A recent survey by the ICAEW Quality Assurance Department (QAD) suggests a strong and positive implementation of ISQM1 but urges the small minority of firms that haven’t put it in place to act quickly. All active audit firms are expected to have implemented ISQM1, and QAD will review evidence of this as part of its audit monitoring visits. Here we summarise the findings and resources available to support implementation.
International Standard on Quality Management (UK) 1 (ISQM1), replaced ISQC1 on 15 December 2022. The new standard represents an important shift in expectations of audit procedures within firms, with arguably a more proactive, iterative approach to maintaining audit quality as opposed to ISQC1.
The new standard is scalable, as was its predecessor. An important development is the need for firms to first conduct their own risk assessment, tailored to consider factors such as their structure, clients, staff and other resources.
To get early insights into how our audit firms have tackled ISQM1 and the changes it has made to their audit practice, QAD surveyed a randomly selected sample of 150 non-PIE audit firms in early January 2023.
The survey asked basic questions about the process of implementation (who was involved and what guidance or other materials the firm used to assist in its implementation), and we also asked about their risk assessment process and any new quality management procedures that had been introduced as a result.
As at 31 March 2023, the vast majority of firms had responded. We are following up the small number of non-responders and note that all those firms have very limited audit portfolios, and most are sole practices. For the purposes of drawing initial conclusions from this survey we assume that those non-responders have not implemented ISQM1 yet.
Comments from firms that have adopted ISQM1 were very positive about the value of the new standard.
“The process has helped to critically analyse the firm and staff, with the aim of improving quality standards. Whilst I think most of the weaknesses were known beforehand, the process of carrying out the documentation and findings has focused the mind and made us, as a firm, re-evaluate our processes, our future aims, and our future clients that we will accept.”
“The implementation felt a daunting process at first, but it has turned out to be a worthwhile exercise, and with ISQM now in place, we are confident it can only improve audit quality.”
“ISQM 1 has made us look at audit quality in a different way. We have identified improvements to our processes that might not otherwise have been found had we continued to use ISQC 1.”
We asked firms about the information and guidance used to support implementation, and of the firms that had either adopted or started implementation, many had referred to multiple sources. Of these firms, 62% had used ICAEW materials, 54% Mercia and 33% Croner-I, with multiple other sources also cited by firms.
It is clear firms really value materials that bring the requirements of the standard to life through templates and examples:
“The HAT and ICAEW webinars were useful in the lead up to the preparation for and implementation of ISQM1. However, it was only when some templates and HAT example risk assessments and documentation became available that I was able to have a better grasp on the extent of what was required. The risk assessment process was also very useful in identifying risk factors which sat outside of audit quality, or were on the fringes (ie, it became a very practice-wide risk assessment).”
Firms also acknowledge that adoption of ISQM1 is only the start of the journey and that the system of quality management will evolve, with the next challenge being the monitoring and remediation of the system through 2023 and beyond.
“The hardest aspect of implementing ISQM1 has been to perform a risk assessment for the firm taking account of the relatively unique circumstances in which the firm operates, and then documenting the objectives, risks and responses in a way that complies with the standard. The overview was that the firm should comply with ISQM1, but documenting this did prove challenging. The firm's ISQM1 quality management system will continue to be reviewed and improved, as the responsible individual (RI) gains more knowledge and training in performing the risk assessment and documenting how the firm addresses these risks.”
In further explanation given as part of the survey, the overwhelming majority of firms that had not implemented ISQM1 had no current audits, or indeed had recently applied to withdraw from audit registration. Many of these firms without current statutory audits continue with registration under a written undertaking to provide us with updated audit procedures and other information should the firm wish to take on an audit client in the future. This will enable ICAEW to ensure that these firms have adopted ISQM1 at that point.
There will inevitably be a small number of audit firms actively involved in statutory audit work that are still to adopt ISQM1. With Christmas and the self-assessment tax return season over, it is essential that these firms catch up without delay. If these firms are struggling to know where to start, we hope that feedback from other firms will be helpful and provide some confidence that ISQM1 is not simply a regulatory requirement but a valuable process that will enhance the firm’s procedures.
“The webinars from ICAEW were very helpful, especially the recent issues from a sole proprietor explaining their process of implementation of the ISQM1 process and procedures, including developing the risk assessment and examples. This was very relevant to the firm's situation.”
Only a small minority of firms surveyed said they had not yet implemented ISQM1. As noted above, it is important that any firms that are late in doing so remedy the situation immediately. QAD expects all active audit firms to have implemented ISQM1 and will review supporting documentation as part of its audit monitoring visits.
Depending on the quality of documentation and the seriousness of any deficiencies QAD reviewers identify, there may be further follow-up action or information requested.
The new standard is scalable, as was its predecessor. An important development is the need for firms to first conduct their own risk assessment, tailored to consider factors such as their structure, clients, staff and other resources.
