iaasb quality management exposure drafts isqm... · overview and background 1. post implementation...
TRANSCRIPT
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IAASB Quality management – Exposure Drafts
Information and Discussion Session
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IFAC Guidance Material
Copyright statement• This presentation includes extracts from the
IAASB Exposure Drafts for Quality Management
at the Firm and Engagement Level, Including
Engagement Reviews (QM-EDs).
• Contact [email protected] for permission to
reproduce, store or transmit, or to make other
similar uses of these extracts
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Quality management – ED-ISQM 1Overview and background
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Overview and background
1. Post implementation
review of clarified ISAs
(2013)
2. Issue of the ITC (2015)
3. IAASB approved
quality management
project (2016)
4. IAASB issued quality
management exposure
drafts (2019)
Recap
Findings
indicated
revisions,
improvements
or clarifications
required
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Overview and background
IAASB QM-EDs• ED-ISQM 1
• ED-ISQM 2
• ED-220
• Deadline for comment 1 July 2019
SAICA activities • Quality Control Reference Group
• Recordings– Video recordings
– Voice recordings
• Articles
• Information session
• Survey
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Overview and background
ED-ISQM
1
ED-ISQM
2
ED-220
Relationship
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Overview and background
Effective date
• Anticipated - December 2021
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Quality management – ED-ISQM 1Introductory paragraphs
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Introductory paragraphsScope
• Deals with firm’s responsibility to design, implement and operate a SOQM
• Includes– Audits or reviews of financial statements
– Other assurance engagements
– Related services engagements
Scalability
• Make standards practically useable by ALL firms– Nature and circumstance
• SOQM will change over time– In response to identified change
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Introductory paragraphsThe firm’s SOQM• Purpose
– Support the consistent performance of quality engagements
– Public interest role
– Achieved by planning, performing and reporting in accordance with professional standards and legal and regulatory requirements
• Professional judgement and professional scepticism
– Standards are principles-based
– Required to be exercised to achieve the objective of quality engagements
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Introductory paragraphsT
he c
om
po
nen
ts o
f a
SO
QM
House of quality
Source: Explanatory Memorandum to ED-ISQM 1
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Introductory paragraphsR
isk
as
se
ss
men
t p
roces
sSource: Explanatory Memorandum to ED-ISQM 1
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Introductory paragraphs
Monitoring and remediation
1. Design and perform
monitoring activities
2. Evaluate findings and
identify deficiencies
3. Evaluate deficiencies
4. Respond to
deficiencies
5. Communication
6. Evaluate the SOQM
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Introductory paragraphs Objective• SOQM that provides the firm with reasonable assurance that
– Firm and personnel fulfil their responsibilities
– Issued reports are appropriate
• Consistent performance of quality engagements key to firm’s responsibility to act in the public interest
• Objective does not specifically mention public interest
• Link in paragraph 7 of ED-ISQM 1
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Introductory paragraphs
Definitions
• Revisions made to this section
Changes worth noting
• New definition
– Deficiency
• Revised definition
– Engagement team
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Introductory paragraphs
Requirements – Applying, and Complying with, Relevant Requirements
• Individuals must understand ED-ISQM 1 relevant to their responsibilities
– Individual assigned ultimate responsibility and accountability for SOQM
– Assigned operational responsibility
• Firms must comply with each and every requirement of ED-ISQM 1
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Quality management – ED-ISQM 1Governance and leadership
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Governance and leadershipWhy the need?
• Gap in requirements relating to leadership responsibilities
Overview of changes
• Based on the component Leadership Responsibilities for Quality Within the Firm
• Included as the first component in ED-ISQM 1
• Substantially enhanced to improve robustness of a firm’s governance and leadership
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Governance and leadershipComparison of changes
• Extant ISQC 1
– Establish policies and procedures
– Ultimate responsibility for a firm’s SOQC
• Have sufficient and appropriate experience, ability and necessary authority
• ED-ISQM 1
– Risk assessment process
• Six prescribed quality objectives
• Firm required to identify quality risks
• Three prescribed responses
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Governance and leadership
Th
e c
om
po
nen
ts o
f a
SO
QM
Source: Explanatory Memorandum to ED-ISQM 1
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Governance and leadership
1. Firm’s culture
2. Firm’s leadership
3. Firm’s strategic decisions
and actions
4. Organisati
onalstructure
5. Resources
6. Fulfillment
of responsibil
ities
Qu
ality
ob
jecti
ves
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Governance and leadership
Assign ultimate
responsibility
Periodic performance evaluation
Dealing with complaints
and allegations
Re
qu
ire
d r
esp
on
ses
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Quality management – ED-ISQM 1Risk assessment process
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Risk assessment processSource: Explanatory Memorandum to ED-ISQM 1
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Risk assessment process
Why the need?
