Introducing the New Quality Management Standards, a timeline for implementation
In a previous post, A significant Step Change in IAASB Quality Management Standards, we discussed the new quality management standards and how they will impact how audit firms approach audit quality in the future, moving from a policy-based approach to a risk -based approach. In this article we will take a deeper dive in to what the standards and how firms can look to implement them.
The new quality management standards consist of three separate standards which firms must implement, as follows:
ISQM 1 – – New Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements – ISQM 1 (SQMS No.1 in US, ASQM 1 in Australia)
This replaces ISQC 1 and addresses firm level quality management, with a focus on the design, implementation, and monitoring of a quality management system.
This requires that a system of quality management address the following eight components:
- Governance and Leadership
- Risk Assessment Process
- Relevant Ethical Requirements
- Acceptance & Continuance
- Engagement Performance
- Information and Communication
- Monitoring and Remediation
ISQM 2 – Engagement Quality Reviews – ISQM 2 (SQMS No. 2 in US, ASQM 2 in Australia)
A new standard addressing engagement quality reviews and the role of the engagement quality reviewer.
It aggregates and extends requirements previously included within other standards and covers topics such as:
- The appointment of engagement quality reviewers
- Their role and responsibilities
- Documentation of the engagement quality review
ISA 220 Revised – Quality Management for an Audit of Financial Statements -ISA 220 (AU-C 220 in US, ASA 220 in Australia)
An update that supersedes ISA 220 (AU-C 220 in US, ASA 220 in Australia) and addresses quality management at the engagement level, focusing on the quality responsibilities of the engagement team and engagement partner.
Key changes from current standards
These new standards will require firms to transition from a policies-and-procedures approach to an integrated-and-iterative approach, encompassing the quality management system as a whole.
Timeline for implementation
Following the approval of the new quality management standards by the IAASB in December 2020, the effective date for engagements regarding financial statements is described as beginning on or after December 15th, 2022. Therefore, the new standards must be designed and ready to operate by the end of the 2022 calendar year, per the international timeline.
Most territories will implement the international standards unamended and in line with the international timeline, though firms will need to consider any additional guidance from local professional bodies.
The standards are being adopted as follows in selected major markets:
UK – December 2022
- In the UK, a small number of amendments and additional requirements have been made to the international standards.
- The new standards must be implemented by UK firms in line with the international timeline by December 2022.
Australia – December 2022
- In Australia a small number of amendments and additional requirements have been made to the international standards to form ASQM 1, ASQM 2 and ASA 220.
- The new standards must be implemented by Australian firms in line with the international timeline by December 2022.
US – December 2025
- In the US, a small number of amendments have been made to the international standards to form to form SQMS No. 1, SQMS No. 2, SAS No. 146, and SSARS No. 26.
- The new standards must be implemented by US firms by December 2025, allowing US firms to have one triennial peer review between the issuance of the standards and their effective dates.
- Firms auditing US listed companies will need to also comply with Public Company Accounting Oversight Board (PCAOB) requirements.
- The PCAOB has indicated that new standards will pull largely from the new ISQM standards, with amendments as necessary (for example, to comply with US security laws and SEC rules). The PCAOB has not yet communicated a specific timeline for developing new quality management standards.
To learn more about the new quality management standards check out our full explanatory guide, or understand how technology can help your firm implement a new system of quality management in line with the ISQM standards