Audit Firm Quality Management Overview
Summary
TLDRIn this video, Amanda, an auditing educator from an Australian university, discusses new audit firm quality management standards, focusing on ISQM1, ISQM2, and ISA 220, set to be implemented in 2022. She provides an overview of the audit quality framework, emphasizing the importance of detecting and reporting material misstatements. She also explains how audit quality is managed at both the engagement and firm levels, including governance, risk assessment, and monitoring. Amanda highlights the need for engagement quality reviews and outlines how these new standards aim to improve overall audit processes.
Takeaways
- 📊 The video discusses audit firm quality management, focusing on new exposure drafts ISQN1, ISQM2, and ISA 220, set to be implemented in 2022.
- 📚 Audit quality is crucial for the accuracy and reliability of financial statements, and it can be defined in various ways, though no single universally accepted definition exists.
- 👀 According to research from D'Angelo (1981), audit quality depends on two factors: the auditor's ability to detect material misstatements and their propensity to report them.
- 👥 Audit quality is achieved at the individual audit engagement level, with teams responsible for adhering to auditing standards such as ISAs or ASAs.
- 👔 The audit partner is ultimately responsible for audit quality, but the audit firm as a whole must also have policies in place to ensure quality across all engagements.
- 🏢 The Quality Management Standards (QMS) aim to ensure that audit firms manage audits with consistency, involving key components like governance, leadership, risk assessment, ethics, and monitoring.
- 📋 ISQN1 focuses on audit firms' structural policies for quality management, emphasizing the need for monitoring and review processes.
- 🔍 ISQM2 centers on engagement quality reviews, ensuring that a qualified and independent review partner evaluates key audit judgments before signing off on the audit.
- 📑 ISA 220 deals with audit quality at the engagement level, covering documentation, supervision, and monitoring of the audit team.
- 🌍 The video also highlights a fundraising campaign by the presenter to support international students affected by COVID-19 by providing food hampers through OzHarvest.
Q & A
What is the primary focus of the video?
-The video focuses on audit firm quality management, specifically discussing new standards such as ISQN1, ISQM2, and ISA 220, which are aimed at improving audit quality.
What are the two main factors of audit quality according to D'Angelo's 1981 research?
-D'Angelo's 1981 research highlights two factors of audit quality: (1) the ability to detect material misstatements, and (2) the propensity to report material misstatements.
Why is audit quality difficult to define?
-Audit quality is difficult to define because there is no universally accepted definition, making it challenging for regulators and inspectors to ensure consistent audit quality.
What is the role of the audit partner in ensuring audit quality?
-The audit partner is ultimately responsible for the audit quality on a specific engagement, ensuring that the audit team follows standards and conducts a proper evaluation of the client's financials.
What is the difference between ISQN1 and ISQM2?
-ISQN1 focuses on the structures and policies audit firms must have in place to manage quality across the organization. ISQM2, on the other hand, is specifically about engagement quality reviews and ensuring that audits are properly reviewed by qualified and independent reviewers.
What are the eight components of quality management in ISQN1?
-The eight components of quality management in ISQN1 are governance and leadership, risk assessment, ethics, engagement acceptance and continuance, engagement performance, resources, information gathering, and monitoring.
What is the purpose of engagement quality reviews in ISQM2?
-The purpose of engagement quality reviews in ISQM2 is to ensure that each audit engagement is reviewed independently by a qualified reviewer to assess whether the audit team followed standards, remained objective, and did not miss key issues.
What is the role of ISA 220 in audit quality management?
-ISA 220 focuses on audit quality at the engagement level, including aspects such as documentation, supervision, and ensuring that the audit is conducted and reviewed according to the standards.
Why is monitoring an important component of audit firm quality management?
-Monitoring is important because it ensures that audit firms regularly review their quality management processes, address any issues, and make necessary improvements to maintain high audit standards.
How does the video suggest that audit quality is linked to firm-wide processes?
-The video suggests that audit quality is not just about individual engagements but also firm-wide processes. Audit firms must have policies and procedures in place to ensure consistent quality across all engagements and partners.
Outlines
📊 Introduction to Audit Firm Quality Management
In this introduction, the speaker, Amanda, addresses the importance of audit firm quality management. She introduces new exposure drafts of standards like ISQN1, ISQM2, and ISA 220, expected to take effect in 2022. Amanda sets the stage for an in-depth discussion on the quality management framework and its relevance to ensuring that audits meet necessary standards. She also gives a warm welcome to returning subscribers and new viewers, emphasizing her passion for auditing and teaching the subject at an Australian university.
🧠 Understanding Audit Quality
Amanda delves into defining audit quality, emphasizing the difficulty in arriving at a universally accepted definition. She references old yet relevant research by D'Angelo (1981), which frames audit quality based on two factors: an auditor's ability to detect material misstatements and the independence and ethics required to report them. This segment highlights the complexities of measuring and ensuring audit quality, especially on individual audit engagements, where the audit partner holds responsibility but is also part of a larger firm-wide process.
