The quality of audits has come into question from international regulators after a series of high-profile accounting scandals, with the most recent being Wirecard. Last week, the International Auditing and Assurance Standards Board (IAASB) approved a new and revised set of quality management standards designed to improve audit quality, as reported by Accounting Today. While the standards won’t take effect until December 15, 2022, some firms have already begun implementing some of the changes.
According to the article, IAASB Chair, Tom Seidenstein, told Accounting Today how the new standards may address some of these concerns, and explains the differences between quality control and quality management at auditing firms:
“Control and management have different connotations. Control gives us a sense that we’re going to make sure to review things after the fact to make sure that we lived up to our standards of quality. Quality management sees these things as a continuous feedback loop, which is really what our standards are about. Quality is not something that is finite, but we hope it will be continuously improving over time, and the standards are meant to move discussion of the management of quality to the heart of firm strategy, firm operations and firm conduct.”
The International Standards on Quality Management (ISQM 1 & ISQM 2) and the International Standard on Auditing (ISA 220 Revised), are now pending approval by the Public Interest Oversight Board – a global regulator that oversees the International Federation of Accountants (IFAC) and its affiliated standard-setting boards, including the IAASB.
The objectives of the standards and purposes of the revision are as follows:
Last year, the Public Company Accounting Oversight Board (PCAOB) issued a concept release proposing to revise its quality control rules for auditors. As stated in the release,
“In addition, the International Auditing and Assurance Standards Board (IAASB) is in the process of updating its analogous firm-level QC standard and recently proposed International Standard on Quality Management 1, Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements (Proposed ISQM 1 or the proposed standard) … We are considering using Proposed ISQM 1 as a starting point for a future PCAOB QC standard.”
Therefore, the international standard is likely to apply to U.S. firms, as well. William Duhnke, PCAOB chairman, explained, “The proposed standard includes specific requirements related to current developments not addressed in PCAOB standards. … Many firms that follow PCAOB standards also follow the IAASB standards (or standards based on the IAASB’s standards), and we believe it would not be practical to require firms to comply with fundamentally different quality control standards. Indeed, unnecessary differences in standards can detract from audit quality.”
IAASB Chair Seidenstein goes on to explain the need to update existing quality control standards, stating that the standards are outdated and do not reflect modern thinking about how to manage systems and ensure quality throughout firms.
Seidenstein emphasizes that this is an “iterative, dynamic process where you’re expected to get clear objectives, follow those objectives, determine where deficiencies exist through a risk-based approach and keep on remediating them immediately. […] This is not supposed to be a bolt on at the end of the day, but discussions about audit quality are part and parcel of the firm’s daily operations.”
The new standards are also important for the monitoring and remediation of deficiencies, as well as communication within the firm. Additionally, other requirements place accountability with the leadership and governance of the firm, including at the engagement level. This includes any requirement as it relates to the engagement quality reviews and the objectivity of those reviewers. As explained, “For example, this may not be an issue in the United States, but to make sure that there’s a cooling off period so the engagement partner of the audit doesn’t go on to be the engagement quality reviewer right away. There’s a two-year cooling off period to reinforce objectivity of those reviewers.”
As discussed in a previous post, the increasing use of technology could affect how auditors assess the accuracy, completeness, relevance, and reliability of audit evidence, potentially leading to variation in practice with respect to how auditors evaluate that information. As many auditors move toward a more automated approach for audits, it is important for firms to maintain a human factor; an experienced auditor can bring professional skepticism and objectivity to an engagement that technology cannot.
Considering the breadth of technology used in audits – ranging from data analytics, artificial intelligence, process automation, and machine learning – the IAASB is hoping to avoid constant updates with every new form of technology. “We try to future proof our standards as much as possible these days, so technology doesn’t pass us by.” Seidenstein explained.
While the proposed rules are still pending approval, one thing is certain: firms will need until the effective date to adhere to the standard, even if quality control systems are already in place. Seidenstein clarifies, “This is no small undertaking to put together a robust system of quality management that will conform … I really do think that this is a big step forward for a foundation aimed at improvements in quality, and consistency of quality, across all engagements.”
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