Proactive Audit Quality:
A Continuous Improvement Approach Under ISQM 1
Audit quality is crucial for the financial integrity of financial information relied upon by stakeholders. Yet, many firms take a reactive stance – waiting for firm-wide monitoring reports before addressing deficiencies. This delayed approach leads to recurring issues, last-minute fixes, and a compliance-driven, rather than an improvement-driven culture.
ISQM 1 and ISA 220 (Revised) require firms to shift towards a proactive, risk-based, and continuous evaluation of audit quality to ensure that deficiencies are remediated in a timely and effective manner. Instead of relying mainly on periodic assessments, firms should integrate ongoing monitoring, timely remediation, and leadership-driven accountability into daily operations.
Why a reactive approach falls short
Firms relying on periodic reviews risk missing early warning signs, repeating past issues, overburdening staff with last-minute corrections, and facing regulatory scrutiny. Addressing deficiencies only after formal reviews may lead to inefficiencies and compromised audit quality. Audit failures are also not identified before it is too late.
Embedding a proactive culture of quality management
Shifting from a reactive to a proactive mindset requires intentional effort across various levels of the firm. Key steps include:
1. Continuous monitoring and real-time feedback
Firms should implement real-time monitoring tools such as:
• Engagement quality reviews during audits
• Regular internal peer reviews
• Technical expert involvement
• More frequent monitoring reviews.
2. Data-driven quality risk assessments
ISQM 1 mandates a risk-based approach to audit quality. Firms should analyse review findings and issues to track:
• Trends in audit findings
• Common errors flagged in internal and external inspections
• Areas where staff require additional training.
3. Ongoing training and competency development
Instead of waiting for firm-wide review findings to identify training needs, which delay implementing improvements, firms should:
• Conduct ongoing training based on real-time monitoring and staff assessments
• Encourage a culture of continuous learning
• Implement mentorship systems for skills development.
4. Leadership-driven quality culture
Audit quality should be a firm-wide priority. Leaders should:
• Promote a quality-centric mindset beyond compliance
• Encourage open discussion on quality challenges between different levels of seniority
• Set clear expectations for proactive quality management
• Empower teams to act and communicate as fellow professionals.
5. Root cause analysis and preventive actions
Rather than merely correcting deficiencies, firms must analyse root causes and implement preventive measures:
• Perform in-depth analyses of causes of findings through discussion with teams
• Identify patterns in deficiencies
• Apply targeted remediation
• Share knowledge firm-wide to improve processes.
6. Technology-enabled quality management
Audit tools, real-time monitoring, assessment and evaluation of teams, and risk assessment systems can help firms detect and address issues before they escalate.
In summary
Audit firms should move beyond reactive responses and embrace proactive, continuous quality improvement as required by ISQM 1. Communication by all levels of audit teams should be respected in a culture of professionalism. By integrating real-time monitoring, data-driven risk assessment, leadership accountability, and technology-enabled solutions, firms can ensure sustained audit quality, regulatory compliance and enhanced professional reputation.
References
- ISQM 1, Quality management for firms that perform audits or reviews of financial statements, or other assurance or related services engagements
- ISA 220 (Revised), Quality management for an audit of financial statements.
How LEAF can assist
LEAF can assist firms with a full-spectrum service, producing manuals and risk registers, in line with firm circumstances and risks; continuous administration and monitoring of quality management systems; monitoring of audit engagement quality; thorough file reviews and EQR reviews; providing practical advice; reviewing methodology design; designing audit working paper templates; and providing staff training on the relevant requirements and procedures. Necessary safeguards are being applied to ensure the objectivity of our partners in each team.
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