Quality Control Review System

Under the CPA Act, as amended in 2003, the JICPA has the legal authority to conduct quality control reviews. Since 1999, quality control reviews have been carried out as a self-regulatory activity of the JICPA. The amended CPA Act also requires the establishment of a public oversight body, the Certified Public Accountants and Auditing Oversight Board ("CPAAOB"), to ensure a fair, neutral, and effective auditor oversight system in Japan. One of the most significant roles of the CPAAOB is to monitor the quality control reviews performed by the JICPA.

The following chart illustrates the structure of quality control review and the monitoring by the CPAAOB:

During the economic recession of the 1990s, the Japanese accounting and auditing system was under scrutiny, and improvement of the system was considered necessary. Faced with increasing public attention to external auditing, the JICPA introduced a post-audit review system. In March 1997, the JICPA established a project team for quality control. In April 1997, the CPA Investigation and Examination Board, then an advisory body to the Finance Minister, recommended a post-audit review system. Meanwhile, the JICPA Auditing Standards Committee issued Auditing Standards Committee Statement No. 12, "Quality Control of Audits," that requires all audit corporations and CPAs to perform quality control of audit practices. In March 1998, the Quality Control Project Team issued an important statement regarding the implementation of quality control reviews in Japan, proposing that full-time professionals from the JICPA conduct quality control reviews of all audit corporations and CPAs who are engaged in audits of listed companies. All such audit corporations and CPAs shall be reviewed once every three years to assess whether they conduct audit practices in compliance with then Auditing Standards Committee Statement No. 12, which was modeled after ISA 220 and other related requirements. In view of practical considerations, especially related to smaller firms, the JICPA did not employ the firm-to-firm peer review system. At the JICPA General Assembly in July 1998, members approved a proposal to require quality control reviews. The quality control review teams began conducting their reviews in April 1999.
The CPA Act, as amended in 2003, provides the JICPA with the legal authority to conduct quality control review.

The JICPA quality control review is performed for audits of financial statements only, not management consulting services. Under the amended JICPA Constitution, the scope of quality control review was extended from only listed companies to include certain large companies and other entities which are required by relevant laws and regulations to have their financial statements audited by CPAs. This amendment became effective on April 1, 2004.

In order to implement the quality control review system, the JICPA created a Quality Control Committee consisting of predominantly JICPA council members, and other highly experienced members that plan quality control reviews and direct the Quality Control Review Team that executes reviews. The Quality Control Review Team is independent of other JICPA organizations and reports directly to the Quality Control Committee. The team consists of full-time reviewers including one chief executive reviewer, two deputy chief reviewers, nine senior reviewers and eight staff reviewers as of March 31, 2007. Each reviewer must be independent of a firm under review and is required to have sufficient knowledge and experience of audit practices. Also, the reviewers are required to preserve the confidentiality of information that they may learn during the course of a review.

The reviewers must establish a reasonable basis for expressing a conclusion on whether a firm's system of audit quality controls, both firm-wide and on an individual engagement basis, has been well designed in accordance with the Quality Control Standards, and that such quality control policies and procedures have been adequately implemented. The review does not determine whether an auditor's conclusions were appropriate; rather, it reviews the audit process conducted by auditors.

The review procedures include interviews with professional personnel at various levels and the review of relevant audit working papers. In accordance with JICPA Quality Control Standards Committee Statement No. 1 and Auditing Standards Committee Statement No. 32, which superseded No. 12, and other relevant standards, reviewers are to examine whether audit firms (including both audit corporations and sole practitioners) properly adopt the professional requirements of independence, integrity, confidentiality, and professional behavior. Also, reviewers examine: (a) whether necessary skills and competence are attained and maintained through CPE; (b) a proper assignment policy, such as to whether the partner rotation rule has been implemented; (c) audit engagements are independently reviewed by an independent engagement quality control reviewer; (d) acceptance and retention of clients are properly controlled; and (e) monitoring is adequately provided. The Standards for Quality Control Review and Procedures for Quality Control Review are established and revised in a timely manner to maintain the proper level of quality control review. These Standards and Procedures are distributed to all members of the JICPA to promote their full dissemination. Based on the review, a written report is addressed to the firm's chief executive partner after the deliberations of the Quality Control Committee. If reviewers learn of anything that needs improvement or that the reviewed firm has not conformed to quality control policies and procedures, the findings and recommendations are to be reported to the firm. The firm must then respond in writing, in due course.

Since the registration system for listed company audit firms has been introduced, the Quality Control Committee has new responsibilities regarding registration of listed company audit firms and consideration of measures against registered audit firms.

For the year ended March 31, 2007, 137 audit firms were reviewed by JICPA. Quality control review reports and recommendation reports were issued to 142 firms, including nine firms from the previous review period. Of these 142 firms, a qualified conclusion was expressed with respect to 69 firms, and a negative conclusion to two.
Overall review results are published every year to ensure the transparency of the quality control review performed by the JICPA.