• Address key public interest issues
• Risk based approach
• Based on the nature and circumstances of the firm and the firm’s
individual engagements
• Promoting continual improvement and responsiveness
Limitation
• SOQM provides reasonable and not absolute assurance
• Uncertainties and risks may exist that cannot be predicted
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Risk assessment process
Overview of changes
• Integrated risk approach
• Professional judgment
• Focus on quality risks at both a firm and engagement level
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Risk assessment process Source: Explanatory Memorandum to ED-ISQM 1
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Risk assessment process
Definition: Quality objectives – The objectives that, when
achieved by the firm, collectively provide the firm with reasonable
assurance that the objectives of the system of quality management are
achieved.
Establishing quality objectives
Source: Explanatory Memorandum to ED-ISQM 1
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Risk assessment process
Definition: Quality risks – Risks arising from conditions, events,
circumstances, actions or inactions that may adversely affect the
achievement of a quality objective(s).
Step 1:Identify quality risks that:
• Have a reasonable possibility of occurring; and
• If they were to occur, may individually or in combination with other
quality risks, have a significant effect on the achievement of a
quality objective [ED-ISQM 1, par 28]
Step 2:Assess the identified quality risks to provide a basis for the design and
implementation of the related responses [ED-ISQM 1, par 29]
Identify and assess quality risks
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Risk assessment processId
en
tify
an
da
ss
es
sq
uali
tyri
sks
Source: Explanatory Memorandum to ED-ISQM 1
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Risk assessment process
Definition: Response (in relation to a system of quality
management) –Policies or procedures designed and implemented by the firm to address
an assessed quality risk
ED ISQM 1, paragraph 30The firm shall design and implement responses to address the assessed
quality risks, including the responses required by this ISQM.
The design of the responses shall be based on, and responsive to, the
reasons for the assessments given to the quality risks.
Design and implement responses
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Risk assessment processDesign and implement responses
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Risk assessment process
The firm shall identify changes in the nature and
circumstances of the firm or its engagements and modify the
quality objectives, quality risks or responses, as appropriate,
in response to such changes [ED-ISQM 1, par 31] as a result of:
• Information arising from the firm’s monitoring activities;
• Changes in the nature and circumstances of the firm and /
or its engagements
Changes in nature and circumstances
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Risk assessment processIAASB – Draft Examples
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Quality management – ED ISQM 1Relevant Ethical Requirements
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Relevant ethical requirements
Why the need?• The rules of the game
• South African experiences
– IRBA inspections report
“Many of the audit deficiencies identified during inspections can be attributed to a lack of independence as an underlying root cause...”
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Overview of changes• Continues to be framework-neutral
• Updated to align with restructured and revised IESBA Code
• Principles-based approach
• ED-ISQM 1
– Consideration of law, regulation or other ethical requirements
– Risk assessment process
• Three prescribed quality objectives
• Firm required to identify quality risks
• Four prescribed responses
Relevant ethical requirements
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Relevant ethical requirements
Firm
Personnel
Others
Understand the rules
Play by the rules
Respond to breaches
Quality objectives
WHO? WHAT?
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Relevant ethical requirementsSpecific considerations
• Establish policies or procedures to– List the rules
– Identify threats
– Identify breaches
– Communicate threats and breaches
– Respond to threats and breaches
– Obtain annual confirmations
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Relevant ethical requirements
Integration with other components
Governance and leadership
• Aspects of the SOQM shall include operational responsibility for
compliance with independence requirements
Communication and information
• Communication of independence matters
• Not specifically required in Relevant Ethical Requirements
• Addressed by the broader requirements Information and
Communication
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Relevant ethical requirements
Identify relevant ethical requirements and determine the applicability
• Identification and evaluation of threats
• Identification, communication, evaluation and reporting
Establish policies or procedures
Annual confirmation of compliance with independence
Required responses
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Quality management – ED ISQM 1Acceptance and Continuance of Client Relationships and Specific
Engagements
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Acceptance and continuance
Why the need?• Recent international experiences
• South African experiences
– IRBA inspections report
“Numerous issues have been identified, including firms not sufficiently weighing up the risks in relation to the perceived benefits of taking on an audit client; commercial interests outweighing audit quality considerations; the risk of association with clients whose integrity may be lacking; and a general risk of damaging the reputation of not only the firm but also the profession as a whole.”
