IAASB Quality Management Webcast Series: Webcast Three
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The document provides an overview of the IAASB’s quality management proposals, including exposure drafts for ISQM 1, ISQM 2, and revised ISA 220 related to audit engagements and engagement quality reviews. It emphasizes the importance of the engagement partner's role in maintaining audit quality, outlines the relationship between firm-level and engagement-level quality management, and details the requirements for engagement quality reviews. Key public interest issues, ethical considerations, and documentation requirements for quality management and reviews are also discussed.
IAASB Quality Management Webcast Series: Webcast Three
- 1. Overview of Quality Management for Audit Engagements and Engagement Quality Reviews Presented by: Lyn Provost, IAASB Member and ISA 220 (Revised) Task Force Chair Imran Vanker, IAASB Member and ISQM 2 Task Force Chair Joint Webcast of ED-ISA 220 (Revised) and ED-ISQM 2 New York, NY, United States May 7, 2019 Page 1
- 2. The IAASB’s Quality Management Proposals February 2019: Three exposure drafts released for public comment • Proposed ISQM 1 (Previously ISQC 1), Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements • Proposed ISQM 2, Engagement Quality Reviews • Proposed ISA 220 (Revised), Quality Management for an Audit of Financial Statements • Also released: a covering explanatory memorandum – addresses: – The relationships between the standards – Overall matters – Possible effective dates, including a question to seek views about the time needed to implement the standards February 2019 – June 2019 • Global outreach and consultation 1 July 2019 • Comment letters due – see http://www.iaasb.org/quality-management for links to the above documents and to post comments Page 2
- 3. Quality Management Webcast Series Webcast 1 – March 28, 2019 • Introduction to the Quality Management Standards and Deep Dive into the Firm’s Risk Assessment Process Page 3 Webcast 2 – April 25, 2019 Webcast 3 – May 7, 2019 • Overview of Quality Management at the Firm Level • Overview of Quality Management for Audit Engagements and Engagement Quality Reviews
- 4. Proposed International Standard on Auditing (ISA) 220 (Revised): Quality Management for an Audit of Financial Statements ISA 220 (Revised) Page 4
- 5. • Performing audits of financial statements in the public interest; exercising professional judgment and professional skepticism • Clarifying the engagement partner’s role and responsibilities • Interaction with or dependence on firm or network firm quality management processes and procedures • Addressing audit delivery models and component auditors Key Public Interest Issues Addressed in ED-ISA 220 (Revised) Page 5
- 6. Relationship Between Quality Management at the Firm Level and Engagement Level Design and implement additional responses that address nature and circumstances of the specific engagement Implement the firm-level responses to be implemented at engagement level Communicate information to support the design, implementation and operation of the firm’s SOQM FIRM LEVEL ENGAGEMENT LEVEL Communicate responses to be implemented at engagement level Implement firm-level responses Design responses to quality risks Identify and assess quality risks Establish quality objectives Page 6 Engagement team may depend on the firm’s policies or procedures Linkage Between ED-ISQM 1 and ED-ISA 220 (Revised)
- 7. • Key focus is on the engagement partner’s involvement in the audit as the basis for managing and achieving quality – Leadership responsibilities for managing and achieving quality on audits, throughout the audit (e.g., planning; managing resources; direction, supervision and review; standing back at the end of the audit) • Stronger emphasis on public interest context, professional judgment and professional skepticism in achieving quality at the engagement level – Professional skepticism supports the quality of judgments – Lists impediments to skepticism, auditor biases and highlights possible actions to deal with them • Proposed revisions to definition of engagement team – Focus on those performing the audit, and any other individuals who perform audit procedures • Engagement partner – Clarify that the engagement partner is responsible for managing and achieving quality through engagement partner’s sufficient and appropriate involvement – New focus on creating an environment that emphasizes the firm’s culture and the expected behavior of engagement team members Introduction, Leadership by the Engagement Partner Page 7
