Reforms to support audit quality

The International Auditing and Assurance Standards Board (IAASB) has issued a revised suite of quality management standards with the focus on improving audit and assurance quality on a proactive and firm-wide basis. These are based on the standards issued by the IAASB.

ISA 220 (Revised), Quality Management for an Audit of Financial Statements, together with ISQM 1, Quality Management For Firms That Perform Audits Or Reviews Of Financial Statements, Or Other Assurance Or Related Services Engagements, and ISQM 2, Engagement Quality Reviews, provide assurance firms with guidance that will be mandatory from 15 December 2022. Firms of all sizes should be acting now to ensure compliance by that date.

Farewell, tick box

The quality management standards adopt a proactive and scalable set of tools to enable firms to focus on the quality of their engagements at a firm-wide level. This is a change from the retrospective review process driven by ISQC 1 and replaces the ‘tick-box’ checklist approach of the former standalone engagement review process.

The revised standards allow firms to adapt the guidance for the individual size and type of assurance firm, allowing sufficient flexibility to suit their specific requirements.

The key changes for firms include:

• making quality pervasive across the business – firms should seek to upgrade and ensure that their system of quality management (SoQM) is robust and meets their individual requirements
• an emphasis on the risk assessment of assurance engagements.

Focus on engagements

Additional emphasis is placed on the acceptance and continuance of business relationships. Assurance firms should consider not just the financial reasons for the engagement, but also the ethics and integrity of the client management team. Existing client relationships should be assessed on a regular basis, which is of particular significance during times of financial uncertainty or when the client is undergoing organisational changes.

The assurance firm must design and implement a risk-assessment process for each client, and each engagement, that defines the quality objectives and assesses the risks of that engagement against them. The revised standards work alongside ISA 315 (Revised) in assessing the risks of each engagement and preparing the strategy and procedures to mitigate these risks.

Governance and leadership

Engagement teams must understand their responsibilities for performing a quality engagement. This will be achieved through the training and coaching of junior staff, regular review of audit working papers and good communication across all levels of the team.

It is vital that senior partners and management within the firm lead by example, enabling staff to challenge on issues where there may be areas of judgment and support an ethically robust environment.

It is strongly advised that all firms ensure that they understand the extent of, and guidance within, the revised standards – see the panel.