It’s been over 18 months since the December 15, 2022 deadline for firms to design and implement a system of quality management under the International Standard on Quality Management 1 (ISQM 1). Around the world, firms have begun integrating ISQM 1 into their operations. But there are still many firms that haven’t yet implemented the standard. 

ISQM 1 is an audit standard, issued by the International Auditing and Assurance Standards Board (IAASB), that replaces the International Standard on Quality Control 1 (ISQC 1). It represents a significant shift in how firms think about audit quality, moving away from a focus on quality control toward a risk-based system of quality management. 

ISQM 1’s goal is to offer a more proactive quality management approach. It requires firms to identify risks to achieving audit and assurance quality objectives and come up with responses to these risks.

With this approach in mind, an ISQM 1 system of quality management must address eight components. These include:

• A firm’s risk assessment process
• Governance and leadership
• Relevant ethical requirements
• Acceptance and continuance of client relationships
• Engagement performance
• Resources
• Information and communication
• Monitoring and remediation process

A look at how things were done in the past in Canada illustrates the shift that’s occurring. In that country, many firms relied on audit assurance manuals that had been compiled in Word, much like human resources policy manuals, explained Sarah Coulson, Head of Canada Solutions at Caseware. 

“Everyone was supposed to read it and abide by it,” she said. “It was very much a reactive situation, where you’d check against it, you’d monitor it manually and you’d evaluate things. But it was more of a double-check control after the fact, rather than a true system of quality control.”

ISQM 1 adoption is growing quickly

ISQM 1 changes this by requiring firms to set up a proactive and effective approach to quality management. Quality management will be a focus of practice inspections by professional accounting bodies. An audit quality report titled Upholding High Standards to Protect the Public: Managing Audit Quality 2023 from CPA Ontario, the regulatory body responsible for overseeing CPAs in Canada’s largest province, for example, notes the body’s Practice Inspection team will be conducting in-depth reviews of quality management systems, to ensure compliance with the new standard. 

There is no set-in-stone approach that every firm must follow. Instead, the standard pushes each firm to design a quality management system (QMS) that is tailored to the firm’s size, circumstances and the engagement types it handles. This means the QMS for a four-person firm specializing in audits for a couple of industry verticals will be significantly different from the QMS used by a large, multinational firm. 

While each QMS will be unique, there are factors every firm performing engagements under the IAASB’s international standards must consider. The ultimate goal is to establish legal and professional requirements that ensure the quality and compliance of all audit, reviews, other assurance and related service engagements.

An informal poll from a November 2023 Caseware webinar found 20 percent of respondents had designed a QMS, 26 percent had designed a system and implemented it, seven percent had designed, implemented and evaluated a system and two percent had begun remediation of their QMS. But the largest group, 44 percent, had not yet begun their QMS journey.

The Institute of Chartered Accountants in England and Wales (ICAEW) polled 150 non-Public Interest Entity audit firms in early 2023 and found 67 percent had adopted ISQM 1, another 17 percent had begun preparing to adopt it and just 16 percent had not started implementation.

Different jurisdictional deadlines

Many national accounting bodies have already integrated ISQM 1 into their quality management standards. In the U.S., firms have until December 15, 2025 to design and implement a QMS that complies with the country’s ISQM 1 equivalent, SQMS No. 1, with an evaluation deadline coming one year later. 

In Canada, the Canadian Standard on Quality Management 1 (CSQM 1) required firms to design and implement their system of quality management for audits or reviews of financial statements or other assurance engagements by December 15, 2022. Firms were required to evaluate their systems by December 15, 2023. 

For related services engagements, Canadian firms had until December 15, 2023 to design and implement a QMS with a deadline of December 15, 2024 to evaluate their respective systems.

Australia’s equivalent of ISQM 1, ASQM 1, also required firms to comply with the December 15, 2022 deadline, as did ISQM (UK) 1 in the U.K.

While the later compliance deadline in the U.S. may mean some firms aren’t yet looking seriously at implementing a new QMS, it’s better to begin planning early to avoid more work later, Coulson noted.

“Some firms have been using Word or Excel as a temporary measure to meet the guidelines,” she said. “But it’s hard to update and maintain a system of quality assurance in Word or Excel. Spreadsheets don’t have strong controls over versioning and there are limitations on user access controls. You’re better off having one integrated system — a living, breathing system that evolves as new risks are identified and new policies are enacted to address those risks.”

Caseware SQM is an intuitive, cloud-based QMS designed to help firms meet the ISQM’s risk-based approach to quality management. Caseware SQM includes an extensive library of risks, policy responses and procedure responses supporting firms to both identify and assess quality risks, and to design appropriate responses.  

Additionally, a built-in library of monitoring activities assists firms in evaluating their system of quality management, to provide reasonable assurance that the quality objectives are being achieved. 
Discover how you can use Caseware SQM to construct an effective QMS that meets different global quality management standards, such as CSQM and NCGQ in Canada, ASQM in Australia, NIGC in Latin America (in Spanish), FSQM in France, MSZJ in Poland, SQMS in the U.S. as well as ISQM in multiple countries and languages.