ICAEW.com works better with JavaScript enabled.

ISQM 1: the benefits for smaller firms

Author: ICAEW Insights

Published: 19 May 2022

All firms – not just larger ones – need to have a quality management system in place by the end of the year. But it doesn’t have to be a burden, and it can deliver lasting benefits.

For many small audit firms, quality management can seem like a process that will take up time that they do not have. Ultimately, they want to keep their clients happy. While they might be concerned about passing a Quality Assurance Department (QAD) visit, their focus is on the day-to-day work that clients need from them. 

As a result, the relatively new International Standard for Quality Management (ISQM 1) can seem like a burden. The regulatory changes this introduces, which must be in place by December, can create a bigger struggle for smaller firms, which do not necessarily have in-house technical, IT and training support services. 

“The proportion of management time spent in this area is going to be far greater, so any time invested needs to offer a payback of some kind in terms of performance, compliance and/or financial returns,” says Sarah Flint, a Director of Benee Consulting, which conducts ‘audit only’ engagements, file reviews, looks at practice procedures and provides training for audit staff for firms. 

“It’s a competitive market and the investment in time involved in compliance with these standards could seem too large if firms assume that the payback is more compliance than financial benefit,” Flint adds. 

However, while it seems like a simple compliance task, there are shorter- and longer-term benefits that can arise from ISQM 1. Flint lists a few examples of general benefits that firms might receive from adopting a quality management system.

“If you work on your highest risks to quality, the seriousness of those risks will reduce over time,” she says. “If your audit work has a quality focus, that new approach and culture will trickle into other work automatically.”

With the scarcity of audit staff, a quality management approach can make employees feel more job satisfaction and value in their work, which in turn can increase staff loyalty. 

Repeating issues

Paul Clegg, Founding Partner of firm Paul Clegg & Company, also conducts file reviews for other practices as well as undertaking audits for his firm’s clients. He says there are common issues in audit among different tiers of small firms that ISQM 1 can address. 

The smallest practices, for example, commonly have issues of a lack of evidence. The auditors might spend a couple of days on work in progress, but it is not recorded. The quality of accounts and disclosures is often high. The responsible individual (RI) often does not spend enough time planning the audit, meaning that a lot of the audit file is made up of information that is not much use for the audit. A lack of appreciation of the use of materiality is also common. 

“There’s a lot of over-auditing in smaller firms, which means too much time, which means under-recovery. In terms of the actual accuracy of the accounts, they’re seldom inaccurate, so there’s a lot of good work by the vast majority of small practices. It’s trying to guide these firms in improving their quality by reducing the amount of work they do, which sounds counterintuitive.”

With larger firms approaching nine to 12 partners, the biggest issue is communication between the top of the pyramid and the bottom, says Clegg. Small firms with more than one office, for example, do not always communicate enough with each other, so do not share best practice.

“These firms are probably moving on to computerised audit systems and can become over-reliant on the technology. “The lower tier of audit staff don’t necessarily recognise when something may or may not be wrong. They don’t always pick up the fundamentals,” Clegg adds. 

These issues are often picked up by file reviews and QAD visits, and sometimes crop up year after year. ISQM 1 requires firms to identify why these occur and take action so that they do not happen again.

Greater profit through quality management

For Clegg, the primary benefit of the new quality management standard is simple: “Better recoverability, greater profit; that’s what comes from good quality management. It’s a more efficient audit done in a shorter space of time without sacrificing the quality of the product and conclusion at the end.”

Flint expands on the positive reputational impacts that ISQM 1 can have for small firms. With audits being heavy on client interaction, the focus on quality will be apparent to clients, improving the firm’s reputation. Longer term, it may also make QAD visits much easier, reducing the number of queries. The same goes for file reviews.

“Better-quality audits will also inevitably reduce the risks of actions against the firm. If all firms are doing this, insurance premiums may even be lower,” says Flint.

Above all, you end up with happier clients, says Clegg. “I know it’s not necessarily our job to make clients happy, but there’s no reason why we shouldn’t have happy audit clients if we do our jobs really professionally and do things right.”

First steps to ISQM 1 adoption

ISQM 1 requires that firms perform engagements under the International Audit and Assurance Standards Board’s international standards to design a quality management system tailored to ‘the nature and circumstances’ of the firm and engagements it performs.

Small firms need direction to get started with ISQM 1, says Clegg. They also need to know what the positive outcomes will be for them. “They need to be aware that if they’ve got a good practice in terms of audit papers, that should be reflected across the practice.”

One critical aspect for small firms to note is that having a quality management system in line with ISQM 1 will not necessarily mean more paperwork. “Smaller firms aren’t going to have to write reams and reams of explanations. They should be able to be very concise. I believe that root cause analysis can be done in five pages.”

Some small firms may want to wait for others to come up with a solution first to help fast-forward the process a little, says Flint. Some training providers are already offering solutions, but it is not a one-size-fits all exercise. “The process you go through during the risk assessment and root cause analysis is all part of bringing everyone into a quality-based culture/approach that’s at the core of the standard.”

Flint recommends that small firms take a look at the IAASB's guidance on ISQM 1. ICAEW is also producing resources for smaller firms to use, such as a webinar series. Whatever preparation firms do, Flint highlights her key home truths about ISQM 1 that all practices should keep in mind:

  • It is not about adding tasks, it is about changing to achieve a higher-quality result.
  • It is not about overnight success, it is about having a culture of continual improvement in quality.
  • It is not about blame, it is about helping everyone to achieve a consistent quality outcome together.
  • It is not about focusing on ‘problems’, it is about capitalising on what you do well and finding solutions.

“I would encourage firms to make a start, however small, and make regular time in the diary to revisit and build on the start that they make,” Flint says. “Don’t leave it until closer to the deadline – start now.”

Recent articles

Quality management

With new quality management standards for audit on the horizon, there is an opportunity for firms of all sizes to supercharge their audits and reap significant knock-on benefits that go beyond ticking the regulatory box

Buildings

Recommended content

Audit standards
Two women reviewing paperwork
Quality management in audit firms

Resources to help audit firms prepare for new quality management standards ISQM 1, ISQM 2 and ISA 220 (Revised).

Read more
Watch
Laptop computer with an alarm clock and stationary beside it
Webinar: Quality management in audit firms

Join Gill Spaul and David Smith for the first of a series of quality management webinars, as they discuss the requirements and how firms can be proactive.

Watch now
Listen
Young man wearing yellow beanie and headphones
Podcast: How do we measure audit quality?

Anna Draper, Jayne Kerr, Tracy Gordon and Katharine Bagshaw join ICAEW’s Iain Wright to discuss.

Listen now
}
}