🏛️ Firm-Level Audit Quality Management
Amanda shifts focus from individual audits to the broader responsibilities of audit firms in managing quality across engagements. She explains that firms must have comprehensive policies and procedures, as it’s not just about a single audit but about ensuring consistency across all partners and audit teams. The quality management standards, specifically ISQM1 and ISQM2, address this need for structured management. Amanda also touches on the importance of having these standards, which include risk assessment, ethics, proper resources, and ongoing monitoring, ensuring that firms maintain high audit quality.
🔍 Overview of ISQN1 and ISQM2 Components
The discussion continues with a breakdown of ISQN1 and ISQM2, which are essential components of quality management. Amanda outlines the eight key areas for audit firms: governance, risk assessment, ethics, client engagement processes, audit procedures, resource management, information gathering, and monitoring. She emphasizes the need for continuous review and monitoring of audit processes to ensure adherence to standards. Additionally, she references the COSO 2013 framework and highlights the role of external oversight bodies like ASIC and PCAOB in maintaining quality through inspections.
🔎 Engagement Quality Reviews and ISQM2
Amanda explains the role of ISQM2 in ensuring engagement quality reviews. She emphasizes the importance of having qualified, ethical, and independent reviewers for each audit engagement. These reviewers ensure that audit teams are following proper procedures and making sound judgments. Importantly, she notes that the engagement report cannot be signed off by the main partner until the quality review partner has verified everything. This ensures objectivity and compliance with audit standards.
📋 Summary of Quality Management Standards
Amanda summarizes the main points of ISQM1 and ISQM2, as well as the new ISA 220, which addresses audit quality on individual engagements, focusing on documentation and supervision. She announces her plans for future videos to delve deeper into each standard, offering detailed explanations. Finally, she encourages viewers to subscribe and support her fundraiser initiative to aid international students affected by COVID-19, highlighting how simply watching the video contributes to the cause.
Mindmap
Keywords
💡Audit Quality
💡ISQM1
💡ISQM2
💡ISA 220
💡Material Misstatement
💡Risk Assessment
💡Engagement Quality Review
💡Governance and Leadership
💡Ethics
💡Monitoring
Highlights
Introduction to audit firm quality management and new exposure drafts ISQN1, ISQM2, and ISA 220, expected to come into effect in 2022.
Definition of audit quality: It's difficult to define universally, which presents challenges for inspectors and regulators.
Two key components of audit quality per D'Angelo's 1981 research: auditors’ ability to detect material misstatements and their willingness to report them.
Audit quality is determined on individual engagements, not at the firm level, making team efforts critical in ensuring compliance with standards.
Audit firm policies and procedures play a crucial role in ensuring audit quality across multiple partners and engagements.
Introduction to the Quality Management Standards (QMS), focusing on ISQN1 and ISQM2, which define firm-wide policies and procedures to ensure audit quality.
ISQN1 focuses on governance, leadership, risk assessment, ethics, engagement acceptance, resources, and monitoring in audit quality.
ISQM2 specifically addresses engagement quality reviews, including the qualification and independence of review partners.
Importance of quality review partners in ensuring ethical compliance, objectivity, and thorough evaluation of key judgments made during audits.
Audit reports must not be signed off by the main engagement partner until the quality review partner has completed their checks.
The third component of the quality management framework is ISA 220, which focuses on documentation, supervision, and engagement quality.
Explanation of the ISAs (International Standards on Auditing) and ASAs (Australian Standards on Auditing), which provide regulatory requirements for audits.
Overview of future content, with promises of detailed analysis of ISQN1, ISQM2, and ISA 220 in subsequent videos.
Discussion on the role of regulators like ASIC in Australia and PCAOB in the US, ensuring quality through inspections and monitoring.
Fundraiser for Oz Harvest to support international students affected by COVID-19 with food security through food hampers.
