Focus on Quality Management

The International Auditing and Assurance Standards Board (IAASB) has released a suite of three quality management standards. The standards promote a robust, proactive, scalable and effective approach to quality management and mark a significant evolution of the existing quality control standards.

“These standards will drive the audit profession to an enhanced approach to quality ‘management’ rather than ‘control’, which better enables the consistent performance of quality engagements, including audits,” according to IAASB Chair Tom Seidenstein. “The standards place greater responsibility on firm leadership for continuously improving the quality of their engagements and remediating when deficiencies are found. When effectively implemented, the standards should help ensure that a commitment to quality is at the heart of firm strategy and operations.”

The suite of standards includes:

• International Standard on Quality Management (ISQM) 1, Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements

ISQM 1 strengthens firms’ systems of quality management through a robust, proactive and effective approach to quality management. The standard encourages firms to design a system of quality management that is tailored to the nature and circumstances of the firm and engagements it performs. ISQM 1 applies to all firms that perform engagements under the IAASB’s international standards. ISQM 1 replaces ISQC 1, Quality Control for Firms that Perform Audits and Reviews of Financial Statements and Other Assurance and Related Services Engagements

• ISQM 2, Engagement Quality Reviews

ISQM 2 deals with the appointment and eligibility of the engagement quality reviewer, and the engagement quality reviewer’s responsibilities relating to the performance and documentation of an engagement quality review. ISQM 2 applies to all engagements for which an engagement quality review is required to be performed in accordance with ISQM 1.

• International Standard on Auditing 220 (Revised), Quality Management for an Audit of Financial Statements. 

ISA 220 (Revised) deals with the engagement partner and engagement team’s responsibilities for quality management for an audit of financial statements. The revised standard modernizes the approach to quality management through improved and requires the engagement partner and engagement team to be proactive in managing and achieving quality.

The standards become effective on December 15, 2022.

Lets analyze the standards basis of WHAT, WHEN, HOW &OUTCOME AIMED AND SIGNIFICANT CHANGES/CONCEPTS

WHAT

ISQM 1 - Under ISQM 1, firms are required to design a system of quality management to manage the quality of engagements performed by the firm. ISQM 1 applies to all firms that perform audits or reviews of financial statements, or other assurance or related services engagements (i.e., if the firm performs any of these engagements, ISQM 1 applies to managing quality for those engagements). ISQM 1 consists of: a)Eight components that operate in an iterative and integrated manner; and b)Other requirements, comprising the roles and responsibilities for the system, leadership’s overall evaluation of the system, network requirements or network services and documentation

ISQM 2 - Since an engagement quality (EQ) review is a specified response designed and implemented by the firm to address quality risks, ISQM 1 addresses the scope of engagements subject to an EQ review. The performance of an EQ review is undertaken at the engagement level by the EQ reviewer on behalf of the firm. Accordingly, ISQM 2, Engagement Quality Reviews, addresses: i) The appointment and eligibility of the EQ reviewer; and ii) The EQ reviewer’s responsibilities relating to the performance and documentation of an EQ review.

ISA 220 (Revised) - ISA 220 (Revised), Quality Management for an Audit of Financial Statements, deals with the specific responsibilities of the auditor regarding quality management at the engagement level for an audit of financial statements, and the related responsibilities of the engagement partner.

WHEN

ISQM 1 - Firms are required to have their system of quality management designed and implemented by December 15, 2022.

ISQM 2 - ISQM 2 is effective for:

? Audits and reviews of financial statements for periods beginning on or after December 15, 2022; and 

? Other assurance and related services engagements beginning on or after December 15, 2022.

ISA 220 (Revised) -  effective for audits of financial statements for periods beginning on or after December 15, 2022

HOW AND OUTCOME AIMED

ISQM 1 -

MORE ROBUST GOVERNANCE AND LEADERSHIP. ISQM 1 addresses, among other matters:

? The firm demonstrating a commitment to quality through its culture which exists throughout the firm – includes recognizing and reinforcing:

– The firm’s role in serving the public interest by consistently performing quality engagements.

