SOQM evaluation requirements
Monitoring activities undertaken by firms to comply with ISQM1 must be tailored to the SOQM operated by the firm. For the very smallest audit firms with only a handful of audits this may be covered by an annual exercise including review of one or more completed engagements. However, for firms with more responsible individuals (RIs) and more extensive audit portfolios, monitoring is likely to comprise several activities conducted at different times over the year. This monitoring must be tailored to the firm and activities could include:
- Review of a sample of completed engagements maybe twice or four times per year
- Procedures to monitor attendance at core continuing professional development courses throughout the year
- Annual checks on the completion of appraisals for RIs and staff, together with a review of a sample of appraisals to verify that these assessments include audit quality as intended by the firm in its procedures
- Procedures to monitor compliance with relevant ethical requirements, such as confirming that planned safeguards have been implemented for a sample of audits where there is an independence threat from long association
- Review of remediation actions taken to address previously identified deficiencies in the SOQM.
Findings must be assessed to identify deficiencies, with deficiencies subject to root cause analysis and remediation.
The annual evaluation then brings together the monitoring work undertaken since the previous evaluation to form a conclusion at that point in time as to whether the objectives of the SOQM are being achieved, with three possible conclusions as set out in the standard:
- Reasonable assurance that the objectives of the SOQM are being achieved
- Reasonable assurance except for deficiencies that have a severe but not pervasive effect
- Does not provide reasonable assurance that the objectives of the SOQM are being achieved
As highlighted earlier in 2024, it is important that firms do not view ‘B’ or ‘C’ conclusions as failure or non-compliance with Audit Regulations in themselves. ICAEW anticipates that simply due to the scale of larger firms, conclusion ‘B’ will be reasonably common, particularly where there are significant numbers of RIs 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 are important.
| The benefit of regular monitoring activities followed by the necessary remediation may be that certain severe and possibly pervasive deficiencies could have been fully resolved by the time of the annual evaluation. This approach could enable a more positive evaluation conclusion than might have been the case without the timely information and opportunity for remediation provided by ongoing monitoring activities. |
The evaluation will of course require judgements on the part of the firm, which need to be documented.
ICAEW quality assurance monitoring
On the majority of audit monitoring visits we find that firms have now undertaken their first evaluation at least, but there are some that have not, and so have not complied with the Audit Regulations. The public rightfully have high expectations of auditors and it is essential that all fully engage with ISQM1.
It is likely that the timing of firms’ evaluation will vary in the early years. We have seen firms where the first evaluation was concluded in December 2023 and the second evaluation was planned for some time in – say – Q2 or Q3 2024 to coincide with other activities such as completion of annual returns. This is a good practical approach, the important point in this example is that the second evaluation is not delayed until 2025.
| The need for a tailored SOQM means that compliance with the monitoring, remediation and annual evaluation requirements is more than ‘a cold file review’ and ‘ticking a checklist’. If firms are struggling with the requirements, their first port of call should be the extensive guidance available from ICAEW and training providers on all aspects of the quality management standard. |
Quality assurance reviewers continue to take a proportionate approach to the review of compliance with ISQM1. They will be happy to discuss their findings, why any findings may have been missed in the firm’s own monitoring and how to avoid recurrence in the future. However, to do that, firms must already have an existing framework of monitoring and evaluation to build upon
Non-compliance issues
Where firms have not engaged with ISQM1, including carrying on an annual evaluation, we will:
- need to see evidence that this has been resolved before closing an audit monitoring visit; and
- be likely to select the firm for accelerated monitoring visit(s) in the future.
Where firms do not then take appropriate action, we will escalate this to ICAEW’s Audit Registration Committee and the FRC. The FRC now require notification from ICAEW of any firm’s continuing failure to comply with the evaluation requirements of ISQM1.
Help and guidance
ICAEW has a range of resources available to help you with ISQM1 compliance, visit our hub or contact our Technical Advisory Team for help in this area.
