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Key areas to address for ISQM Implementation
Smart Audit Team · 5 min read · 9 Jan 2021
Key areas where ISQM wants you to focus on:
Governance and Leadership
Why it is important?
Governance and Leadership serves as the framework for how the firm’s decisions are made. The tone set at the top will drive the firm personnel behavior in every small or bigger decision. How the senior management reacts or act in certain circumstances, will flow into the firm’s culture. Basically the commitment to quality should be reflected in firms’ strategy, operational activities, and business processes. For example,
- the leadership may prioritize financial and operational goals, which may affect delivering appropriate results. For example, you want to expand your tax practice. And hence the tax assignments are accepted even though we provide Audit service to the clients.
- When a junior staff approaches to the senior leadership with complaint or allegation, the actions and reactions will reflect the commitment to quality and will drill down the culture to the firm level.
Some of the responses to address this component:
- Clearly define the roles and responsibilities for Leadership. The Ultimate responsibility and operational responsibility need to be assigned for effective Implementation.
- Define and communicate the purpose and values of the firm which reflects its commitment to Quality. This can be done by conducting regular meetings with Team personnel and highlighting the purpose and values of the firm, sending E-mails, conducting trainings, etc. which ensures that the firm values are communicated effectively to the team.
- Include Quality KPIs in the performance appraisals which incorporates quality related measures.
- Communicating with the team, the decisions where the leaders have prioritized Quality over Financial goals.
Compliance with Ethical Requirements
Why it is important?
ISQM requires the firm, including its personnel to understand the relevant ethical requirements and fulfill their responsibilities in relation to that.
Ethical requirements are not just a compliance thing, but the quality of deliverables will also be affected by the fulfillment of ethical requirements.
Ethical requirements are not just a compliance thing, but the quality of deliverables will also be affected by the fulfillment of ethical requirements.
Relevant Ethical requirements of the firm depends upon the Jurisdiction of the firm. It is possible that the ethical requirements extend beyond the IESBA code, and the firm might not comply with the additional ones. For example many jurisdictions restrict the acceptance of gifts at all, even of trivial value. This may not be a part of CODE but still need to be complied by the firm.
The non-compliance with Ethical requirement can also have an impact on the quality. For example, the firm may breach independence requirements for a client, which can lead to a biased opinion.
In the New ISQM, The focus has been increased on ‘all’ relevant ethical requirements, rather than only Independence.
Some of the responses to address this component:
The quality objective is that everyone in the firm understand the ethical requirements and fulfill them.
This can be addressed by:
- Identifying and communicating all the relevant ethical requirements, including the Jurisdictional requirements.
- Preparing a detailed checklist of all the requirements and include it in the Audit program for each engagement.
- Provide regular training on the relevant ethical requirements to the staff and the implications of non-compliance.
- Regularly communicating with the team members on the importance of Ethical compliance.
Acceptance and Continuance of relationships and Engagements
Why it is important?
Engaging a client if you don’t have comfort over the integrity and ethical values of the client, or if you are not capable to perform the engagement, because the subject matter is complex or the firm does not have relevant expertise, you might end up compromising the quality of Engagement.
Some of the responses to address this component:
- Mandatory performance of client due diligence before accepting any engagement.
- Reassess existing Business relationships at the start of each new year.
- Mandatory inclusion of Independence checks and each year.
- Reevaluate the conflicts of Interests or competency of team every year.
- Obtaining and reviewing the Engagement Letter every year
- Documenting the Risk Assessments
Engagement Performance
Why it is important?
The better we perform the Audit engagement, the better results and value we can deliver to the client. Engagement performance quality is one of the very important components as without quality control in engagement performance, quality control in rest of the components won’t even matter.
Some of the responses to address this component:
- Conducting mandatory Internal Team Meeting, between Partner and Team and providing appropriate guidance at the beginning of the assignment.
- Review and supervision of work during the Audit process.
- Effective Allocation of work amongst the team.
- Standardized Audit program checklist/ Audit manual is used which comply with relevant standards and regulations, for each engagement.
- Promoting professional skepticism among the team, through trainings, sessions.
- Interim meeting with the team to discuss the issues and Audit progress, rather than reviewing the work at the completion stage.
- Planning the assignments such that the team have sufficient time to perform Audits.
- Ensuring that the engagement is appropriately staffed, in terms adequacy and technical expertise.
- Technical resources and consultation process in case of complex issues. For smaller firms, this can be an external consultation or the junior team members can reach out to partner for all complex issues.
- Training the team about documentation standards and standardizing the formats.
Resources
Why it is important?
Needless to say, Quality cannot be managed without adequate and appropriate resources. Human, Technological, and Intellectual resources like guides, Policies and procedures, methodology, etc. are assets in a Professional services firm. Quality of these resources will have a direct impact on the quality management of all other components.
Some of the responses to address this component:
- Recruiting competent Individuals or Individuals who can develop competencies with training.
- Development of team with Constructive feedback and performance appraisals.
- Implementing new technologies in the firm to bring efficiencies. The type of technology adoption may depend upon the firm size and purposes.
- Introducing Guides, Methodology, written policies, and procedures for Engagement Performance.
ISQM Implementation is not an overnight task, nor it is a one-time activity. The firm need to take a phased approach to implement the responses. Moreover, it is a non-linear process that operate in iterative Manner.