Introduction to ISQM 1 and 2
International Standard on Quality Control 1 (ISQC 1) was introduced by the International Auditing and Assurance Standards Board (IAASB) and provides guidance on the quality control system for firms that audit and review financial statements. ISQC 1 has made provisions for a sound quality control system that ensures that the firm complies with ethical and professional standards and legal and regulatory requirements. But the audit environment is becoming more complex, and IAASB made the decision to develop and issue a new suite of quality assurance standards: International Standard on Quality Management (ISQM 1 and ISQM 2). These build on ISQC in order to provide more relevant and comprehensive guidance on the effective implementation of QA and the quality management system for firms that perform assurance engagements other than audits or reviews of financial statements.
The new standards are driven by the emphasis on a risk-based approach to quality assurance. Whilst ISQM 1 sets out the approaches to quality assurance for firms, ISQM 2 focuses on quality assurance at the engagement level and the appointment of an engagement quality reviewer. Both standards establish the requirements for a firm's system of quality management to ensure a robust and adaptive system based on risk assessment is implemented to manage quality risks in a constantly evolving environment. The standards also provide guidance on the responsibilities of the firm's leadership, the management of engagement quality, and the monitoring of the system's effectiveness.
The implementation of ISQM 1 and ISQM 2 is essential for ensuring the quality of audits and other assurance engagements. These standards facilitate the building of users’ confidence in the reliability of financial statements and other assurance reports issued by audit firms, improve the consistency of audits, enhance risk management processes and improve information exchange with stakeholders within and outside the firm.
ISQM 1, issued in 2019 and enforced in 2022, builds on the framework established by ISQC1. It expands its scope to cover various types of assurance services provided by accounting firms and, most importantly, places greater emphasis on the assessment of quality risks as a foundation for designing a quality management system. The standard presents an integrated approach to quality management. It requires firms to identify and assess the quality risks associated with their services, implement appropriate controls to mitigate them, and introduce monitoring and remediation procedures. It also requires firms to establish a quality culture within the organisation and promote continuous improvement as foundations for effective implementation.
ISQM 1 is complemented by ISQM2, which also came into force in December 2022. ISQM 2 focuses on the effective management of quality at the engagement level, providing guidance on how firms can ensure that individual engagements meet the required standards of quality and that the engagement quality reviewer appointed to the engagement has sufficient skills and competencies to perform their task.
Implementation of ISQM 1 and 2 shifted the approach from control of the quality to the management of quality, which will require audit firms to invest time and resources. The integrated QA approach benefits audit firms and users of financial statements. It will enable a more robust and effective approach to quality building trust and confidence in audit and assurance services during times of turbulence and uncertainty.
One professional accountancy organization (PAO) that has demonstrated great commitment to ensuring high standards of quality of audits and assurance engagement and the benefits of a robust system is the Palestinian Association of Certified Public Accountants (PACPA).
PACPA was established in 1995 as a professional association for Palestinian accountants. PACPA’s jurisdictions have been reformed by the Palestinian Audit Practice Law for the year 2004. Since its establishment, PACPA has been committed to promoting the highest standards of professionalism and ethical conduct among its members. In 2010, PACPA started extensively working in adoption of the SMOs and became an associate member of IFAC in 2013. In 2015, PACPA built its manuals and internal regulations and provided the required awareness and trainings. In 2020, PACPA conducted its first round of the field review to the members and became one of the first professional accounting organisations in the Middle East to fully adopt ISQC 1. This decision was driven by a desire to enhance the quality of services provided by Palestinian accounting firms and to promote greater transparency and accountability in the profession. The adoption of ISQC 1 was a significant undertaking for PACPA, as it required a comprehensive review of its member firms' quality control systems and the implementation of a new standardised approach to quality assurance.
PACPA worked closely in coordination and support of IFAC and the World Bank to ensure that the adoption of ISQC 1 was tailored to the needs and circumstances of Palestinian accounting firms. This included developing guidance and training programs to support the implementation of the standard and providing ongoing support to member firms as they worked to comply with its requirements.
The proactive adoption of ISQC 1 has positively impacted the Palestinian accounting profession, enhancing the credibility and reputation of Palestinian accounting firms and increasing client confidence in the quality of their services. It has also helped promote greater transparency and accountability in the profession, which is essential for building trust with clients and stakeholders.
PACPA has also learned some valuable lessons from its experience of ISQC 1 adoption. One of the most important of these lessons is the importance of stakeholder engagement. PACPA has worked closely with its members, stakeholders, and regulators to ensure that the adoption of ISQC 1 is aligned with their needs and expectations. Another lesson learned by PACPA is the need for ongoing training and development. Implementing a quality assurance system requires a significant investment of time and resources. It is important to ensure that staff and members are equipped with the necessary skills and knowledge to implement the system effectively.
Implementing ISQC 1 helped PACPA:
- Become a sustainable PAO by enhancing the quality of audit services provided by its members;
- Establish policies and procedures for quality control, including a system for monitoring compliance with those policies and procedures;
- Promote consistency and reliability in the services, thereby increasing the credibility of the profession in Palestine;
- Strengthen its relationships with stakeholders, including regulators, investors, and the public; and
- Become better positioned to attract and retain members, which helped increase the organisation’s revenue and contribute to its long-term sustainability.
Overall, PACPA's adoption of ISQC 1 demonstrated the organisation’s commitment to promoting the highest standards of professionalism and ethical conduct among its members and its dedication to ensuring the sustainability and success of the Palestinian accounting profession. However, this journey is not static, and PACPA is now fully engaged with the adoption and implementation of the new suite of quality standards. In the middle of 2023, PACPA updated the quality assurance guidelines and testing procedures to align with ISQM 1 and 2. Orientation of the reviewers and training of the members were conducted based on the new standards, in addition to considering the lessons learned from the previous round of quality assurance program. While PACPA is conducting another round of the QA review on the members in 2023, PACPA members understand the positive impact of the quality assurance program on their personal and professional development. The quality assurance program was one of the areas in which PACPA is achieving progress that supports PACPA’s application for the full membership in IFAC, which is expected to be finally approved in November 2023.