- 8. • Relevant ethical requirements – New requirement for the engagement partner to understand relevant ethical requirements applicable to the nature and circumstances of the engagement – Focus on whether other team members have been made aware of such requirements and firm’s related policies and procedures – Enhanced material related to identification and evaluation of threats to compliance with relevant ethical requirements, and responsibilities of engagement partner to deal with breaches – aligned with IESBA Code • Acceptance and continuance – Focus on two-way communication with the firm; taking information learned in this process into account when addressing other ISAs • Engagement resources – Broadened focus on resources needed to support the whole audit process - human, technological, intellectual; sufficient and appropriate for engagement – Take appropriate action if resources assigned or made available by the firm are insufficient or inappropriate Ethical Requirements, Acceptance and Continuance, Resources Page 8
- 9. • Emphasis on tailoring nature, timing and extent of direction and supervision of team members, and review of work performed, to the nature and circumstances of the engagement – Scalability of performance requirements is key – achieving the requirements needs to be responsive to the nature and circumstances of the engagement • Provided additional specificity as to what the engagement partner should review, including: – Significant matters, other areas involving significant judgments (and conclusions reached thereon), and other matters – The financial statements, auditor’s report, and any formal written communications to management, those charged with governance, or regulators • Engagement partner and engagement team required to co-operate with the engagement quality reviewer Engagement Performance Page 9
- 10. • Monitoring and remediation – Engagement team needs to be aware of results of the firm’s monitoring and remediation process, take appropriation action as needed and remain alert for information relevant to the firm’s process • Taking overall responsibility – New stand-back requirement for the engagement partner o Has the engagement partner’s involvement been sufficient and appropriate throughout the audit such that the engagement partner has the basis for determining that the significant judgments made and the conclusions reached are appropriate given the nature and circumstances of the engagement? o Have the nature and circumstances of the audit, any changes thereto, and the firm’s related policies or procedures been taken into account in complying with the requirements of this ISA? • Documentation – New application material on how to document compliance with the ISA and on the importance of documentation on the exercise of professional skepticism Monitoring and Remediation, Standing Back, Documentation Page 10
- 11. Proposed International Standard on Quality Management (ISQM) 2: Engagement Quality Reviews ISQM 2 Page 11
- 12. Relationship Between ED-ISQM 1 and ED-ISQM 2 Yes No ED-ISQM 2: • Appointment and eligibility of engagement quality reviewers • Performance of the engagement quality review • Documentation of engagement quality review ED-ISQM 2 does not apply Engagement quality review required? ED-ISQM 1: Requirements for the selection of engagements for engagement quality review Page 12
- 13. • An engagement quality review is a firm-level response to quality risks relating to the engagement performance component of the firm’s system of quality management • ED-ISQM 2 incorporates and enhances requirements of extant ISQC 1 and ISA 220 • How does ED-ISQM 2 address public interest considerations for engagement quality reviews? – Engagement quality reviews are still required for audits of listed entities – Engagement quality reviews will be required for more engagements – Enhanced eligibility criteria to be appointed as an engagement quality reviewer – More robust performance and documentation requirements Engagement Quality Reviews: An Overview Page 13
- 14. • Enhancements to the selection of engagements for engagement quality review – firm required to establish policies or procedures that require an engagement quality review for: – Audits of listed entities (required in extant ISQC 1) – Audits of financial statements of entities the firm determines are of significant public interest (new) o Entities of significant public interest is a concept already in other ISAs, e.g., ISA 700 (Revised) – Audits of entities for which an engagement quality review is required under law or regulation (included as guidance in extant ISQC 1) – Audits or other engagements for which the firm determines that an engagement quality review is an appropriate response to assessed quality risks, based on the reasons for the assessments given to those risks (new) Engagements Requiring an Engagement Quality Review Page 14
