ACYAUDI: Quality Management for Audit and Assurance Firms

PSQM 1 - Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements, PSQM 2 - Engagement Quality Reviews, and PSA 220 (Revised) - Quality Management for an Audit of Financial Statements

These are the three (3) governing standards of quality management for audit and assurance firms.

Philippine Standards on Quality Management (PSQM1)

Deals with a firm's responsibilities to design, implement, and operate a system of quality management for audits or reviews of financial statements, or other assurance or related services engagements.

Engagement Quality Reviews

Form part of the firm's SQM and deals with the firm's responsibility to establish policies or procedures addressing engagements that are required to be subjected to engagement quality reviews.

Engagement Quality Reviews (PSQM2)

Deals with the appointment and eligibility of the engagement quality control reviewer, and the performance and documentation of the engagement quality review.

Design, Implement, and Operate a System of Quality Management and Serve the Public Interest

These are the two (2) objectives of a firm's system of quality management.

Design, Implement, and Operate a System of Quality Management

The first objective of a system of quality management. This objective provides reasonable assurance that there is COMPLIANCE WITH STANDARDS. The firm and its personnel fulfill their responsibilities in accordance with professional standards and applicable legal and regulatory requirements, and conduct engagements in accordance with such standards and requirements. This objective also provides reasonable assurance that there is APPROPRIATENESS OF REPORTS. Engagement reports issued by the firm or engagement partners are appropriate in the circumstances.

Serve the Public Interest

This is the second objective of a firm's system of quality management. Engagement reports issued by the firm or engagement partners are appropriate in the circumstances.

Components of SQM

Components include:

a. A firm's SQM operates in continual and iterative manner, and is responsive to changes in the nature and circumstances of the firm and its engagements. It also does not operate in a linear manner.

b. A firm's SQM addresses the following components (GM REPAIR)

1. The firm's risk assessment process

2. Governance and leadership

3. Relevant ethical requirements

4. Acceptance and continuance of client relationships and specific engagements

5. Engagement performance

6. Resources

7. Information and communication

8. Monitoring and remediation process

c. Application of risk-based approach

Application of Risk-Based Approach

Is required for a firm in designing, implementing, and operating the components of the SQM in an interconnected and coordinated manner such that the firm proactively manages the quality of engagements performed by the firm.

Application of Risk-Based Approach

In applying this approach, in terms of scalability, the firm is required to consider:

a. The nature and circumstances of the firm.

b. The nature and circumstances of the engagement performed by the firm.

True

(True or False) Even when the firm complies with network requirements or uses network services or resources from a service provider, the firm is responsible for its SQM.

True

(True or False) In establishing the system, the firm shall exercise professional judgement, considering the nature and circumstances of the firm and its engagements. It is noteworthy that the policies and procedures presented in PSQM are only MINIMUM standards of quality management and may vary from one firm to another.

Documentation of the System of Quality Management

States that the firm's policies and procedures for its SQM must be well documented.

Documentation

Provides evidence of the firm's commitment to quality and serves as the basis for its compliance with engagement standards, laws, regulations, or relevant ethical requirements.

What should be Documented in a Firm's SQM

The firm shall document its SQM that is sufficient to:

a. Support a consistent understanding of the SQM by its personnel, including an understanding of their roles and responsibilities with respect to the SQM and the performance of engagements.

b. Support the consistent implementation and operation of the responses.

c. Provide evidence of the design, implementation, and operation of the responses, to support the evaluation of the SQM by the individuals assigned ultimate responsibility and accountability for the system.

Firm's Risk Assessment Process

This is the first component of SQM. This component sets out the process the firm is required to follow in implementing a risk-based approach across the SQM.

Firm's Risk Assessment Process

This component allows the firm to establish quality objectives, identify and assess quality risks, and design and implement responses to address the quality risks.

Quality Objectives

Pertain to the desired outcomes in relation to the components of the system of quality management to be achieved by the firm.

