1 April 2021
For many firms, trying to understand why the IAASB has moved from requiring quality control to quality management and how to meet the requirements may fill you with a sense of unease.
These new standards will come into effect at the latest by December 2022, so we are committed to staying ahead of the changes to ensure the smoothest possible transition, and hopefully quell some of the uneasiness by producing a range of articles and tools to help.
One of ISQM 1’s primary aims is to foster a culture of quality within your practice and for your firm to think critically about what service you are providing and how can it be improved.
In many ways, the quality management standards apply principles from the ISA’S on your firm to ensure their 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. Unlike ISQC 1 (PES 3), ISQM 1 is scaled for small, medium auditing and assurance practices (SMP). Requirements and application material emphasise professional judgement and professional scepticism when fulfilling the standard’s needs.
The extant ISQC 1 requires firms to establish and maintain a quality control system and specifies the policies and procedures that firms must establish as part of quality control. A criticism of ISQC 1 has been that it acts as a minimum set of quality requirements (Checklist). The new standard has been specifically designed not to be a minimum set of requirements that a firm ticks off to keep the regulators happy but instead makes the firm develop a comprehensive quality management system.
Assuring audit quality is now achieved by regular monitoring of the system and 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 communication of findings up the chain of command without other engagement team members’ ability to hinder this process.
How does ISQM 1 address aspects of the International Framework for Audit Quality?
ISQM 1 addresses aspects of the Framework for Audit Quality, such as:
(i) 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).
(ii) Internal monitoring reviews, including the scope and extent of such reviews.
(iii) Governance structures of firms and networks.
(b) The need to address remediation and acknowledge the importance of root cause analysis.
(c) The need for additional guidance to demonstrate how ISQC 1 could be applied proportionately by small- and medium-sized practitioners (SMPs), including clarifying the application to audit, assurance, and related services engagements; this means that it is specifically designed to be scaled. For example, a sole practitioner would not create the same system as a large entity with multiple partners, managers and employees.
(d) 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).
The new approach’s focus is on the firms’ attention on risks that may impact engagement quality. Unlike extant ISQC 1, the new approach requires the firm to transition from policies and procedures that address standalone elements to an integrated approach that reflects upon the system as a whole. This approach requires the audit firm to proactively identify and respond to quality risks and adjust or create new quality objectives to address any deficiencies.
What are the benefits of ISQM 1?
The new approach benefits the firms’ systems of quality management that support the consistent performance of quality engagements, including:
- 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. A tailored system of quality management may also result 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. This new approach will help keep the standard fit for purpose and adaptable to a changing environment would likely enhance firms’ ability to apply the standard proportionately.
- 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.
- It requires a firm to customise the design, implement and operate its quality management system based on its nature and circumstances and the engagements it performs.
We will be adding additional blog posts on this plus technical articles on our support hub.