There has been significant activity in the quality management arena over the past few years, culminating in the approval of the set of new quality management standards at the September 2020 IAASB meeting. Subject to final approval by the Public Interest Oversight Board later this year, it is anticipated that the standards will be issued by the end of the year and that the profession will have 24 months to implement the changes introduced with these new standards.
The set of new quality management standards is comprised of the following:
1. International Standard on Quality Management (ISQM) 1
2. ISQM 2
3. ISA 220 (Revised)
The main elements of ISQM 1 may be compared to the extant ISQC 1 as follows:
|New ISQM 1
||Extant ISQC 1
|The firm’s risk assessment process
|Governance and leadership
|Relevant ethical requirements
||Relevant ethical requirements
|Acceptance and continuance
||Acceptance and continuance
|Resources (human, technological and intellectual resources)
|Information and communication
|Monitoring and remediation process
The new standards facilitate an integrated and iterative process to manage the quality of the firm’s engagements. The standards are aimed at comprehensively and actively managing risks to quality through greater accountability; improved focus on leadership and culture; and continuous improvement through a required monitoring and remediation feedback loop.
The new requirements reinforce firm leadership’s responsibility of ensuring that the system operates efficiently and effectively. The standards require more rigorous monitoring of the system, understanding the root causes of deficiencies and swift remediation of those deficiencies.
ISQM 1 goes beyond existing requirements by placing increased emphasis on information systems and active two-way communication within and outside the firm, including transparency reporting, in some instances.
ISQM 1 specifies when engagement quality reviews are required, and ISQM 2 sets out clear guidelines on what is involved and who may perform the review. These requirements have been expanded to incorporate due consideration of public interest.
ISA 220 requires the audit engagement partner to actively manage and take responsibility for the achievement of quality, especially through confirming adherence to the firm’s policies.
In view of the important role of networks in promoting consistent quality across network firms, ISQM 1 directly addresses firms’ responsibilities for what they receive from networks and how they interact with them. The ultimate responsibility for the firm’s system of quality management essentially resides with the individual firm’s leadership.
Finally, the firm should perform an annual evaluation of the system of quality management and conclude whether the system provides the firm with reasonable assurance that the objectives of quality management are being achieved.
Ahead of the anticipated release of the set of new quality management standards, the IAASB has developed implementation plans for each of the three standards. The plans explain which implementation materials may be anticipated, including topics covered and the proposed timeframe. A summary of these materials is included below:
|Basis for conclusions
|First-time implementation guide
||First fact sheet – December 2020
Others – first quarter 2021
|Frequently asked questions
||First quarter 2021
||First quarter 2021
|Multimedia asset (animated video) to introduce the QM standards
Firms will have to execute a great deal of change management for the new and revised standards to be effectively absorbed, and implemented. LEAF is already preparing for the changes ahead and will gladly assist you with transitioning smoothly to the new era of quality management. The LEAF approach to implementation of quality standards at SMPs makes it easy for firms to change over and comply with the new requirements.
1. IAASB: ISQM 1, Quality management for firms that perform audits or reviews of financial statements, or other assurance or related services engagements
2. IAASB: ISQM 2, Engagement quality reviews
3. IAASB: ISA 220 (Revised), Quality management for an audit of financial statements
4. IAASB: IAASB Quality management implementation support plan, October 2020