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Overview of changes• New requirements
– Financial and operational priorities do not inappropriately influence acceptance and continuance
– Firm to determine whether it has access to information/persons
• ED-ISQM 1– Risk assessment process
• Four prescribed quality objectives• Firm required to identify quality risks• Prescribed responses
– The firm shall include policies and procedures
Acceptance and continuance
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Acceptance and continuance
• nature and circumstances of the engagement
• client integrity and values
Firm obtains sufficient appropriate information about
• Required resources
• Access to information / persons
Firm’s ability to perform the engagement appropriately, including
Firm’s financial and operational priorities
Firm responds appropriately
Quality objectives
Judgements appropriate
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Acceptance and continuance
• How did the client get to us? Do you insist on referrals?
• Acceptable financial reporting framework?
• Do we accept any financial condition?
• Any industry or sectors you avoid?
• Any tax conditions?
• State of accounting records?
• Does the partner have the skills, experience and time?
• Access to those charged with governance
Specific considerations
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Quality management ED-ISQM 1Engagement performance
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Source: Explanatory Memorandum to ED-ISQM 1
Engagement performance
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Engagement performanceWhy the need?• In general
– Maintain and enhance robustness of standard
– Principles-based versus previous rule-based
– Scalability
• Professional scepticism project
Overview of changes• Change in terminology from EQCR to EQR
• EQR– firm-level response to quality risk(s) in ED-ISQM 1
• Engagements requiring EQR
– proposed to strengthen
• Eligibility criteria and review requirements now in ED-ISQM 2
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Extant ISQC1 Para ED-ISQM 1 Para
Engagement
performance policies
and procedures
32-33 37(a)-(b)
Consultation 34 37(c)
Engagements subject to
EQCR
35 37(e)
EQCR: Eligibility and
procedural requirements
36-42 ISQM 2
Differences of opinion 43-44 37(d)
Engagement
documentation
45-47 37(f)
Professional judgement
and scepticism
36(b)
Engagement performance
Comparison of changes
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Comparison of changes• Includes requirements from extant ISQC 1 addressing
– direction, supervision and review,
– consultation,
– differences of opinion,
– retention and maintenance of documentation
• Addresses exercise of professional judgement and professional scepticism by engagement teams
• Required response for firm to perform EQRs
• ED-ISQM 1– Risk assessment process
• Three prescribed quality objectives
• Firm required to identify quality risks
• Six prescribed responses
Engagement performance
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Personnel understand and fulfill their responsibilities
Engagement team exercises appropriate professional judgement and, where applicable professional scepticism
Engagement documentation appropriately assembled and retained
Engagement performance
Quality objectives
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Engagement performance
• direction, supervision and review
• ED-ISQM 1 establishes overarching requirements
• ED-ISA 220 builds on these requirements
• communication, consultation, differences of opinion, and retention and maintenance of documentation
Includes requirements from extant ISQC 1 addressing
Required response for firm to perform EQRs
New EQR requirement: Significant public interest
Required Responses
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Engagement performanceSignificant public interest
ED-ISQM 1: Application
material describing the characteristics
Large number and
wide range of stakeholders
Nature and size
of the business
May include
financial institutions
and certain not-for-
profit organisations
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Quality management – ED-ISQM 1Resources
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Resources and Information and CommunicationSource: Explanatory Memorandum to ED-ISQM 1
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ResourcesWhy the need?
• Extant ISQC 1 only addresses human resources
• Increased use of technology in
– Performing engagements
– Facilitating operation of systems of quality management
• Intellectual resources essential to enabling performance ofquality engagements
Overview of changes
• New principles-based requirements included for
– Technological resources
– Intellectual resources
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Resources
Extant ISQC 1 Para ED-ISQM 1 Para
Human Resources Resources
HR policies or
procedures
29 38(a)-(d)
Assignment of
engagement partners
30 38(b)
Assignment of personnel 31 38(b)
Performance evaluations A28 38(d)
Technological resources 38(e) & (g)
Intellectual resources 38(f)-(g)
Comparison of changes
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ResourcesComparison of changes• Extant ISQC 1 only addresses human resources
– Establish policies and procedures• Engagement performed ito applicable standards
• Reports issued are appropriate
• Identification and role of EP communicated to TCWG
• Assign appropriate personnel with necessary competencies andcapabilities
– Assign responsibility for the engagement to the EP• Has appropriate competence, capabilities and authority
• Responsibilities of the EP are clearly defined.
