Quality Management at the Firm and Engagement Levels

MIA Outreach
26 April 2019
Presenter:
Chiew Chun Wee, IAASB Member

High-Quality Audits
in a Changing Business Environment –
Influenced by Technology, Complexity, and
Demands for Continued Relevance

Quality Control Risk Auditing Group Audits

at the Identification Accounting (ISA 600)
Engagement and Estimates,
Level Assessment Including Fair
(ISA 220) (ISA 315) Values
(ISA 540)

Strengthening the Application of Professional Skepticism

Enhancing Firms’ Systems of Quality Management (ISQM 1 and new ISQM 2)

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 2013
Post-implementation
review

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Invitation to comment (2015/16)

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Away from checklist approach

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 Scalability

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Proactive/preventive

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 Changes

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Photo by Daniele Levis Pelusi on Unsplash

Tailored

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 Work-in-progress

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 The system of
quality
management is
dynamic, iterative
and highly
integrated and does
not operate in a
linear manner.

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Risk assessment process

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 ED ISA 315

ED ISQM 1

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The general risk-based Specific

What is the firm
approach required by requirements in
expected to do?
the standard the standard

Prescribed quality
Establish quality Establish prescribed quality objectives +
All components

objectives for each

objectives additional/more granular QO as necessary
component

Identify and assess Identify and assess quality risks

quality risks

Design, implement responses, including

Design and Some prescribed
prescribed responses (adapt prescribed
implement responses for certain
responses taking into account quality
responses components
risks)

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Abbreviated version for reference
only; Please refer to ED ISQM 1
for actual wordings.
Quality objectives
• Culture promotes commitment to
quality
• Leadership responsible and
accountable for quality
• Strategic decisions reflect
commitment to quality & role in
public interest
• Organizational structure supports
commitment to quality
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• Appropriate resource planning
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Responses
• CEO responsible for the SoQM,
demonstrate commitment to quality
through actions and behaviours
• Establish structure – operational
responsibilities
• Periodic performance reviews of
those with ultimate & operational
responsibility for SoQM
• Policies/procedures for internal &
external complaints-handling on
quality
Abbreviated version for reference
only; Please refer to ED ISQM 1
for actual wordings.

Quality objectives Responses

• Staff understand relevant ethical
requirements, including
independence
• Staff are following relevant ethical
requirements
• Firm identifies relevant ethical
requirements
• Establishes policies or procedures
for identifying & addressing threats
to compliance

• Staff identify and respond to • Reporting of, and responding to,

breaches of relevant ethical breaches
requirements
• Annual reporting on independence
by staff

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Abbreviated version for reference
only; Please refer to ED ISQM 1
for actual wordings.

Quality objectives Responses

• Gets information needed • Policies/procedures to address
circumstances when firm is obliged
• Makes proper judgement about by law or regulation to
firm’s ability to perform engagement accept/continue an engagement

• Financial/operational priorities do
not inappropriately sway decisions

• Responds appropriately if new

information comes to light

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Abbreviated version for reference

only; Please refer to ED ISQM 1
for actual wordings.

Quality objectives Responses

• EP & staff understand their roles &
responsibilities
• Sufficiently directed &
supervised
• Staff make appropriate judgments
and exercise professional scepticism
• Establish policy/ procedures:
• Nature, timing & extent of direction,
supervision & review of work
• Consultation
• Differences of opinion

• Documentation is assembled & • EQR

retained
• Assembly & retention of
documentation

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Abbreviated version for reference

only; Please refer to ED ISQM 1
for actual wordings.

Quality objectives Responses

• Attracts, develops & retains quality
staff, including EPs

• Assigns human resource to

engagement and SoQM with time,
ability and resources for quality

• Held accountable through timely

evaluations, compensation,
promotion & other incentives

• Technology & intellectual resources

support quality
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Abbreviated version for reference
only; Please refer to ED ISQM 1
for actual wordings.
Quality objectives
• Information system that supports
SoQM
• Timely communication about SoQM
• Culture supports information sharing
and staff communicate reliably
• External communications, as
deemed appropriate
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Responses
• Policies/procedures on
communication by firm to
engagement teams, network, etc.
• Communicate responsibility for
implementing responses to relevant
personnel incl. ET
• Policies/procedures on
communicating externally on SoQM,
including considering use of
Transparency Report
 Impediments

Culture Governance
Tone @top & leadership
Professional
skepticism
Limited time
Insufficient experience Resources
Lack of expertise

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Abbreviated version for reference
only; Please refer to ED ISQM 1
for actual wordings.

Quality objectives Responses

• Relevant, reliable, timely information • Designing and performing monitoring
about design, implementation and activities – incl. considering capacity
operation of components provided of individuals responsible

• Takes appropriate & timely actions to • Inspection of in-process/ completed

remediate deficiencies engagements

• Person ultimately responsible for • Identifying, evaluating & responding to

SoQM evaluates whether objectives deficiencies
of ISQM met
• Ongoing communication

• Evaluating SoQM
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Monitoring and remediation

Covers all responses Enhanced requirements re.