– The importance of quality in the firm’s strategic decisions and actions, including those related to the firm’s financial and operational priorities

? The roles, responsibilities and accountability of leadership, leadership’s qualifications, and undertaking performance evaluations of leadership annually.

ISQM 2

The new standard aims to respond to issues and challenges with the requirements relating to EQ reviews in extant International Standard on Quality Control (ISQC) 1, Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements, and International Standard on Auditing (ISA) 220, Quality Control for an Audit of Financial Statements, by making changes that clarify and strengthen aspects of the relevant requirements for a more robust EQ review. The revised requirements focus on the objective evaluation of the significant judgments made by the engagement team and the conclusions reached thereon.

The changes in ISQM 2 are intended to:

? Extend the scope of engagements subject to an EQ review (in addition to audits of financial statements of listed entities).

? Strengthen the eligibility criteria for an individual to be appointed as an EQ reviewer.

? Enhance the EQ reviewer’s responsibilities relating to the performance (including the nature, timing and extent of procedures) and documentation of the EQ review.

ISA 220 (Revised)

The revised standard clarifies and strengthens the key elements of quality management at the engagement level. This is achieved by focusing on the critically important role of the engagement partner in managing and achieving quality on the audit engagement, and reinforcing the importance of quality to all members of the engagement team. The changes are intended to:

? Encourage proactive management of quality at the engagement level.

? Keep the standard fit for purpose in a wide range of circumstances and in a complex environment.

? Emphasize the importance of professional skepticism and enhance the documentation of the auditor’s judgments.

SIGNIFICANT CHANGES/CONCEPTS:

ISQM 1:

A: INTRODUCING A RISK-BASED APPROACH FOCUSED ON ACHIEVING THE QUALITY OBJECTIVES - i) Establish quality objectives that the firm considers are necessary to achieve the objectives of the system of quality management, ii) Identify and assess quality risks and iii) design and implement responses that addresses quality risk

B: EXPANDED RESOURCES - i) 3 categories of resources needed to operate the system of quality management i.e human, technological and intellectual, ii) The firm considers what resources are needed, whether they are appropriate, and how they are used and maintained

C: IMPROVING INFORMATION AND COMMUNICATION - i) ISQM 1 emphasizes the continual flow of information within the firm, and with engagement teams, and drives firms to establish an information system, ii) The firm culture needs to embed the need to exchange information, iii) The firm communicates with external parties (including to those charged in governance) when it is appropriate.

D: PROACTIVE MONITORING OF THE SYSTEM AS A WHOLE, AND TIMELY AND EFFECTIVE REMEDIATION - i) the firm monitors the system as a whole, tailors the nature, timing and extent of monitoring and performs inspection of completed engagements. ii) the firm evaluates findings, identify deficiencies, evaluates the severity and persuasiveness' of deficiencies and investigates the root cause of deficiencies. iii) the firm appropriately remediates deficiencies that is responsive to the root cause and the leadership is required to determine that remedial actions are effective.

E: EVALUATING THE SYSTEM OF QUALITY MANAGEMENT ON AN ANNUAL BASIS - i) Leadership evaluates and concludes whether the system of quality management is achieving its objectives, ii) Evaluation required to be undertaken at least annually, iii) The firm takes further action if the conclusion is unsatisfactory.

F: ADDRESSING THE USE OF NETWORKS - i) ISQM 1 focuses on reinforcing the firm’s responsibility for its own system of quality management, ii) The firm understands network requirements or network services and the effect on the firm’s system of quality management, iii) The firm understands monitoring activities undertaken by the network across network firms, including those to determine that network requirements have been appropriately implemented across network firms.

ISQM 2:

A: EXTENDED SCOPE OF ENGAGEMENTS SUBJECT TO EQ REVIEWS - i) Audits of financial statements of listed entities, ii) Audits or other engagements for which an EQ review is required by law or regulation, iii) Audits or other engagements for which the firm determines that an EQ review is an appropriate response to address one or more of quality risk.

