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Proposed ISQC 2 Engagement Quality Control Review and Other Quality Issues

By Julia Penny

The IAASB carried out a post-implementation review of the clarified ISAs in 2013, including a review of ISQC 1. The results of this were that some improvements were required, to both ISAs and ISQC requirements, with the latter having a lower priority than some of the other issues. The IAASB now has a project to issue an exposure draft for ISQC 2, on EQCRs, and updated ISQC 1 requirements, in September 2018 with new standards by late 2019. Of course in the UK, we use FRC versions of the international standards, but we can expect to maintain alignment with the FRC looking to adopt the new standard in due course, albeit that they may add UK specific material.

This all sounds rather far into the future, but in the meantime the point is that there are some issues which have been identified with the EQCR and the wider quality system at present. The IAASB wants to ensure that there is proactive quality management, with robust communication both internally and externally, about how quality is achieved. The current thinking on the new standards is that there will be four governance principles applicable to all firms, which will be scalable in their implementation, according to the size and circumstances of the firm. These governance principles are as follows:

1.       Culture that promotes professional and ethical values that extends throughout the firm (tone in the middle as well as at the top);

2.       Organisation of the firm to support the system of quality management;

3.       Effective leadership with responsibility and accountability;

4.       Consideration of external stakeholders on matters related to quality.

Even without any new standards these four principles provide a good framework for quality management within a firm. It is always worth reflecting on where you achieve the quality product that you are looking for and where you may fall short on your expectations and plans. Can you identify what the underlying or root causes are of the shortcomings in quality? How do they fit into the four principles above?

The FRC have already issued an audit quality thematic review on root cause analysis. This document provides some useful insights into how to get the most out of root cause analysis. There is, perhaps, a temptation when receiving the results of cold reviews to tell the audit partners and teams what they have done wrong and remind them not to do it again. But digging deeper may result in a better understanding of what went wrong. Was it that the audit junior really didn’t understand the objective of the work he/she was doing or how to achieve that objective? If so, whilst including the issue in training may help, it is more likely to be effective to help more senior members of staff provide adequate on-the-job coaching, checking that the more junior member of staff really understands what they are trying to do.

Don’t forget to “notice” instances of good practice, as well as poor practice as the situations surrounding this may indicate what is required in other audits. For example, staff may report more detailed team meetings, more regular discussions of issues with seniors, more timely review etc. Knowing that these things happened in a good audit is just as valuable (if not more so) than knowing that staff on a poor audit were time-pressured and overworked.

Obviously none of the new requirements proposed in relation to the ISQCs exist at the moment, but you can at least take some steps to keep quality at the top of the agenda:

  • Ensure that your policies and procedures are fully compliant with the current ISQC 1 and in particular that any internal procedures and processes have been updated for the changes that took place after the EU Audit Directive and Regulations (ARD) in 2016;
  • Ensure that your policies and implementation of them in respect to EQCR are robust;
  • Consider whether your root cause analysis is in depth enough and asks all members of the audit team for their honest opinion about how things were done (this can be painful but is valuable);
Consider the four quality principles that are being planned for the new ISQCs and whether any steps can, or should, be taken now to improve quality.  

February 2018 


This article is published with the understanding that SWAT UK Limited is not engaged in rendering legal or professional services. The material contained in this article neither purports, nor is intended to be, advice on any particular matter. This article is an aid and cannot be expected to replace professional judgment. SWAT UK accepts no responsibility or liability to any person in respect of anything done or omitted to be done by any such person in reliance, whether sole or partial, upon the whole or any part of the contents of this article.