(not just inspection of
engagements) performing monitoring
Increased flexibility in
inspection e.g. frequency,
in-process engagements
Results of external
inspections & other
info considered
eligibility of those Ongoing
communication incl.
with external
Root-cause analysis
Overall
evaluation on
Remediation: no more SoQM
prescribed; leadership
evaluate effectiveness

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 Networks

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Service
providers
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 vs. small practice

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The individual(s) assigned The individual(s) assigned

ultimate responsibility and ultimate responsibility and
accountability, and the accountability for the
individual(s) assigned system of quality
operational responsibility, management may also
for the firm’s system of assume operational
quality management shall responsibility for the system
have an understanding of of quality management, for
this ISQM relevant to their example, in smaller firms.
responsibilities, including
the application and other
explanatory material, to
understand the objective of
this ISQM and to apply its
requirements properly.

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For a larger firm in which … a smaller firm may be

personnel are dispersed able to establish the desired
across many geographical culture through the direct
locations, more formal interaction of firm
communication may be leadership with other
necessary. Other actions personnel.
that may be taken to
establish the expected
behavior of personnel
include creating a code of
conduct.

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 Larger firms may have … the leadership structure
multiple levels of of a smaller firm may
leadership, such as a chief comprise a single managing
executive officer (or partner with sole
equivalent) and a managing responsibility for the
board of partners (or oversight of the firm.
equivalent), and further
levels that reflect the
organizational structure of
the firm. Some firms may
also have an independent
governing body that has
non-executive oversight of
the firm.

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Given the unique position of In the case of smaller firms,

the individual(s) assigned
ultimate responsibility and
accountability for the
system of quality
management, the
performance evaluations
may be undertaken by an
independent non-executive
member of the firm’s
governing body, or a special
committee overseen by the
firm’s governing body, or the
firm may engage a service
provider to perform the
evaluation.
it may not be practicable to
perform performance
evaluations; however, in
such cases, the results of
the firm’s monitoring
activities may provide an
indication of the
performance of the
individual(s).

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 The firm may also identify
an individual(s) to be
responsible for supervising
the investigation of
complaints and
allegations… The
individual(s) supervising an
investigation may involve
legal counsel as necessary.
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… in the case of a larger
firm, frequent and direct
interactions by leadership
with all personnel may not
be practicable and
therefore the actions taken
to demonstrate a
commitment to quality may
involve multiple actions,
including establishing firm
values in a code of conduct
that all personnel are
required to comply with and
a series of formal
communications from firm
leadership that emphasize
the importance of quality.
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In the case of a smaller
firm, it may not be
practicable to identify an
individual to supervise an
investigation of an
allegation or complaint who
is not involved in the related
engagement or area of the
investigation. As a result,
such firms may use a
service provider to carry
out the investigation into
complaints and allegations,
for example, legal counsel
or a suitably qualified
consultant.
… in demonstrating a
commitment to quality
through their actions and
behaviors… leadership of a
smaller firm may engage in
direct and frequent
interactions with personnel
throughout the firm.
 Documentation may take
the form of formal written
manuals, checklists and
forms, may be informally
documented (e.g., e-mail
communication or postings
on websites), or may be
held in IT applications or
other digital forms (e.g., in
databases).
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ISQM 2: Engagement Quality Control
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In a smaller firm, it may not
be necessary to have
documentation supporting
matters communicated
because informal
communication methods
may be effective.
Nevertheless, the firm may
determine it appropriate to
document such
communications in order to
provide evidence that they
occurred.
 Scope of audit subject to EQC

All
Proposed engagements
Extant Scope
Scope

More More
flexible stringent

Fewer More
selected selected

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Revised
Extant scope
scope

Entities that have significant public interest

Required by law or regulation

Determined by firm’s SoQM

Audits of financial
statements of listed Criteria based
entities selection of
engagements

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 ED ISQM 1.37(e)

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ISA 220

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 FIRM LEVEL

Establish Identify and Design Implement firm-

level responses
quality assess responses to
objectives quality risks quality risks Communicate
responses to be
implemented at
engagement level

ENGAGEMENT LEVEL

Communicate Design and Implement the firm-

information to support implement additional
design, implementation, responses that address
nature and
and operation of firm’s circumstances of
SoQM specific engagement
level responses that
are intended for
implementation at
engagement-level

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 For the component allocated to your table, consider how your SoQM
will look like – more quality objectives, more granular quality
objectives? What quality risks would be relevant for you? How about
the responses?

Do you like the new risk-based approach to quality management?

Why?

What do you think would be the biggest hurdle(s) to successful

implementation of the ISQM?

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For more information visit

www.iaasg.org/quality-management

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