Quality Risk

Refers to a risk that has a reasonable possibility of

a. Occurring

b. Individually, or in combination with other risks, adversely affect the achievement of one or more quality objectives.

Risk-Based Approach for Quality Management

The firm shall apply the risk-based approach that is focused on achieving the firm's quality control objectives. This approach includes the following:

a. Establishing quality objectives

b. Identifying and assessing risks to the achievement of the quality objectives (quality risks)

c. Designing and implementing responses to address the quality risks

Identifying and Assessing Risks to the Achievement of the Quality Objectives (Quality Risks)

The firm is required to provide a basis for the design and implementation of responses.

The firm shall perform the following:

a. Obtain an understanding of the conditions, events, circumstances, actions, or inactions that may adversely affect the achievement of the quality objectives. With respect to the nature and circumstances of the firm. With respect to the nature and circumstances of the engagements performed by the firm.

b. Consider how, and the degree to which, the conditions, events, circumstances, actions, or inactions may adversely affect the achievement of the quality objectives.

Designing and Implementing Responses to Address the Quality Risks

Are based on and are responsive to the reasons for the assessments given to the quality risks which is considered occurrence and effect on the achievement of one or more quality objectives. The responses designed and implemented by the firm may operate at the firm level or engagement level, or there may be a combination of responsibilities for actions to be taken at the firm and engagement level.

Specified Responses to Address Quality Risks that are Required to be Performed by the Firm

These responses include the establishment of policies and procedures for the following:

a. Compliance with relevant ethical requirements and reporting of breaches.

b. Annual independence declaration from all firm personnel required to be independent.

c. Addressing complaints and allegations about failures to perform work or non-compliance with the firm's policy.

d. Changes in client acceptance or continuance decision.

e. For audits of listed entities.

f. Communication with external parties about the firm's SQM and the nature, timing, and extent of the communication.

g. Engagement quality reviews for specific engagements.

Governance and Leadership

The second component of SQM. The attainment of quality objectives can be attributed to the strength of this component since it establishes the environment that supports the design, implementation, and operation of the SQM.

Governance and Leadership

This component includes a quality objective that the firm has an organizational structure and assignment of roles, responsibilities, and authority that is appropriate to enable the design, implementation, and operation of the firm's SQM.

Members of the Firm's Governance and Leadership

They significantly influence the quality-oriented internal culture of the organization through its actions and communications. Such culture should exist throughout the firm and must recognize and reinforce the following:

a. The firm's role in serving the public interest.

b. The importance of professional ethics, values, and attitudes.

c. The responsibility of all personnel for quality relating to the performance of engagements or activities within the SQM, and their expected behavior.

d. The importance of quality in the firm's strategic decisions and actions, including the firm's financial and operational policies.

Leadership

Serve an essential role at the top of the system, the firm shall hold the same to be responsible and accountable for quality. Consequently, it is required that the firm undertakes periodic performance evaluations of individuals who are assigned with ultimate responsibility and accountability for the SQM.

Firm's Chief Executive Officer, or Firm's Managing Board of Partners (or Equivalent)

Has the ultimate and accountability for the SQM of a firm.

Partner of the Firm who has Appropriate Influence and Authority

Has the operational responsibility for the firm's SQM.

Partner of the Firm who has Appropriate Influence and Authority

Has the operational responsibility for specific aspects of the SQM:

a. Compliance with independence requirements.

b. Monitoring and Remediation (M&R) Process.

True

(True or False) Notwithstanding such assignments, the firm remains ultimately responsible for the SQM. The firm shall undertake periodic performance evaluations of the individuals assigned to promote accountability. At least annually, the individual assigned with ultimate responsibility shall perform an evaluation of the SQM and remediate any identified deficiencies.

Organizational Structure

May include operating units, operational processes, divisions or geographical locations, and other structures.

Organizational Structure

It is the way that the firm assigns roles, responsibilities, and authority within the firm. This may vary, and may be affected by law or regulation that may impose certain requirements in the assignment of responsibilities.

