Systems of Quality Management Monitoring
Published: 7 June 2024
2 minute read
Background
We take a cross-market approach to monitoring Tier 1 & Tier 2 audit firms’ compliance with the new quality management standards (ISQM (UK) 1 & ISQM (UK) 2), which came into effect on 15 December 2022.
Overview of the Quality Management Standards
These standards set out the quality management requirements for firms that perform audits, reviews of financial statements and other assurance and related engagements. ISQM (UK) 1 requires firms to establish and maintain a system of quality management, centring on establishing quality objectives, identifying and assessing quality risks, and designing and implementing responses to them. It also requires firms to design and implement monitoring and remediation activities, including root cause analysis, to ensure the effectiveness of these responses and address deficiencies arising. This system of quality management covers:
- Risk assessment process
- Governance and Leadership within the firm
- Relevant ethical requirements
- Acceptance and continuance of relationships with audited entities and specific engagements
- Resources (including human, technology and intellectual resources obtained from the firm’s network and service providers)
- Engagement performance (including implementation of ISQM (UK) 2); and
- Information and communication
ISQM (UK) 2 specifically covers the requirements relating to the use of engagement quality reviews in the system of quality management.
Inspection Approach
Our inspection is undertaken on a risk-focused and cyclical basis, supported by targeted thematic work where we perform in-depth reviews of particular aspects of firms’ systems of quality management, as needed.
Through our work we assess how firms have tailored their system of quality management to their specific circumstances and use benchmarking against their peer group to identify good practice and areas for improvement. We review how firms monitor their system of quality management, how they identify and assess findings, and how they design and implement remediating actions. We also assess the monitoring procedures in place.
Under ISQM (UK) 1, firms are required to perform an annual evaluation of their system of quality management. We review the process, evidence, and outcome for the firms’ annual evaluations, including how other sources of information regarding audit quality and the firms’ systems are considered, and how matters are aggregated. We do not reperform the annual evaluation to form a view on what the conclusion should be.
Our monitoring of the relevant ethical requirements component of ISQM (UK) 1 assesses the audit firms’ compliance with the FRC’s Ethical Standard for Auditors.
The table below sets out our inspection approach on ISQM (UK) 1 and ISQM (UK) 2 for the Tier 1 and Tier 2 audit firms, which is a combination of annual review and rotational testing to ensure all components of the firms’ systems of quality management are covered on a three-year cycle. We conduct audit thematic reviews on the Tier 1 firms to complement our monitoring of ISQM (UK) 1.
Tier 1 firms
| Annual review components | Rotational review components |
|---|---|
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Tier 2 firms
| Annual review components | Rotational review components |
|---|---|
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Our monitoring of Tier 3 firms’ compliance with the quality management standards is performed on a six-yearly basis by the Audit Quality Review team.
Pre-appointment meetings
We conduct pre-appointment meetings with candidates for Ethics partners within firms. Once appointed, we hold regular engagement meetings with tier one Ethics partners on a firm by firm basis.
Interaction with other supervisory pillars
Our supervision of these quality management standards draws on, and integrates with, the work of the other AMS supervisory pillars (Governance and Leadership; Culture and Conduct and Risk and Resilience). The quality and consistency of our work is supported by quality control and peer-review processes together with oversight from the Executive Director of Supervision, and the FRC’s Board.
Reporting
Significant findings from this inspection activity are reported annually in the public reports on each Tier 1 firm and, since December 2022, for the Tier 2 firms on an anonymised basis.