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In this article, the UK Financial Reporting Council outlines its expectations of those designing and implementing the new quality management standards.

The International Standard on Quality Management (UK) 1 (ISQM (UK) 1) replaces the existing quality control standard and deals with a firm’s responsibility to design, implement and operate a system of quality management (SoQM) for audits or reviews of financial statements, or other assurance or related services engagements.

Implementing the SoQM is an opportunity for firms to:

  • focus on delivering high-quality engagements;
  • shape the firm’s governance and leadership to drive the oversight, control and discipline needed to embed a culture of quality; and 
  • better understand and respond to conditions, events, circumstances, actions or inactions that adversely affect the achievement of quality.

By the effective date of 15 December 2022, firms should have established their quality objectives, identified and assessed their quality risks and designed and implemented their responses to address such risks. Firms are also expected to have designed and implemented their monitoring and remediation activities. There is much to be done. 

Implementing the new QM standards is not just a compliance exercise. ISQM (UK) 1 is about proactively and comprehensively managing risks to quality, greater accountability, improved focus on leadership and culture, and continuous improvement through a required monitoring and remediation feedback loop. Firms need to approach implementation with a commitment to truly modernise and tailor their policies and procedures. Retrofitting quality risks to existing quality control policies and procedures will not meet the requirements – or the spirit – of the standard. However, those policies and procedures may be an appropriate response to an identified quality risk.

One approach does not fit all. ISQM (UK) 1 is scalable and can be adapted for firms of varying size, complexity and circumstance. We expect each firm’s SoQM to be unique to the nature and circumstances of the firm and engagements it performs. Therefore, a thorough analysis of quality risks that are relevant to the nature and circumstances of the firm and the engagements it performs are critical to tailoring appropriate policies and procedures. Firms should also take into account matters that give rise to audit quality issues, and internal or external inspection findings, when determining and addressing those risks to quality.

Quality and the associated professional behaviours are the responsibility of all personnel within a firm, and its leadership is accountable for embedding that culture. ISQM (UK) 1 is designed to greatly enhance expectations and accountability of firm leadership for QM and create an appropriate culture committed to the consistent performance of quality engagements. The firm needs to win over hearts and minds in its audit practice – and the wider firm – to embed quality in its culture. Firms, in many cases, may have to exercise a great deal of change management for a culture of quality to be effectively embedded; the time and resource for this should not be underestimated.

Robust planning is critical. By this stage, we expect all firms to be finalising an implementation plan, utilising strong project management methods to set clear actions and milestones, and establishing governance arrangements to monitor implementation of the QM standards. Any network requirements, services or resources need to be taken into account when developing the architecture of the SoQM and tailoring policies and procedures. Commitment, time, resource, project management and business partnering within the firm are needed to meet the implementation date.

Ultimately, we believe that a key foundation for consistently delivering high-quality engagements rests in the SoQM, and these new and revised standards will raise the bar. Embedding a culture of quality and continuous improvement into the firm’s strategic decisions, operations and business processes, coupled with a robust commitment to rigorous ethical standards, will be a significant step forward in improving quality.

About the authors

Kate Dalby, Project Director, Financial Reporting Council
Josephine Jackson, Director of International Auditing and Assurance Standards, Financial Reporting Council and Board Member of the IAASB

Audit & Beyond

This article was first featured in the February 2022 edition of Audit & Beyond.

Audit and Beyond February 2022 cover