- 15. • Firm policies or procedures required to set forth eligibility criteria for appointment as an engagement quality reviewer – Enhanced guidance on considerations regarding the competence and capability of the engagement quality reviewer o For example, understanding of standards / law / regulation, knowledge of industry – New requirement that engagement quality reviewer has sufficient time to perform the engagement quality review – Enhanced requirements on objectivity of engagement quality reviewer o New requirement to comply with relevant ethical requirements, including in relation to threats to objectivity o Limitations on eligibility to be appointed as engagement quality reviewer – New application material cites an example of firm policies and procedures that limit eligibility is determining a suitable cooling-off period that depends upon the facts and circumstances of the engagement, and applicable provisions of law or regulation or relevant ethical requirements o Enhanced guidance on impact on EQ reviewer’s objectivity of discussions with engagement team – Enhanced application material on appropriate authority of the engagement quality reviewer o Firm policies or procedures addressing differences of opinion may enhance authority Eligibility Criteria for Engagement Quality Reviewers Page 15
- 16. • Firm policies or procedures required to set forth eligibility criteria for individuals who assist the engagement quality reviewer • Explicit eligibility criteria for assistants – Competence and capabilities, including sufficient time to perform assigned duties – Compliance with: o Relevant ethical requirements o Requirements of law and regulation, if applicable • Engagement quality reviewer takes responsibility for performance of the engagement quality review, including the appropriateness of the work performed by individuals assisting in the review Individuals Who Assist the Engagement Quality Reviewer Page 16
- 17. Performance of the Engagement Quality Review • Enhanced requirements for performance of an engagement review – New requirement to read and understand information provided by the firm about the results of its monitoring and remediation – Enhanced application material on identifying significant judgments made by the engagement team and conclusions reached thereon o For audits of financial statements, builds on requirements in the ISAs in relation to significant matters and significant judgments – New requirement to evaluate: o Engagement team’s basis for making significant judgments, including when applicable the appropriate exercise of professional skepticism o Whether conclusions reached by the engagement team were appropriate – New requirement if there are concerns that the engagement team’s significant judgments were not appropriate, including actions to take in such cases – New requirement for the engagement quality reviewer to perform a stand-back evaluation of whether the performance requirements of ED-ISQM 2 were fulfilled and the engagement quality review was complete Page 17
- 18. Documentation of the Engagement Quality Review • Enhanced requirements for documentation of engagement quality reviews – required to be sufficient to enable an experienced practitioner, having no previous connection with the engagement, to understand the nature, timing and extent of the procedures performed by the engagement quality reviewer • Requirement for engagement quality review documentation be included with the engagement documentation • Required documentation explicitly includes: – Identification of the engagement quality reviewer and assistants – Identification of the engagement documentation reviewed – Documentation of the engagement quality reviewer’s stand-back evaluation – Date of completion of the engagement quality review • New application material on: – The form, content and extent of the documentation – How the engagement quality review may be documented Page 18
- 20. Illustrative Timeline July 1, 2019 March 2020 June 2020 December 2021 Comment period for EDs closes IAASB approval of standards PIOB approval of due process Anticipated effective date 18 months This timeline is for illustrative purposes only—approval dates and the implementation period are dependent on a number of factors, including stakeholders’ comments on the exposure drafts and on the implementation period proposed therein Page 20
- 21. How to Comment Other useful resources: • Draft Examples: How the Nature and Circumstances of the Firm and the Engagements It Performs Affect the Implementation of Proposed ISQM 1 • Draft Frequently Asked Questions Regarding Proposed ISQM 1 New resources will be available throughout the consultation period – keep checking back www.iaasb.org/quality-management Comments due by July 1, 2019 Page 21
- 23. www.iaasb.org For copyright, trademark, and permissions information, please go to permissions or contact permissions@ifac.org. Page 23
Editor's Notes
- #7: Mention that paragraph A8 of ED-220 describes matters that the EP may take into account determining whether, and if so, the degree to which, the engagement partner may depend on the firm’s policies or procedures in complying with the requirements of ISA 220.
- #21: Note – The timeline is an illustration to stimulated views on whether the implementation period is appropriate. Please emphasize that the December 2021 anticipated effective date is subject to the comments received, and may vary based on the time needed to finalize the standards, further board discussions on the implementation period.