The International Auditing and Assurance Standards Board (IAASB) has issued a trio of new and revised standards intended to strengthen and modernize the way audit firms on an international level approach quality management.
The quality management standards, which the IAASB said “mark a significant evolution of the existing quality control standards,” replace the current International Standard on Quality Control 1 and International Standard on Auditing 220 (ISA 220). The new standards are effective Dec. 15, 2022.
“These standards will drive the audit profession to an enhanced approach to quality ‘management’ rather than ‘control’, which better enables the consistent performance of quality engagements, including audits,” said IAASB Chair Tom Seidenstein in a press release.
The standards are as follows:
ISQM 1, Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements: Addresses an audit firm’s responsibility for managing the quality of engagements.
Compliance implications: Revised ISQM 1 shifts the focus from a traditional compliance-based system to one that introduces a risk-based approach that encourages audit firms to design or modify quality objectives tailored to the nature and circumstances of the firm and the engagements it performs. The revision further increases the roles, responsibilities, and accountability of leadership and addresses the importance of demonstrating a commitment to quality through the firm’s culture. For example, it encourages leadership to evaluate at least annually whether its system of quality management is achieving its objectives and to take further action, if necessary.
ISQM 2, Engagement Quality Reviews: Addresses the appointment and eligibility of engagement quality (EQ) reviewers and their responsibilities relating to the performance and documentation of an EQ review. ISQM 2 applies to all engagements subject to an EQ review in accordance with ISQM 1.
Compliance implications: ISQM 2 extends the scope of engagements subject to an EQ review, in addition to audits of financial statements of listed entities; enhances the eligibility criteria for EQ reviewers; and enhances EQ reviewers’ responsibilities relating to the performance and documentation of the EQ review. Under ISQM 2, EQ reviewers will be “responsible for the overall performance of the EQ review and determining the nature, timing, and extent of the direction and supervision of assistants, and the review of their work.” The standard requires EQ reviewers to determine whether they’ve fulfilled their performance requirements and further “precludes the engagement partner from dating the engagement report until notification has been received from the EQ reviewer that the EQ review is complete.”
ISA 220 (revised), Quality Management for an Audit of Financial Statements: Addresses the engagement partner and engagement team’s responsibilities for quality management for an audit of financial statements.
Compliance implications: Among significant changes, the revision encourages the “proactive management of quality at the engagement level” by requiring engagement partners to be responsible for “determining the nature, timing, and extent of direction, supervision, and review,” considering engagement circumstances. The updated ISA 220 also incorporates revisions to the definition of “engagement team” to recognize individuals who perform audit procedures must be “appropriately directed and supervised and the work reviewed in accordance with ISA 220 (revised),” regardless of where those individuals are located or how they are related to the firm.
Another key change to ISA 220 emphasizes the central role professional skepticism and professional judgment plays in performing audit engagements. It further places responsibility on the engagement partner for determining that resources assigned are “sufficient and appropriate” or made available “on a timely basis.” Engagement partners are also responsible for “taking appropriate action when insufficient or inappropriate resources are provided by the firm, among other matters.”
To reflect the IAASB changes, the U.K. Financial Reporting Council (FRC) has published a consultation paper that proposes similar amendments to U.K. audit standards. The FRC is seeking comments through March 19.