Evaluating the system of quality management
In the past year, firms have been making a significant effort to update their systems of quality management and start implementing the new risk-based standards of managing quality. Throughout this coming year, firms will perform the first round of monitoring to determine whether they are complying with their updated systems. The final step of implementing the new standards must not be overlooked, namely evaluating the system of quality management.
Evaluating the system
The individual or individuals carrying the ultimate responsibility and accountability for the system of quality management, normally the CEO or management board, must evaluate the system of quality management on an annual basis. Firms can decide at what point in time the annual evaluation should be performed; ideally, at the end of each annual monitoring cycle. The first of these evaluations must be performed by 15 December 2023.
During the first few years, firms can decide to evaluate implementation, and compliance with the policies and procedures more often, depending on the circumstances and risks associated with implementation in the different sections, seeing as implementation of the system also presents a quality objective.
In larger firms, where risk committees have been established, the implementation and monitoring of the quality management system is evaluated on a more regular basis, in accordance with their established terms of reference.
Based on the evaluation performed, it must be concluded whether:
a) The system of quality management provides the firm with reasonable assurance that the objectives of the system are being achieved
b) The system of quality management provides the firm with reasonable assurance that the objectives of the system are being achieved, excluding matters that have a severe, but not pervasive effect on the design, implementation and operation of the system
c) The system of quality management does NOT provide the firm with reasonable assurance that the objectives of the system are being achieved.
Dealing with the outcome of the evaluation
Annually, firms aim to achieve a positive conclusion on their system of quality management. However, it is quite probable that firms will take a few years to iron out implementation and compliance issues encountered with their new systems.
If it is concluded that there are severe, but not pervasive matters identified, or that the system does not provide the firm with reasonable assurance that the objectives of the system are being achieved, it is important that the firm takes prompt and appropriate action to address the deficiencies identified. This may include assigning more resources to engagement teams, such as EQRs and technical consultants, developing more guidance, training and communicating such measures to engagement teams.
In some cases, it may be required or appropriate to inform external parties about the evaluation, for example:
• When the firm belongs to a network
• When other network firms use the work performed by the firm
• When a report issued by the firm is inappropriate, due to failure of the system, and management or those charged with governance need to be informed
• When legislation or regulation requires communication to an oversight authority or regulatory body.
Individuals with ultimate responsibility and accountability
The annual evaluation of the system of quality management is clearly a very important and responsible task and, therefore, the individual or individuals assigned with ultimate responsibility and accountability for the system, and the individuals assigned with operational responsibility must undergo periodic performance evaluations. Such performance evaluations promote accountability.
When conducting these performance evaluations, the firm must consider the outcome of the evaluation of the system of quality management. The results of the firm’s monitoring activities, and actions taken by the individual, in response to identified deficiencies, may be considered.
A positive performance evaluation may be rewarded through incentives that focus on the individual’s commitment to quality, and reinforce accountability. Conversely, the firm should consider taking corrective action to address a negative performance evaluation which may affect the firm’s achievement of its quality objectives.
In summary
An honest evaluation of the system of quality management followed by appropriate action, is crucial to improving audit quality.
LEAF can assist firms with the administration of the quality management system, which includes:
• the annual evaluation
• proposed action through firm and engagement-level monitoring reviews
• methodology design reviews
• staff training on the relevant requirements and procedures
• training in all aspects of audit.
References
1. IAASB, ISQM 1: Quality management for firms that perform audits or reviews of financial statements, or other assurance or related services engagements
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