1 April 2021
PES 3 is the King of the Assurance Quality Standards. It is the NZ equivalent to International Standard on Quality Management 1 (ISQM 1).
Its full royal title is ‘Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements’. PES 3 and its lesser nobility of other quality management standards become effective on 15 Dec 2022 (early adoption permitted).
One of PES 3’s primary aims is to foster a culture of quality within assurance practices and to help firms to think critically about the service they are providing and how can it be improved.
The quality management standards dovetail with concepts from the ISAs so that internal controls, policies, procedures, resources, and systems are of sufficient quality to ensure that the firm audit and assurance engagements are free of material misstatement.
The standard is designed to be scaled for small and medium auditing and assurance practices. Requirements and application material emphasises professional judgement and professional scepticism when fulfilling the standard’s needs.
While the old standard required firms to establish and maintain a quality control system that specifies the policies and procedures that firms must follow (a checklist approach), the new standard has been designed to instead make the firm develop a comprehensive quality management system.
Assuring audit quality is achieved by regular monitoring of the system and regularly ensuring that the practice has sufficient knowledge and expertise.
If the firm detects a quality deficiency, it investigates the root cause and creates new quality objectives, policies, and procedures to manage them. Furthermore, it emphasises having a good firm structure that allows easy communication of findings to the relevant staff level.
PES 3 addresses:
- The competence and capabilities of the engagement team, recruitment and training, and changes in the firm’s resource models (e.g., use of shared service centres).
- Internal monitoring reviews, including the scope and extent of such reviews.
- Governance structures of firms and networks.
- The need to address remediation and acknowledge the importance of root cause analysis.
- How to apply proportionately to small- and medium-sized practitioners, including clarifying the application to audit, assurance, and related services engagements (e.g., a sole practitioner would not create the same system as a large entity with multiple partners, managers and employees).
- Addressing multiple issues related to engagement quality control reviews (e.g., selecting the engagement quality control reviewer and their independence from the engagement team, the professional scepticism exercised by the reviewer and the objective, extent, timing, and documentation of the review).
This new approach focuses the firms’ attention on risks that may impact engagement quality, requiring the firm to transition from policies and procedures that address standalone elements to an integrated approach that reflects upon the system as a whole.
The audit firm must proactively identify and respond to quality risks and adjust or create new quality objectives to address any deficiencies.
PES 3 benefits the firms’ systems of quality management that support the consistent performance of quality engagements, by providing:
- A system that is tailored for the firm’s nature and circumstances and the engagements it performs (scalable), thereby improving the robustness and effectiveness of activities undertaken by the firm to address engagement quality, resulting in improved utilisation of firm resources.
- The facilitation of a firm risk-based proactive response to changing circumstances, proactively managing or mitigating risks, and promoting continual improvement and responsiveness to a changing environment.
- Increased emphasis on monitoring the system as a whole and timely and effective remediation promotes ongoing improvement and consideration of the system’s appropriateness, including whether it effectively supports engagement quality.
- Integration of the system’s components promotes an ongoing process of improvement and consideration of the effect of decisions across the system.
- Scope to design, implement and operate a quality management system based on the nature and circumstances of the firm and the engagements it performs.
Let’s hope the new king enables our assurance engagements to be performed with great confidence and order.
To commemorate the coronation we are releasing a new suite of tools under our ‘Business Management’ label. These include:
- Audit Quality Management Tool – designed to meet the requirements of creating a dynamic QMM (Quality Management Manual) including customisable templates for all aspects of the manual, annual independence confirmations for staff, staff training and development records, annual evaluation, client complaint procedure, root cause analysis records, and much more. The manual is designed to be rolled over and reviewed annually.
- Staff recruitments, Orientation and Review Tools – to ensure that policies are followed for staffing resources.
- New Assurance Client Tool – for screening and working through client induction including ethical letter to prior auditor, welcome letter etc.
- Client Exit Tool – to ensure that procedures are followed and documented when a client leaves.
All these tools provide a starting point and may be fully customisable. We have adapted and added to the CAANZ suggested templates in producing these tools. Contact us to sign up or to find out more.