Transcripts
what's up audit fans today we're going
to be talking about audit firm
quality management i've had a number of
requests to talk about
the quality management standards
obviously there are some brand new
exposure drafts that have been released
this year
isqn1 isqm2 and
isa 220 those are looking to come in
in 2022. today i'm going to talk about
an
overview of what our new quality
management framework looks like so
let's get into it
[Music]
welcome back to my regular subscribers
and hi if you're new my name is amanda
i do love auditing um and i teach
auditing to undergraduates at a major
australian university now today we're
going to be talking about
quality management we know that audit
quality is
important you will have seen potentially
my
previous interviews with professor roger
simnet who is the
chair he's in charge of the australian
auditing standard process
talking about the difficulties around
measuring audit quality
but it's a really important part of the
audit process so
i'm going to jump onto my tablet and
let's talk about audit quality some more
so let's start by talking about a
definition of audit quality and that's
somewhere you know it's really important
to start with this idea of a definition
so audit quality um can be defined in
lots of different ways and the
difficulty is that there is no one
universally accepted version of audit
quality this makes it hard for
you know inspectors and regulators to
make sure that audits are of a quality
i guess you know we could think about
that audits that are
appropriate they give the right opinion
they don't make mistakes that meet
the auditing standards those could all
be quality audits
now i'm going to take you back to some
research and this is some old research
but still valid today and still really
widely cited is d'angelo in 1981
which said audit quality is really
beholden to two particular factors there
are two particular components
to audit quality the first component is
our ability to detect
material misstatements all right that's
our skill as an auditor to evaluate the
evidence and detect the misstatements
the second thing is our propensity
to report material misstatements
so if we find a material misstatement do
we have the independence the ethics
the professional competence to be able
to report those
to management request an adjustment and
if they don't adjust
then potentially disclose that as part
of the audit opinion
so it really talks about our ability to
report and our ability to detect
so that's you know i guess an original
um research
perspective from order quality now if we
think about this
in a more practical sense really
audit quality happens
on an individual engagement right on
an individual audit is where we actually
get audit quality related to a specific
client
so the audit team go out they do their
work
so the the team goes out they have to
follow the auditing standards the isas
internationally
or the asas here in australia
and so that team is responsible for
audit quality
and part of that team of course the
ultimate person responsible
is the audit partner now the partner is
part of
a bigger organization remember that the
partner is part of the audit firm
so we also want to make sure that the
audit firm
overall has policies and procedures in
place to make sure that we're doing
quality audits we're managing our audits
in a quality way
across all of their partners across all
of the engagements because remember it's
not just
one individual partner just doing one
audit
it's you know hundreds of partners and
thousands of team members
working on these audits so it's really
important that the firm
have their own processes to ensure audit
quality and that's really what the
quality management standards are about
if you think back to um our standards
themselves
you know i mentioned before that the
isas and the asas are where
we have you know actual um requirements
for audit quality
for the audit firm they have and they
will they will have
isqms international standards on quality
management
now right now what you'll see is isq's
the isqms are draft they're proposed
we hope that they'll be approved but i'm
going to talk about the most
recent sort of set of standards
but there's a lot of similarities
between the qcs and the qms but i'm
going to be talking
about the qms today so the qms have
two components isqn1
and isqm2 there are eight components to
quality management from the audit firm
perspective governance and leadership so
that's having the right people in charge
the right tone at the top
risk assessment so how are we assessing
the risk of things going wrong on an
audit
just like we would expect our clients to
have risk assessment processes
ethics which links back to apes 110
our ethical standard our engagements
where we want to make sure that we
accept and continue
appropriately we have processes to
choose and decide to continue or
discontinue with clients
and then um processes to make sure that
when we're doing the audits we're doing
the audits appropriately
that we have resources to support the
entire process
that we're gathering information and
importantly the last one is that we have
monitoring
so remember in talking about internal
controls there's no point in having
internal controls if we don't actually
monitor
the process audit firms need to do the
same thing
they need to monitor their quality
management processes
so you know there's got to be somebody
reviewing audits
if there are issues how are they dealt
with what are
annual quality reporting requirements
regard related to those engagements this
probably also links back through to
inspections from centralized
oversight bodies so you might have asic
here in australia pcaob in the us
making sure that we inspect audit firms
you know we'll be looking at those
monitoring um processes as well
so there's a really great diagram from
kozo the 2013 kozo framework
which is in the exposure draft of isqn1
that talks about these eight different
components
so isqm2 which is about engagement
quality reviews
is really about making sure that we have
processes in place
to review engagements um and i'll do
some more videos on the actual standards
here
um we'll go through them line by line
like i have in my other standards
explain series but as an overview
they're really about making sure that
there are engagement quality reviewers
that those reviewers are qualified they
know what to do they're ethical they're
independent
and also the performing of individual
engagement quality reviews so every
audit has to have a process of review
there has to be a review partner that
review partner is there to ensure that
the team
isn't getting off track isn't missing
something isn't compromised
ethically or from an independence
perspective
so you know they have to be objective
and evaluate the key
judgments made on the audit and a really
interesting
component that i wanted to bring up now
is that the audit report should not be
signed off by the main engagement
partner
until the quality review partner has
checked everything so that's really
interesting
so realistically is qm1 is like the
structures the firm has to have in place
to make sure that we can provide quality
audits and we've got structures
to ensure that there's quality policies
and procedures
qm2 is specifically about that
monitoring process
and that performance process to make
sure
that there is a review and that review
is being done appropriately by
appropriate staff members now the third
component um
in this trinity i guess of quality
management is new
isa 220 which is about
you know actual audit quality on the
engagement so that includes things like
documentation and supervision
we've already talked about that a lot
and you can check out my previous videos
on
isa asa 220.
so that's my overview on the new quality
management framework that's hopefully
being approved
and coming in in 2022 in future videos i
will be going through
each of these standards isqn1 and isqm2
and new isa 220 in greater detail so if
you're interested in those
please make sure that you've subscribed
and you've turned the notification bell
on
to get my notifications of new videos
thank you very much for watching of
course uh those of you who have
been viewers of mine for a while will
know that between october at 2020
and february 2021 i'm doing a fundraiser
for oz harvest to help international
students
um get greater food security so we're
providing food hampers to international
students who are affected by covert and
have lost their jobs
so just by watching you've helped um
generate some revenue that helps
students so i'm
really really grateful to you of course
if the video is useful i'd really
appreciate a thumbs up
and if you have any questions pop them
in the comments and i'll see what i can
do
thanks very much for watching and i'll
see you next time
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