Resources

Such needs should be addressed. This may be addressed through the firm's resource planning, which includes the following:

a. Determining the resources currently required.

b. Forecasting the firm's future resource needs.

c. Establishing processes to deal with unanticipated resource needs when they arise.

True

(True or False) The financial and operational priorities of the firm do not lead to inappropriate judgements about whether to accept or continue a client relationship or specific engagement.

Nature and Circumstances of the Engagement

To support the firm's acceptance or continuance decisions, information must be gathered regarding the nature and circumstances of the engagements such as the following:

a. The industry of the entity for which the engagement is being undertaken and relevant regulatory factors.

b. The nature of the entity, for example, its operations, organizational structure, ownership and governance, business model, and how it is financed.

c. Nature of the underlying subject matter and the applicable criteria.

Integrity and Ethical Values

May include the identity and business reputation of the client's principal owners, key management, and those charged with governance.

Existing Client, New Client, Other Appropriate Parties, and Background Searches

These are the sources of information.

Existing Client

Information from current or previous engagements, if applicable, or inquiry of other personnel who have performed other engagements for the client.

New Client

Inquiry of existing or previous providers of professional accountancy services to the client, in accordance with relevant ethical requirements.

Other Appropriate Parties

Discussions with other third parties, such as bankers, legal counsel, and industry peers.

Background Searches

Of relevant databases (which may be intellectual resources) and/or through the use of a service provider.

International Standards on Quality Management 1

Is a more proactive and tailored approach to managing quality, focused on achieving quality objectives through identifying risks to those objectives and responding to the risks. It deals with a firm's responsibilities to design, implement and operate a system of quality management for audits or reviews of financial statements or other assurance or related service engagements. It promotes integrating quality management into the culture of the firm, the firm's strategy, operational activities, and business processes.

International Standards on Quality Management 1

It requires the firm to design, implement and operate an SOQM with due consideration to the eight (8) components of quality management to manage the quality of engagements performed by the firm,

System of Quality Management

Creates an environment that enables and supports engagement teams in performing quality engagements.

Risk Assessment Process, Governance and Leadership, Relevant Ethical Requirements, Engagement Performance, Resources, Information and Communication, and Monitoring and Remediation Process

These are the eighth (8) components of quality management

Risk Assessment Process

A process established by the firm as part of the SQM. It is the process the firm is required to follow in implementing the risk-based approach to quality management.

Risk Assessment Process

Consist of establishing quality objectives, identifying and assessing quality risks to the achievement of the quality objectives and designing and implementing responses to address the assessed quality risks.

Risk Assessment Process

Is the process that is used to establish quality objectives, identify and assess quality risks, and design and implement responses. It applies to the other components (except for monitoring and remediation).

Risk Assessment Process

It is a risk-based approach that helps the firm tailor the SOQM of the firm's circumstances, as well as the circumstances of the engagements performed by the firm. It also helps the firm effectively manage quality by concentrating on what matters most, given the nature and circumstances of the firm and the engagements it performs.

Governance and Leadership

Establishes the environment in which the SOQM operates.

Governance and Leadership

It deals with matters such as the firm's culture, leadership responsibility, and accountability, the firm's organizational structure, assignment of roles and responsibilities, and resource planning, and allocation.

Relevant Ethical Requirements

Is a component fundamental to engagement performance. It deals with fulfilling relevant ethical requirements by the firm and its personnel. It also deals with relevant ethical requirements to the extent that they apply to others external to the firm.

Acceptance and Continuance of Client Relationships and Specific Engagements

Deals with the firm's judgements about whether to accept or continue a client relationship or specific engagement.

Engagement Performance

Deals with the firm's actions to promote and support the consistent performance of quality engagements, including direction, supervision, review, consultation, and differences of opinion.

Engagement Performance

Includes how the the firm supports engagement teams in exercising professional judgement and, when applicable to the nature and circumstances of the engagement, exercising professional skepticism.

