerations recognize context-specific independence safeguards and governance structures.
Group audits require special considerations for component auditors and cross-firm coordination (ISA 600, ISQM 1/ISQM 2 interactions).

Practical Implications and Examples

Engagement partner must ensure a culture of quality, with open communication and勇est skepticism, regardless of engagement size.
If a firm-wide policy proves ineffective for a specific engagement, the engagement team may design engagement-level responses beyond the firm’s standard procedures (A9–A14).
In smaller firms, the engagement partner may take on more direct responsibility for quality management; in larger, more dispersed teams, formal communication and structured reviews become more prominent (A13–A14).
When a misstatement or risk is identified, the engagement partner must ensure timely direction, supervision, and review to address it and document the decision process.
For public sector entities, independence safeguards may involve statutory disclosure and possibly different timelines or reporting requirements (A48).

Summary of Effective Dates and Compliance

PSA 220 (Revised) became effective for audits beginning on or after December 15, 2022, aligning Philippine standards with IAASB’s ISA 220 (Revised).
The document integrates with ISQM 1 and ISQM 2 to provide a comprehensive framework for quality management at both the firm and engagement levels.

Key Takeaways

Quality management is a joint responsibility of the firm (system of quality management) and the engagement team (at the engagement level).
The engagement partner bears ultimate responsibility for managing and achieving quality on the audit engagement, supported by culture, ethics, communication, and appropriate resources.
Ethical requirements, including independence, are central to every phase of engagement development, from acceptance to reporting.
Resource adequacy, competence, and ongoing involvement are critical to delivering quality engagements.
Documentation and timely communication support accountability and enable remediation of deficiencies.
The framework accommodates scalability and variations in engagement complexity, including group audits and public sector considerations.