New Quality Management Standards

There has been a lot of publicity about the new quality management standards issued by the Financial Reporting Council in July 2021 in the form of:

ISQM (UK) 1 Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements; and
ISQM (UK) 2 Engagement Quality Reviews.

Both ISQMs (UK) will require audit firms to overhaul the way in which quality is managed at the firm level. The focus of the ISQMs is on quality management; whereas the focus of outgoing ISQC (UK) 1 Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and other Assurance and Related Services Engagements focuses is on quality control. It should also be noted that there have been consequential amendments to ISA (UK) 220 Quality Management for an Audit of Financial Statements because of the issuance of ISQMs (UK) 1 and 2.

ISQM (UK) 1 requires the system of quality management to be designed and implemented by 15 December 2022, with an evaluation of this within one year following this date.

According to ISQM (UK) 1, there are eight components of a system of quality management as follows:

The firm's risk assessment process
Governance and leadership
Relevant ethical requirements
Acceptance and continuance of client relationships and specific engagements
Engagement performance
Resources
Information and communication
The monitoring and remediation process

ISQM (UK) 1 supersedes ISQC (UK) 1, and key changes reflected in the new ISQM (UK) 1 include:

A more proactive and tailored approach to managing quality which is focused on achieving quality objectives by identifying risks to those objectives and developing responses to the identified risks.
Enhanced requirements to address the firm's governance and leadership, including increased leadership responsibilities.
Expanded requirements which aim to modernise the standard and reflect factors which affect the firm's environment, including requirements to address technology, network and the user of external service providers.
New requirements that address information and communication, including communication with external parties.
Enhanced requirements for monitoring and remediation to promote more proactive monitoring of the system of quality management as a whole and effective and timely remediation of deficiencies.

ISQM (UK) 1 is effective as of 15 December 2022 and ISQM (UK) 2 is effective for audits and reviews of financial statements for periods beginning on or after 15 December 2022; and effective for other assurance and related services engagements beginning on or after 15 December 2022. ISA (UK) 220 (Revised July 2021) is effective for audits of financial statements for periods commencing on or after 15 December 2022.

Firms will need to set aside an appropriate amount of time to ensure a sound understanding of the technical requirements of the new ISQMs (UK) as well as ensuring the firm's system of quality management complies with the new requirements.

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