31 March 2021

What are the main components of PES 3 (aka ISQM 1), and how are they organised and integrated?

PES 3 uses a new approach to managing quality that is scalable to deal with differences in firms’ size and nature of their services. As discussed previously, the new quality management approach drives firms to think about the firm’s nature and circumstances and its engagements when designing, implementing, and operating their quality management system.

The approach focuses on achieving outcome-based quality objectives. One of the most important benefits is a tailored system of quality management that is suitable for its nature and circumstances and the engagements it performs.

The IAASB agreed that retaining the elements of extant ISQC 1 is important as they reflect topics that continue to be relevant to a firm’s quality management system and provide a necessary link to quality management at the engagement level.

The eight components of the proposed system of quality management are as follows:

  • Governance and leadership (adapted from “leadership responsibilities for quality within the firm” in extant ISQC 1).
  • The firm’s risk assessment process (new).
  • Relevant ethical requirements.
  • Acceptance and continuance of client relationships and specific engagements.
  • Engagement performance.
  • Resources (adapted from “human resources” in extant ISQC 1).
  • Information and communication (new); and
  • Monitoring and remediation process (adapted from “monitoring” in extant ISQC 1).

The eight components are designed to be highly integrated. For example, resources and information and communication are essential aspects that enable each of the other components of quality management. The integration of the elements means that the quality management system does not operate in a tick-box manner. As a result, the aspects of PES 3 are designed, implemented, and used by the firm holistically through the audit and assurance process.

While PES 3 is organised according to the eight components. Firms are not required to arrange their systems according to these eight components, provided that the firm adheres to the standard’s overall objective. A firm may have different names for the components, combine the components, or have additional components if the firm wishes to have a more rigorous system than the standard.

Interrelationship of the Components

  • The firm’s risk assessment process sets out how it implements the risk-based approach to quality management. In doing so, the firm must include the quality objectives and responses set out in each of the components of the standard.
  • The governance and leadership component is important to the design, implementation, and operation of the other components quality management system. It provides the basis for the quality management system and creates the environment in which the other quality management components operate.
  • Other components such as information and communication and resources have quality objectives that enable the design, implementation, and operation of quality management. Therefore, such components may include responses that affect or relate to the other components of quality management
  • There may be interrelationships within the components as well; for example, human resources are needed to develop intellectual resources.
  • There are also relationships between components because there are matters related to each other (e.g. aspects of the relevant ethical requirements component may be relevant when accepting and continuing client relationships and specific engagements).
  • The monitoring and remediation process monitors the entire system of quality management, and therefore the monitoring activities are undertaken over all of the components of the system of quality management.

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