14 April 2021

Quality Management: To Invest or not

Johannesburg, 14 April 2021 – The International Auditing and Assurance Standards Board (IAASB) has approved the new and revised suite of quality management standards. This requires that systems of quality management in compliance with International Standards on Quality Management (ISQM) 1 be designed and implemented by 15 December 2022 and the evaluation of the system of quality management required to be performed within one year by 15 December 2022, writes Hayley Barker Hoogwerf, SAICA Project Director for Assurance.

The revisions are so significant that they are set to even impact on the organisational structure of the firms. The change in approach from the passive implementation of quality control where firms were able to either develop or purchase a generic quality control manual, with actions that are largely reactive; to an active management of quality that is embedded in the day to day operations of the firm translates into firms having to invest time and resources in ensuring that they are compliant in time for the effective date. Like any investment decision made, the question on the minds of many is how their practice will benefit from the investment that needs to be made in designing, implementing, and operating a system of quality management.

In answering this question, it is first important to understand the reasons that gave rise to the need for the change.

Need for Change

As stated in the SAICA Code of Professional Conduct, a distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. This public interest role impacts the relevance of accountancy as a profession, and the absence thereof threatens the sustainability of the profession. In the Covering Explanatory Memorandum that accompanied the issue of the suite of quality management exposure drafts, the IAASB indicated that the proposed revisions were made with the public interest at front of mind, and that it addresses the most relevant public interest issues related to quality control, including:

  • Fostering an appropriately independent and challenging skeptical mindset of the auditor.
  • Encouraging proactive quality management at the firm and engagement level.
  • Exploring transparency and its role in audit quality.
  • Focusing more on firms’ (including networks’) structures and communication processes and their internal and external monitoring and remediation activities.
  • Reinforcing the need for robust communication and interactions during the audit engagement.

Overview of the new and revised requirements

ISQM 1 outlines the new risk-based approach to quality management, which consists of three steps, namely:

  • Establish quality objectives
  • Identify and assess quality risks
  • Design and implement responses

ISQM 1 contains minimum prescribed quality objectives that firms are required to achieve, unless one of these quality objectives is not relevant. With respect to quality risks, the IAASB recognised that all firms are different and therefore did not prescribe any quality risks. Each firm is required to identify and assess the quality risks based on the nature and circumstances of the firm and the engagements entered into.

ISQM 1 also contains certain minimum responses that firms are required to implement. Firms are required to design and implement other responses that appropriately address the quality risks. The responses are determined by the firm’s assessment of the quality risk, in terms of the likelihood of the risk occurring as well as the magnitude of the likely impact that the quality risk will have.

These responses contained in ISQM 1 may be done at firm level, engagement level or both at firm and engagement level.

What does this mean for Firms?

The IAASB’s new risk-based approach to quality management will compel firms to be proactive, responsive and thoughtful about the nature and circumstances of the firm and the engagements that it performs in designing, implementing and operating its system of quality management. This new approach is also scalable in that it is customised to suit the nature and circumstances of the firm and its engagements. Such circumstances include the size of the firm and the types of engagements performed, as well as the types of clients that they service.

The responses to the identified quality risks will vary. At a smaller firm, the responses to the identified quality risks may be somewhat informal, for example verbal or email communication relating to engagement teams about their responsibilities to implement policies or procedures. It is also possible that many of the responses will operate at engagement level, for example on-the-job training rather the formal training that is facilitated by the firm.

To elaborate on this, in achieving the quality objective of creating a culture that demonstrates a commitment to quality, firm leadership of a smaller firm is likely to have frequent and direct interaction with all personnel including any on-the-job training. These interactions will form part of the firms’ response to the quality objective. In contrast, a larger firm may be required to design and implement substantially more responses to achieve the quality objective in embedding this culture, including establishing the tone at the top, establishing and communicating firm values, the development of a Code of Conduct, implementing a formal training programme and implementing a system of performance evaluations.

ISA 220 (Revised) builds on ISQM 1 in requiring the engagement team to implement relevant firm level policies or procedures at the engagement level. The manner in which the engagement partner implements the requirements of ISA 220 (Revised) will also depend on the nature and circumstances of the engagement, including the industry in which the client operates as well as the size and complexity of the entity. There may also be some requirements contained in ISA 220 (Revised) that are not relevant to the engagement.

In terms of engagements subject to an engagement quality review, some firms may find themselves in an instance whether they have no engagements that require such a review. Furthermore, where there is such a requirement, either stemming from ISQM 1 or through the firm’s policies or procedures, firms are permitted to outsource these reviews if there is no internal person with sufficient time or the required knowledge, skills or experience to perform such reviews.

In conclusion

The new and revised requirements will see firms reassessing the current policies or procedures relating to quality management. Firms should see this as an opportunity to invest time and resources in streamlining their operations and design and implement responses that only make a positive impact on addressing the quality risks specific to the circumstances of the firms and the nature of the engagements that they perform. This investment will see dividends in the form of a more robust system of quality management that is tailored to suit the firm’s circumstances and ultimately contributes to improved audit quality. This will in turn positively contribute to reaffirming the auditor’s role in protecting the public interest through enhancing the creditability to the financial reporting process and ultimately restoring trust to the accounting profession. With these consequential benefits, the investment decision is an easy one to make.


The South African Institute of Chartered Accountants (SAICA), South Africa’s pre-eminent accountancy body, is widely recognised as one of the world’s leading accounting institutes. The Institute provides a wide range of support services to more than 50 000 members and associates who are chartered accountants (CAs[SA]), as well as associate general accountants (AGAs[SA]) and accounting technicians (ATs[SA]), who hold positions as CEOs, MDs, board directors, business owners, chief financial officers, auditors and leaders in every sphere of commerce and industry, and who play a significant role in the nation’s highly dynamic business sector and economic development.

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