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Are you ready for ISQM 1?

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IAASB ISQM1

Following a series of high-profile audit failures, the IAASB has released a suite of proposed international standards on quality management.

The proposals change the way professional accountancy firms are expected to manage quality for audits, reviews, and other assurance and related services engagements.

isqm-1

Three quality management standards were released for public comment. The standards will require firms to proactively manage quality with a renewed focus on engagement quality reviews. This is going to affect how firms are organised and operate. The risk-based approach will require ‘more robust systems to improve quality’.

The requirements are expected to affect firms by the end of 2021. Leading firms are starting to develop their implementation plans now.

Of the three standards, ISQM 1 is likely to have the most significant impact at a firm level. With input from our customers, we’ve highlighted what look to be some of the biggest hurdles, and how Braid can help.

The components of a system of quality management

The eight components of the proposed quality management system are specifically designed and described as highly integrated. For example, resources and information and communication are essential aspects that enable the operation of each of the other components of the system of quality management.

The integration of the components means that quality management doesn’t operate in a linear manner. As a result, ISQM 1 envisions aspects would be designed, implemented, and operated by firms in an iterative manner.

How can Braid help?

A number of our customers have started planning for the ISQM 1 requirements. We’ve been exploring how our AI-powered planning platform, Braid, can help, and have identified some immediate ways it can support firms in meeting the requirements.

Acceptance and continuance

ISQM 1 defines this component as ‘the firm’s processes for consideration of matters in determining whether to accept or continue a client relationship or specific engagement… This component also requires that the firm’s financial and operational priorities do not lead to inappropriate judgements about whether to accept or continue a client relationship or specific engagement. ‘

Configurable approval workflows

Braid’s configurable approval workflows can ensure engagement plans are reviewed by the right people, as well as ensuring enforcement of independence restrictions and accreditation compliance. Rather than requiring information to be reconciled from multiple systems (or spreadsheets), Braid can serve as an engagement risk acceptance tool, maintaining a single source of truth.

Overcoming challenges together

Engagement performance

The engagement performance component includes firms’ actions to ‘promote and support the consistent performance of quality engagements in accordance with professional standards and legal and regulatory requirements.’ This section of the standard also requires firms ‘establish policies or procedures addressing the nature, timing and extent of the direction and supervision of engagement teams and review of their work, including that such direction, supervision and review is planned and performed on the basis that the work performed by less experienced members of the engagement team is directed, supervised and reviewed by more experienced engagement team members. ‘

Full lifecycle management

Braid allows engagement leaders to create an engagement plan, manage budget approvals, track changes and monitor progress, all in one place. Alerts and notifications are configurable and can be triggered by being off-target burndown, likely to miss recovery rate, and more. Performance data can be accessed through templated or custom reporting, with no requirement for manual or repeated data entries.

Live economics

Braid provides real-time financial data for key measures, such as budget vs actuals, cost to complete, margin and recovery rate.

Team work

Resources

This component covers firms’ processes for ‘obtaining, developing, using, maintaining, allocating or assigning resources to enable the design, implementation and operation of the system of quality management’. Our customers highlighted this as being a critical requirement for which Braid can provide unique and comprehensive support, specifically to help ensure ‘the firm assigns an engagement partner and other human resources to each engagement who have appropriate competence and capabilities, including being given sufficient time, to consistently perform quality engagements. ‘ Similarly, Braid can support the assignment of ‘human resources to perform activities within the system of quality management who have appropriate competence and capabilities, including sufficient time, to perform such activities. ‘

Centralised resourcing

Braid allows Engagement Managers to specify resource needs, specifying all knowledge and technical accreditation requirements, as well as the level of experience of the individual. Engagement partners can drive optimal delivery by looking at their firm nationwide or globally, and understand future headcount requirements with in-depth reporting of predicted surplus or shortfall versus demand.

Best match

With assisted or fully automated scheduling, Braid can help to ensure skills, availability, location, and all key criteria are accounted for when assigning engagements.

ISQM 2 eligibility can be tracked as a trait against quality reviewers, and this can be used in Braid’s configurable workflows to determine who is a suitable quality reviewer for a given engagement.

Making the right decisions

Information and communication

This component includes the requirement to establish an information system ‘whether through the use of manual or automated elements, to identify, capture, process and maintain relevant and reliable information. ‘

Braid is specifically designed as an information system capable of maintaining and managing resource data, performing the budgeting and allocation process, and providing real-time reporting. It integrates with other systems such as time recording systems to reduce manual intervention.

Braid helps to promote a culture of transparency by offering a view of engagement performance to most users by default, and configurable to your firm’s needs.

Monitoring and remediation

Monitoring involves ‘undertaking ongoing and periodic monitoring activities, and identifying and evaluating deficiencies…’. In order to understand how the deficiencies arose, this ISQM also requires the firm to understand the root cause of the identified deficiencies. The standard also requires the firm takes appropriate actions to respond to identified deficiencies such that ‘deficiencies are remediated on a timely basis’.

Automated project controls

Braid monitors and flags up engagements that might need attention, for example where target deadlines are being missed. Real-time tracking of project performance ensures advance notice of potential overruns. Automated alerts are available should breaches of metrics occur, ensuring relevant partners or managers are notified immediately.

Continuous improvement

Full audit trails are available for every engagement, allowing the project to be “rewound” to any time in the past, and facilitating continuous improvement of decisions.

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