B: ENHANCED ELIGIBILITY CRITERIA FOR EQ REVIEWERS - i) Requires a cooling-off period of 2 years, or a longer period if required by relevant ethical requirements, before the engagement partner can assume the role of EQ reviewer. ii) Have competence, capabilities, including sufficient time, and appropriate authority iii) Comply with provisions of law and regulation relevant to eligibility of EQ reviewers, iv) Comply with relevant ethical requirements, including objectivity and independence.

ISQM 2 requires the EQ reviewer to be responsible for the overall performance of the EQ review, and determining the nature, timing and extent of the direction and supervision of assistants, and the review of their work.

C: MORE ROBUST PERFORMANCE AND DOCUMENTATION REQUIREMENTS - i) addresses EQ reviewer's responsibilities to perform the EQ review at appropriate points in time (planning, performing, reporting) during the engagement. ii) Focuses on significant judgments and significant matters, including, when applicable to the type of engagement, the exercise of professional skepticism by the engagement team. iii) Requires the EQ reviewer to “stand-back” to determine whether the performance requirements in ISQM 2 have been fulfilled. iv) Precludes the engagement partner from dating the engagement report until notification has been received from the EQ reviewer that the EQ review is complete. v) The EQ reviewer to take responsibility for documentation of the EQ review vi) The documentation of the EQ review to be included with the engagement documentation.

ISA 220 (Revised)

A: MANAGING AND ACHIEVING QUALITY AT THE ENGAGEMENT LEVEL - i) Engagement partner is responsible for managing and achieving quality at the engagement level. ii) Engagement partner is responsible for determining the nature, timing and extent of direction, supervision and review, in light of engagement circumstances. iii) Engagement partner shall be satisfied that involvement has been sufficient and appropriate to provide basis for taking overall responsibility.

B: MODERNIZING ISA 220 FOR AN EVOLVING ENVIRONMENT - i) Changes have been made to the definition of the engagement team to recognize different and evolving engagement team structures. (All partners and staff performing the audit engagement, and any other individuals who perform audit procedures on  the engagement as been included and auditor’s external expert and internal auditors who provide direct assistance on an engagement is excluded).

Changes in the definition recognize that, regardless of where individuals are located or how they are related to the firm, if an individual is performing audit procedures then he or she is to be appropriately directed and supervised and the work reviewed in accordance with ISA 220 (Revised).

C: CLARIFYING ENGAGEMENT PARTNER RESPONSIBILITIES - i) The engagement partner is required to take into account information obtained in the acceptance and continuance process in planning and performing the audit engagement. ii) Requirements and application material are more explicit about what the engagement partner needs to review, including a listing of examples of significant judgments in relation to the audit engagement.

D: ENGAGEMENT TEAM MAY DEPEND ON THE FIRM'S SYSTEM OF QUALITY MANAGEMENT - i) ISA 220 (Revised) clarifies that, ordinarily, the engagement team may depend on the firm’s policies or procedures, unless (i) the engagement team’s understanding or experience indicates that the firm’s policies or procedures would not be effective or (ii) information provided by the firm or others indicates that the firm’s policies or procedures are not operating effectively. This approach avoids the risk that the engagement team blindly relies on the firm’s system of quality management. ii) ISA 220 (Revised) also integrates the new quality management concepts in ISQM 1, Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements, so that such concepts can be carried through at the engagement level.

E: PROFESSIONAL SKEPTICISM IS CENTRAL TO QUALITY MANAGEMENT - i) ISA 220 (Revised) also includes new material on the importance of professional skepticism and professional judgment in performing audit engagements, ii) Application material describes impediments to professional skepticism, auditor biases, and actions the engagement team can take.

F: RESOURCES - The engagement partner is responsible for determining that there are sufficient and appropriate resources assigned or made available on a timely basis and for taking appropriate action when insufficient or inappropriate resources are provided by the firm, among other matters. Resources are Human, Technological and Intellectual.