This article is the second part of our two-publication series on getting ready for implementing ISQM 1 in Nigeria. In the first part of this article published last week, we discussed the overview of ISQM1, the scope of the standard, practical factors to consider, and possible challenges during implementation. This article discusses the key areas to be considered and recommendations for successful implementation.
Key areas to be implemented and the approach
As noted in our previous publication, a firm in professional audit practice should comply with ISQM 1 to the extent that it is scalable. Therefore, a particular requirement will not apply to a firm if the nature of the firm or its level of operation does not permit practical applicability. The standard identified the following areas as key to establishing a System of Quality Management (SOQM) by a firm:
- The firm’s risk assessment process:
This requirement involves establishing quality objectives, identifying, and assessing quality risks, and designing and implementing responses to them. It applies to other SOQM components, excluding monitoring and remediation. When a firm establishes quality objectives, they should be appropriately communicated to all the responsible team members to properly understand the requirements to promote quality. The quality objectives should be specific to each service rendered by a professional firm and should be achievable under normal circumstances. Again, during the risk assessment, there is a need to understand the conditions, events, circumstances, actions, or inactions that may adversely affect the achievement of the established quality objectives. Identified quality risks should be evaluated to determine their impact on the firm and appropriate responses developed to manage them.
- Governance and leadership:
This requirement establishes the environment that supports SOQM. Leadership is expected to set the tone at the top to reinforce quality; otherwise, it becomes challenging to drive people to perform quality tasks and engagements. To show commitment to quality, a professional firm must assign ultimate responsibility and accountability for the SOQM to the firm’s chief executive officer or the firm’s managing partner, or, if appropriate, the firm’s managing board of partners. Also, as the focus of ISQM1 is shifting from quality control to quality management, the firm’s chief executive should put in place a dedicated team with a sufficient level of experience and expertise to manage quality with particular attention to identified risk areas. At the leadership level, a firm should show a high commitment to quality and the need to ensure that a mechanism is put in place to monitor compliance with the SOQM for effective performance.
ISQM 1 requires that a firm establishes a process of obtaining, developing, using, maintaining, allocating, and assigning resources on time to enable the effective and efficient performance of SOQM. Human, technological, and intellectual resources required to maintain quality across all services performed by a firm in professional practice should be established. This includes but is not limited to ensuring that personnel are hired, developed, and retained with the competence and capabilities to consistently executive quality engagements. The standard also requires that service providers used in executing engagements in any of the mentioned resources above comply with already established quality objectives. Again, a professional firm must ensure that there is a well-established process to obtain, generate and use information, and communicate the information within and outside the firm. Technological resources, including IT applications and intellectual resources, including manuals and guides, are needed to operate in a SOQM environment. Information and communication are necessary to make and guide the use of available resources. Information is essential to assign responsibilities on engagements and support the firm’s judgment on the acceptance and continuance of the client’s relationship.
- Relevant Ethical Requirements
For this requirement, the standard referred to the code issued by the International Ethics Standard Board for Accountants (IESBA). The IESBA Code sets out the fundamental principles of ethics that establish the standards of behaviour expected of a professional accountant in addition to the International Independence Standards. The fundamental principles are integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. In addition to this code, a firm should issue an ethics manual as a matter of policy on independence and objectivity. These requirements are adequately communicated and embedded in the SOQM while executing all engagements. Communication of the relevant ethical requirements is also necessary to ensure that employees know their ethical responsibilities and dealings with external parties.
Recommendations / tips for successful implementation
- Phased Implementation: This will help firms understand the requirements and expectations for proper implementation.
- Data analytical tools can help identify root cause problems and carry out a more robust analysis of risk exposures.
- Tools and customized software with restricted workflows and approval processes that enforce independence and minimize conflict of interest could be used to mitigate risks associated with acceptance and continuance.
- Create policies that would ensure the work of a less experienced team is coordinated, monitored, and reviewed by more experienced staff and with enough days to complete engagements.
- Firms can institute a project management software with audit procedures, processes, relevant standards, templates, and workflows that run from the beginning of an engagement until completion.
- Automated information and communication system: This refers to a platform specifically created to relate with the client and team on a real-time basis during an engagement. It is crucial because it would improve the efficiency and documentation of audit procedures.
- Undertaking periodic monitoring with the use of checklists, tools, and questionnaires for root cause analysis such that deficiencies identified can be easily remediated.
For proper understanding and implementation of the standard, the International Auditing and Assurance Board (IAASB) has released several documents to create awareness and ensure smooth implementation by practitioners. The resources listed below are available on the IAASB website.
- Introduction to ISQM 1: Fact Sheet.
- Final pronouncement of the standard.
- The basis for the conclusion was prepared by the staff of IAASB.
- First-time implementation guide.
- Conforming amendments to International Standards on Auditing (ISA) and related material arising from the quality management projects
We have taken the initiative to implement ISQM 1 in phases within our firm, starting with a risk assessment to identify implementation gaps for possible improvements. Also, we have updated our risk management manuals and processes to be compliant with the standard. On the aspect of resources, we have invested and will continue to invest in human resources to acquire the best talents in the profession. This is in addition to enhancing our training capacity to improve the overall competence of staff and investments in technologies that would foster a seamless transition. The firm’s SOQM may evolve as the standard does not prescribe every matter to be documented by a firm, mainly because the nature and complexity of a firm’s system vary. However, the quality management standard serves as a coping mechanism for firms in the face of looming quality risks. It has further increased the need for firms to improve compliance with ISA 220 ‘Quality Management for an Audit of Financial Statements’ and blaze the trail for ISQM 2, which relates to the engagement quality reviewer.