ICAS responds to IAASB suite of proposed quality management standards
ICAS has responded to the International Auditing and Assurance Standard Board’s (IAASB) proposed suite of quality management standards.
ICAS has responded to the International Auditing and Assurance Standard Board’s (IAASB) proposed suite of quality management standards. The proposals relate to the introduction of International Standard on Quality Management (ISQM) 1 and ISQM 2.
The proposed revisions for firms and audit engagement teams were published by the IAASB in February 2019. If implemented, they will change how firms manage quality and will most likely require increased effort for most firms. They could also affect firms’ organisational structures and operations and require greater leadership by engagement partners in managing and achieving quality engagements.
Objectives of the proposed changes
The objectives of the IAASB in this regard are:
- To more proactively manage quality to address stakeholder expectations and concerns;
- To improve the scalability of the standards; and
- To modernise the standards and keep them fit for purpose.
The IAASB aims to achieve this by:
- Introducing a new proposed standard, ISQM 1, ‘Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements’ which will replace the extant International Standard on Quality Control (ISQC) 1. This deals with a firm’s responsibility to establish a system of quality management to support quality engagements.
- Introducing ISQM 2 ‘Engagement Quality Reviews’ which is a proposed new standard to address engagement quality reviews.
- Revising International Standard on Auditing (ISA) 220 ‘Quality Management for an Audit of Financial Statements’ which addresses the management of engagement quality for audit engagements.
Scalability of the proposed new standards
To improve scalability, the key features of the combined proposals are:
- ISQM 1’s new risk-based approach involves more professional judgement in designing a system that is tailored to the nature and circumstances of the firm and the engagements it performs;
- Increased professional judgment in selecting engagements for engagement quality reviews; and
- Greater focus in ISA 220 (Revised) on the nature and circumstances of the audit engagement in managing quality.
Key messages from the ICAS response
Whilst ICAS is supportive of the new risk-based approach, which tailors the risk assessment process to an individual firm’s circumstances and the nature of its engagements, we are concerned about the overall length of the proposed new ISQM 1. The new standard is considerably longer than the extant ISQC 1 without taking into account the material transferred from the extant ISQC 1 to ISQM 2. This increased length raises some concerns that the standard may not be sufficiently scalable for smaller firms.
Nor is it clear whether a firm’s approach to its current system of quality management will be sufficient to meet the new requirements. ICAS, therefore, believes it would be advantageous for the IAASB to undertake a mapping exercise to identify and illustrate the linkage and key differences between ISQC 1 and the new proposed suite of quality management standards.
That said, ICAS supports the introduction of a separate standard, ISQM 2, to deal with engagements for which an external quality review should be performed. However, we also have concerns around the scalability of this standard. Therefore, we would welcome the inclusion of greater clarification within ISQM 2 that the work of the engagement quality reviewer should be tailored to the identified quality risks and their potential impact based on the circumstances of the individual engagement.
We also raised concerns in our response as to whether the apparent overlap between the requirements of ISA 220 (Revised), ISQM 1 and ISQM 2 is necessary. ICAS believes that a useful exercise would be to identify and then review the various instances of overlaps in the standards for necessity and consistency.
Finally, ICAS encourages the IAASB to continue its discussions around more principles-based standards where the requirements focus on the objectives of the standard, with any supporting or implementation material located in another document or in an appendix to the standard. ICAS would be supportive of the IAASB exploring such an approach in relation to its suite of quality management standards.