Audit Firm Quality Management Overview

Summary

In 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

00:00

📊 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.

05:01

🧠 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.

Keywords

💡Audit Quality

Audit quality refers to the degree to which an audit meets professional standards, such as detecting and reporting material misstatements. In the video, the speaker highlights that audit quality can be defined in various ways but generally revolves around adherence to standards and providing appropriate opinions without mistakes. It’s essential for ensuring reliable financial reporting.

💡ISQM1

ISQM1 (International Standard on Quality Management 1) is a standard for managing audit quality at the firm level. It provides a framework for audit firms to ensure they have the necessary systems in place to deliver quality audits. The video discusses its components, such as governance, risk assessment, and ethics, which help firms ensure consistency in their audits.

💡ISQM2

ISQM2 (International Standard on Quality Management 2) focuses specifically on engagement quality reviews. This standard ensures that audits are independently reviewed by qualified and objective auditors before the report is signed off. The speaker mentions that under ISQM2, no audit report should be finalized without a review from a second audit partner to verify accuracy and ethical adherence.

💡ISA 220

ISA 220 (International Standard on Auditing 220) deals with quality management at the individual audit engagement level. This standard covers aspects such as documentation, supervision, and professional responsibility. In the video, ISA 220 is described as ensuring audit teams follow correct procedures during the actual audit engagement, maintaining quality control throughout the process.

💡Material Misstatement

A material misstatement is an error or omission in financial statements significant enough to affect decision-making. In the video, the speaker explains that detecting and reporting material misstatements are critical components of audit quality. The auditor’s ability to identify and properly disclose such errors is central to maintaining trust in the audit process.

💡Risk Assessment

Risk assessment in auditing refers to the process of identifying and evaluating the risks that could lead to inaccuracies in financial statements. The video mentions risk assessment as one of the key components of ISQM1, where audit firms assess potential risks to ensure proper audit practices and prevent errors or unethical decisions.

💡Engagement Quality Review

Engagement quality reviews involve a secondary audit partner reviewing an audit to ensure quality before finalization. According to the video, ISQM2 requires this review as a safeguard, ensuring that the audit team did not miss critical judgments or compromise ethics. This review process helps maintain an independent check on the quality of the audit.

💡Governance and Leadership

Governance and leadership refer to the management structures and leadership within audit firms responsible for setting the tone for quality management. In the video, this is listed as the first component of ISQM1, emphasizing that leadership must promote a culture of integrity and professionalism to ensure that audits are conducted ethically and competently.

💡Ethics

Ethics in auditing refers to the principles of integrity, objectivity, and independence that auditors must adhere to. The video ties ethics to APES 110, the ethical standard for professional accountants, and highlights that ethical behavior is essential for audit quality. Ethical lapses can compromise an auditor's ability to report material misstatements objectively.

💡Monitoring

Monitoring in audit quality management involves ongoing oversight to ensure compliance with quality standards. The video points out that audit firms need to continuously monitor their processes to maintain high standards of audit quality. This includes reviewing past audits, addressing deficiencies, and responding to external inspections by regulators.

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