• Overview of the Results of Quality Control Review for the Year Ended March 31, 2005(PDF/17P/85KB)
• Overview of Quality Control Review for the First Half of the Year Ending March 31, 2006(PDF/16P/81KB)
• Overview of the Results of Quality Control Review for the Year Ended March 31, 2006(PDF/31P/138KB)
• Overview of the Results of Quality Control Review for the Year Ended March 31, 2007(PDF/41P/177KB)
• Overview of the Results of Quality Control Review for the Year Ended March 31, 2008(PDF/23P/124KB)
• Overview of the Results of Quality Control Review for the Year Ended March 31, 2009(PDF/21P/113KB)

The entire review system is monitored by the Quality Control Oversight Board, which has been created within the JICPA to monitor the review system's effectiveness and independence.

This Quality Control Oversight Board evaluates whether the Quality Control Committee and Review Team adequately perform quality control reviews. The Board is made up of five distinguished individuals from industry, the financial sector, the stock exchange, the media, and academia, and three members of the JICPA.

As the registration system for listed company audit firms has been introduced, the Quality Control Oversight Board has new responsibility to determine the registration of listed company audit firms and measures against registered audit firms.

The Quality Control Oversight Board reviewed the entire process of quality control review for the year ended March 31, 2006 and recommended, in June 2006, that the JICPA and the Quality Control Committee should:

1. continually confirm that audit firms establish policies and procedures adequately responsive to the enhancement of auditor independence in the amended CPA Act;
2. promote audits with the risk-based approach as well as revise policies and procedures of the quality control system, to be consistent with the newly issued or revised Auditing Standards Committee Statements;
3. promote the use of IT experts support, such as referrals of IT experts and the establishment of an Audit IT Consultation, so that each audit firm is able to respond in this area;
4. promote improvements to ensure that audit procedures of accounting estimates are properly performed;
5. enhance follow-up visits to those audit firms that have made no improvement and to audit firms with unsatisfactory improvement; and
6. confirm whether audit firms are properly responding to quality control standards.

In accordance with the above recommendations, the JICPA and the Quality Control Committee have taken the following steps:

1. ascertained whether auditor independence was ensured, the risk-based approach was taken, and audit procedures of accounting estimates were properly performed;
2. added and revised review tools for early application of Auditing Standards Committee Statements;
3. issued a Research Report in order to assist practitioners to respond to new standards related to the risk-based approach;
4. developed review procedures for early application of IT Committee Statement;
5. assisted audit firms with referrals to an IT expert, and by the creation of an Audit IT Consultation;
6. conducted a follow-up of recommendations including those related to large audit corporations;
7. obtained an understanding of the design of quality control systems of all audit firms that are subject to quality control review; and
8. established a Coordinating Committee for Small- and Medium-sized Practitioners.

The CPA Act amended in 2003 stipulates the establishment of the CPAAOB to monitor and oversee CPAs and the JICPA quality control review by reorganizing the CPA Investigation and Examination Board, which formerly oversaw CPA examinations and disciplinary actions for CPAs. The CPAAOB is comprised of ten members who are to be nominated by the Prime Minister with the approval of the Diet. At a minimum, least the chairperson and one member of the CPAAOB will serve full-time.

The CPAAOB published its "Oversight Policy and Plan" on June 29, 2004. In accordance with this policy and plan, the CPAAOB has undertaken a study and evaluation of quality control reviews performed by the JICPA during five years from 1999 to 2003. The purpose of this study were to enable the CPAAOB to gain a full understanding of the actual implementation of quality control reviews by the JICPA and to identify areas that need improvement; so that the public interest is protected, and that fair, neutral, and effective audits are achieved. As a result, the CPAAOB issued a report entitled, "Proposal for Further Improvements to Quality Control Review – Assessment of and Recommendations Pertaining to the Quality Control Review System of the Japanese Institute of Certified Public Accountants ("Proposal")."

In the report, "Proposal," issued on February 8, 2005, the CPAAOB identified the following as necessary areas for improvement:

1. the quality control review system and structure;
2. standards and procedures of quality control reviews;
3. implementation of quality control reviews;
4. auditor independence; and
5. improvement of communication and cooperation between the Quality Control Committee and other related committees within the JICPA.

The JICPA has undertaken necessary measures to further improve the quality control review system in order to respond to the above recommendations, including:

1. doubling the number of quality control reviewers in fiscal 2005;
2. disclosing some portions of reports issued as a result of quality control reviews on its website and in a monthly journal;
3. improving the review procedures and its tools; and
4. establishing collaboration by sharing relevant information between the Quality Control Committee and the Audit Practice and Review Committee.

• Entire translation of responses by the JICPA(PDF/10P/54KB)