Resources

It is a component that enables operation of other components. It deals with obtaining, developing, using, maintaining, allocating, and assigning resources in a timely manner to enable the design, implementation, and operation of the SOQM.

Resources

Includes technological, intellectual, and human resources and addresses service provides.

Resources

Are needed to support other components.

Information and Communication

Deals with obtaining, generating, or using information regarding the SOQM, and communicating information within the firm and to external parties on a timely basis to enable the design, implementation, and operation of the SOQM.

Monitoring and Remediation Process

A process established by the firm as part of the SOQM. It is the process that provides the firm with relevant, reliable, and timely information about the design, implementation and operation of the SOQM.

Monitoring and Remediation Process

It addresses taking appropriate actions to respond to deficiencies such that deficiencies are remediated on a timely basis.

Monitoring and Remediation Process

It monitors the entire SOQM, and therefore the monitoring activities are undertaken for all of the components of the SOQM (including the risk assessment process).

Quality Objectives

Are measurable goals relevant to enhancing the quality of services that would lead to client satisfaction and are consistent with the firm's quality policy.

True

(True or False) ISQM 1 requires that the firm should establish a quality objective that demonstrates a commitment to quality through a culture that exists throughout the firm. It further addresses the need for the culture to recognize and reinforce "the importance of quality in the firm's strategic decisions and actions, including the firm's financial and operational priorities".

True

(True or False) There are no quality objectives for the components: the firm's risk assessment process and the monitoring and remediation process because these components are processes, and ISMQ 1 sets out specific requirements of how these processes need to be applied.

True

(True or False) Paragraph 144 of ISQM 1 includes both the objective of the firm and the objective of the SOQM.

Quality Risks

These are risks that could adversely affect the achievement of the quality objectives.

True

(True or False) Not all risks are considered quality risks in ISQM 1 because it is not reasonable or practicable for the firm to identify and assess every possible risk and to design and implement responses for every risk. ISQM 1 aims to focus the firm on risks that have the greatest impact on achieving the quality objectives so that those risks are appropriately addressed by the firm.

Possibility of Occurring and Possibility of Individually, or in Combination with Other Risks, Adversely Affect the Achievement of One or More Quality Objectives

A risk qualifies as a quality risk when it meets both criteria ___________________________ and ___________________________.

True

(True or False) The firm, regardless of its size, is required to comply with ISQM 1, and if applicable, ISQM 2. Engagement teams performing audits of financial statements are required to comply with ISA 220. For some aspects of the SOQM, a smaller firm may determine that there is no need to establish firm-wide responses, and the firm may instead design and implement responses that operate concurrently with the engagement-level quality management.

True

(True or False) By December 15, 2022, the firm is expected to:

a. Establish the quality objectives, identify and assess the quality risks, and design and implement the responses.

b. Design and implement the monitoring activities.

Early adoption of ISQM 1 is permitted, however, the firm is required to adopt all three quality management standards at the same time.

ISQM 2 Engagement Quality Review

Deals with the appointment and eligibility of the engagement quality reviewer.

ISQM 2 Engagement Quality Review

Deals with the engagement quality reviewer's responsibilities relating to the performance and documentation of an engagement quality review.

Engagement Quality Review

Is an objective evaluation of the significant judgements made by the engagement team and the conclusions reached thereon. It is performed in the context of professional standards and applicable legal and regulatory requirements.

Engagement Quality Review

It is not intended to be an evaluation of whether the entire engagement complies with professional standards and applicable legal and regulatory requirements or with the firm's policies or procedures.

Engagement Quality Reviewer

Is a partner, other individuals in the firm, or an external individual, appointed by the firm to perform the engagement quality review.

Competence and Capabilities (Sufficient Time and the Appropriate Authority, Compliant with Relevant Ethical Requirements (Objectivity and Independence), and Compliant with Provisions of Law and Regulations

These are the qualifications of an engagement quality reviewer.