To get early insights into how our audit firms have tackled ISQM1 and the changes it has made to their audit practice, QAD surveyed a randomly selected sample of 150 non-PIE audit firms in early January 2023.
The survey asked basic questions about the process of implementation (who was involved and what guidance or other materials the firm used to assist in its implementation), and we also asked about their risk assessment process and any new quality management procedures that had been introduced as a result.
As at 31 March 2023, the vast majority of firms had responded. We are following up the small number of non-responders and note that all those firms have very limited audit portfolios, and most are sole practices. For the purposes of drawing initial conclusions from this survey we assume that those non-responders have not implemented ISQM1 yet.
… and the survey said
Based on the results, 67% of firms have adopted ISQM1, with another 17% having started preparation, although implementation is not yet complete. Including the non-responders, our survey indicates that 16% of our audit firms have not yet started implementation of ISQM1.Comments from firms that have adopted ISQM1 were very positive about the value of the new standard.
“The process has helped to critically analyse the firm and staff, with the aim of improving quality standards. Whilst I think most of the weaknesses were known beforehand, the process of carrying out the documentation and findings has focused the mind and made us, as a firm, re-evaluate our processes, our future aims, and our future clients that we will accept.”
“The implementation felt a daunting process at first, but it has turned out to be a worthwhile exercise, and with ISQM now in place, we are confident it can only improve audit quality.”
“ISQM 1 has made us look at audit quality in a different way. We have identified improvements to our processes that might not otherwise have been found had we continued to use ISQC 1.”
We asked firms about the information and guidance used to support implementation, and of the firms that had either adopted or started implementation, many had referred to multiple sources. Of these firms, 62% had used ICAEW materials, 54% Mercia and 33% Croner-I, with multiple other sources also cited by firms.
It is clear firms really value materials that bring the requirements of the standard to life through templates and examples:
“The HAT and ICAEW webinars were useful in the lead up to the preparation for and implementation of ISQM1. However, it was only when some templates and HAT example risk assessments and documentation became available that I was able to have a better grasp on the extent of what was required. The risk assessment process was also very useful in identifying risk factors which sat outside of audit quality, or were on the fringes (ie, it became a very practice-wide risk assessment).”
Firms also acknowledge that adoption of ISQM1 is only the start of the journey and that the system of quality management will evolve, with the next challenge being the monitoring and remediation of the system through 2023 and beyond.
“The hardest aspect of implementing ISQM1 has been to perform a risk assessment for the firm taking account of the relatively unique circumstances in which the firm operates, and then documenting the objectives, risks and responses in a way that complies with the standard. The overview was that the firm should comply with ISQM1, but documenting this did prove challenging. The firm's ISQM1 quality management system will continue to be reviewed and improved, as the responsible individual (RI) gains more knowledge and training in performing the risk assessment and documenting how the firm addresses these risks.”
Firms yet to start ISQM1 implementation
It is important to stress that although our survey suggests that 16% of firms are yet to start implementing ISQM1, the proportion of statutory audit work that is potentially being undertaken outside this new standard for quality management will be very much lower.In further explanation given as part of the survey, the overwhelming majority of firms that had not implemented ISQM1 had no current audits, or indeed had recently applied to withdraw from audit registration. Many of these firms without current statutory audits continue with registration under a written undertaking to provide us with updated audit procedures and other information should the firm wish to take on an audit client in the future. This will enable ICAEW to ensure that these firms have adopted ISQM1 at that point.
There will inevitably be a small number of audit firms actively involved in statutory audit work that are still to adopt ISQM1. With Christmas and the self-assessment tax return season over, it is essential that these firms catch up without delay. If these firms are struggling to know where to start, we hope that feedback from other firms will be helpful and provide some confidence that ISQM1 is not simply a regulatory requirement but a valuable process that will enhance the firm’s procedures.
“The webinars from ICAEW were very helpful, especially the recent issues from a sole proprietor explaining their process of implementation of the ISQM1 process and procedures, including developing the risk assessment and examples. This was very relevant to the firm's situation.”
Your QAD audit monitoring visit
QAD views 2023 as a ‘transition year’ and expects that audit quality monitoring and remediation procedures will evolve and develop in the year to December 2023. The effectiveness of firms’ efforts will be clearer in 2024 and beyond, and there will be opportunity for quality management procedures to be refined in response to firms’ evaluations of their procedures and, of course, as and when their client base changes.Only a small minority of firms surveyed said they had not yet implemented ISQM1. As noted above, it is important that any firms that are late in doing so remedy the situation immediately. QAD expects all active audit firms to have implemented ISQM1 and will review supporting documentation as part of its audit monitoring visits.
Depending on the quality of documentation and the seriousness of any deficiencies QAD reviewers identify, there may be further follow-up action or information requested.
Resources
Keep updated
Be the first to know when articles like this are released by following us on LinkedIn and subscribing to our monthly newsletter, Regulatory & Conduct News.