• ED-ISQM 1– Risk assessment process
• Seven prescribed quality objectives
• Firm required to identify quality risks
• Prescribed response– Firms required to design and implement responses to
address identified and assessed risks
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Resources
• Enhanced requirements for attracting, developing and retaining personnel with the appropriate competence and capabilities to fulfill their functions, and assigning personnel to engagements
• New requirements addressing evaluation of personnel and personnel’s compensation, promotion and other incentives, which are linked to quality
Human resources
• New requirements for obtaining or developing, implementing and maintaining technological resources
• IT terminology aligned with proposed ISA 315 (Revised)
Technological resources
• New requirements for obtaining or developing, implementing and maintaining intellectual resources
• Includes methodology, guidance or other support tools
Intellectual resources
Quality objectives
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Resources
None specifiedFirm to design and implement
Application material for
quality objectives
Required responses
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Quality management – ED-ISQM 1Information and communication
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Information and communication
Why the need?• Extant ISQC 1 does not
– Address the broader need for information and communication
– Acknowledge the nature of two way communication
Overview of changes• New component
– Information system / platform
– Effective two-way communication within firm
– Responsibility of all personnel
– Robust communication during engagements
• Communication with external parties– All forms of communication with external parties
– Aims to promote exchange of valuable information about firm’s SOQMwith stakeholders
– Transparency reports, not required but encouraged
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Information and communication
Extant ISQC 1 Para ED-ISQM 1 Para
(No separate element) Information and
communication
Relevant ethical
requirements
21-23 33(c)-(d)
Human Resources 30(a)
Engagement
performance
41(a)-(c)
Monitoring 50-51, 53-
55
52-54, 57,
61
Quality objectives 40(a)-(e)
Responses 41(a)-(c)
Comparison of changes
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Information and communicationComparison of changes
• Extant ISQC 1 does not include a separate Information
and Communication element
• Addressed in other elements
– Relevant ethical requirements
– Human resources
– Monitoring
• ED-ISQM 1
– Risk assessment process• Five prescribed quality objectives
• Firm required to identify quality risks
• Three prescribed responses
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Information and communication
• Information system may be less sophisticated in the case of an SMP
New requirement to have an information system / platform that supports the SOQM
• Firm communicates relevant and reliable information, sufficient to enable personnel to understand and carry out their responsibilities
• Personnel communicate relevant an reliable information to the firm
New requirement to ensure robust, two way communication
New requirement for all personnel to take responsibility for exchange of information and communication
New requirements addressing external communication on the firm’s SOQM
Quality objectives
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Information and communication
Establish communication policies or procedures
Communicating responsibility for implementing firm’s responses to personnel
• Principles-based approach
• Addresses communication with networks, service providers and other external parties
• Transparency reports not required, firms encouraged
New requirements addressing external communication
Required responses
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QUALITY MANAGEMENT –ED ISQM 1
Monitoring and remediation process
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Monitoring and remediation processWhy the need?
- Monitoring of the entire system, not only engagement inspections
- Addressing the results of external inspections
- Understanding the root cause of findings, implementing remedial actions to respond to findings, and monitoring the effectiveness of remedial actions
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Monitoring and remediation processSource: Explanatory Memorandum to ED-ISQM 1
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Monitoring and remediation processDesigning and performing monitoring activities
• Monitoring activities should cover the system as a whole
• More focus on tailoring the nature, timing and extent of monitoring activities to the circumstances of the firm
• Less prescriptive (firm has to design own monitoring activities)
• More flexibility in terms of monitoring of completed engagements
• Enhanced requirements addressing eligibility of those performing monitoring activities
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Monitoring and remediation process
Evaluating findings and identifying
deficiencies
• Evaluating findings from internal monitoring activities,
external inspections and other information sources
• Positive findings require no further action
• Distinguish between negative findings and a deficiency
• Definition for deficiency
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Monitoring and remediation process
Evaluating identifying deficiencies
• Investigate the root cause (taking into account the nature
and severity of the deficiency)
• Evaluating the severity and pervasiveness of the
identified deficiency
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Monitoring and remediation process
Responding to deficiencies
• Less prescriptive (firm has to design own remedial
actions)
• Evaluate the remedial actions
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Monitoring and remediation process
Communication related to monitoring and
remediation
• Internal
– Firm leadership and relevant personnel
• External Network
– Service providers and other stakeholders
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Monitoring and remediation process
Evaluating the system of quality
management
- Individual with ultimate responsibility has to evaluate
- At least annually
- If it is not effective, leadership required to take prompt and
appropriate action
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Monitoring and remediation process
Link to risk assessment process
- Continuous improvement
- Key aspect of the quality management approach
- Trigger to revisit quality objectives, quality risks and
responses
- Information arising from the firm’s monitoring activities
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Quality management – ED-ISQM 1Networks
Service providers
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Networks Why the need?
