In early 2023 we surveyed a sample of 150 non-PIE (Public Interest Entity) audit firms, and the results indicated that 84% of firms had either implemented or were in the process of implementing ISQM1. This snapshot of compliance was confirmed by results from over 400 audit monitoring visits in 2023. QAD reviewers found that over 90% of non-PIE firms had made ‘at least reasonable progress’ in implementing their system of quality management, with many clearly investing significant time and resources in this area.
Some of the firms visited in 2023 had already identified further enhancements and improvements to their systems of quality management. This is to be expected as the standard supports scalable procedures for the firm and its audit client portfolio. It’s also iterative, with procedures developing over time. ‘One size’ does not fit all audit firms and indeed will not fit any single firm for all-time.
Monitoring, remediation and evaluation were topics covered in the ICAEW ‘ISQM1 Maintaining Momentum' event in November 2023, and these are central to the success of this new quality management approach. One of the challenging aspects for firms is root cause analysis (RCA) of deficiencies, with some evident discomfort about the need for open and sometimes difficult or tense discussions within a firm about why something went wrong on a particular audit or in the operation of a specific process or procedure. Leadership and tone from the top are essential to successfully embed RCA for positive audit quality outcomes, and these challenges will be a good test of an audit firm’s culture.
Some firms are engaging with external organisations to assist with RCA, which may introduce some additional objectivity into the process but will still require the same positive, constructive and timely engagement from those within the firm in order to reach any conclusion.
One year in, QAD reviewers now expect to see evidence of ISQM1 evaluation of the system of quality control, with three possible conclusions, as set out in the standard:
- Reasonable assurance
- Reasonable assurance, except for deficiencies that have a severe but not pervasive effect
- Does not provide reasonable assurance
Based on a small number of audit monitoring reviews, both started and completed in the first few months of 2024, our reviewers found that 75% of the firms had conducted a first evaluation of their systems of quality management. The great majority of these firms concluded ‘A’, that their systems of quality management provide reasonable assurance. This was borne out by the overall outcome of those visits with no follow-up action required.
It is important that firms do not view ‘B’ or ‘C’ conclusions as a failure or non-compliance with Audit Regulations in themselves. We would anticipate that simply due to the scale of larger firms, conclusion ‘B’ will arise periodically with significant numbers of responsible individuals and staff working across many audits from multiple locations. A ‘C’ conclusion will of course be a concern for any firm, but consistent with the underlying principles of ISQM1, it is the understanding of root causes, and resulting remediation and further monitoring that is important.
In this small sample of 2024 audit monitoring visits, none required a report to the Audit Registration Committee. However, suitable ongoing procedures to monitor, remediate and evaluate the system of quality management will be important for all firms to maintain their audit quality in the future.