• Networks can be instrumental in enhancing quality across firms
• Concerns raised
– firms place undue reliance on network requirements or network
services
Overview of changes
• ED-ISQM 1
– New separate section
• Separate concept
• Increased prominence
– New requirements
• Improve robustness of firm’s responsibilities for network
requirements / services
• Firms to understand network requirements / services & effect on
firm’s SOQM
• Firm responsible for own SOQM
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Networks
Extant ISQC1 Para ED-ISQM 1 Para
(Included in Monitoring) Networks
Monitoring procedures
on network basis
54 Network requirements 58(a)
Network services 58(b)
Firm’s responsibilities 58(c)
Overall firm responsibility 58
Risk assessment
process
59
Monitoring & remediation
process
60-63
Comparison of changes
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Networks Comparison of changes
Extant ISQC 1
• Networks included under Monitoring
ED-ISQM 1
• No requirements for networks themselves
• New requirements to address the firm’s responsibilities:
– Understand the network requirements or network services and
the firm’s responsibilities
– Determine the effect of the network requirements and network
services on the firm’s system of quality management
• Determine whether they need to be adapted or
supplemented by the firm to be appropriate for use in its
system of quality management
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Networks Comparison of changes
ED-ISQM 1
• Determine the effect of network level monitoring activities on the
firm’s monitoring activities and the firm’s responsibilities in
relation to such monitoring activities
• Enhanced requirements addressing matters to be communicated
between the firm and the network
• Requirements for networks apply to the network, network firms or
another structure or organisation in the network
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Networks
• Requirements established by the network
• Any services/resources provided by the network
• The firm’s responsibilities
The firm shall understand
• The firm shall determine the effect of the network requirements/services on the risk assessment process
Risk assessment process
• The firm shall determine the effect of network monitoring activities on the firm monitoring activities
• Determine the firm responsibilities
• Obtain results of monitoring activities from the network
Monitoring
Overview of requirements
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Networks
• The firm shall, at least annually obtain information from the network
• Consider the effect of such information on the nature, timing and extent of monitoring activities of the firm
• Communicate information to personnel
• The firm shall communicate any deficiencies identified in the network requirements
Remediation
• Understand the planned remedial action by the network
• Understand whether the network remedial actions address the identified deficiency
• Determine the supplementary actions needed
Identified deficiencies, the firm shall
Overview of requirements
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Service providers
Why the need?
• Firms may use service providers in a SOQM
• Service provider
– Resource
– Therefore firms need to assess if appropriate to use that resource in
SOQM
Overview of changes
• Responsibility of firm, but
– Likely to also have effect on service providers
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Service providers
Extant ISQC1 Para ED-ISQM 1 Para
(No separate topic) Service providers
Use of service providers
in SOQM
64
Deficiencies in resources
provided by service
provider
65
Comparison of changes
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Service providers
• Includes using an external party in the performance of engagements
• Service from the network, network firms or another structure or organization in the network form part of network requirements or network services
New requirements that apply to circumstances when the firm uses resources from an external party
• The firm needs to understand the services and determine that they are appropriate for use by the firm
• Where deficiencies are identified, the firm must understand planned remedial actions by service provider and determine firm’s supplementary remedial actions
Similar concepts to those relating to networks:
Overview of requirements
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QUALITY MANAGEMENT –ED ISQM 1
Documentation
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Documentation
Two-step approach• Principles-based requirement for documentation to be sufficient to
support understanding of SoQM, consistent implementation and
evidence to support the evaluation of the SoQM
• More specific requirements addressing:
Quality objectives, quality risks and responses
Monitoring and remediation
Networks and service providers
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Thank you