The International Standard on Quality Management (ISQM) 2, titled "Engagement Quality Reviews”, is in effect for audits and reviews of financial statements for periods beginning on or after 15 December 2022. What is the status quo of audit quality management more than two years later?
Understanding ISQM 2: Core Components
ISQM 2 is an important part of quality management standards. It works alongside ISQM 1, which focuses on the overall quality management systems of firms. The main goal of ISQM 2 is to improve audit quality, by creating a strong framework for reviewing engagement quality. Key aspects include:
- Appointment and Eligibility of EQRs: The standard mandates that firms establish policies to appoint EQRs who possess the requisite competence, capabilities, and objectivity. This ensures that reviewers can effectively evaluate the significant judgments and conclusions made by the engagement team.
- Performance of Engagement Quality Reviews: EQRs must conduct careful evaluations of chosen engagements. They focus on key areas like important judgments, risk assessments, and the adequacy of audit evidence.
- Documentation: Comprehensive documentation of the engagement quality review process is essential. This includes detailing the procedures performed, findings, and conclusions, thereby providing transparency and accountability.
Intersection with Technology and AI
The years since 2022 saw an increasing interest in topics such as technology, data analytics and AI. These technological advancements, especially AI, have changed the audit profession.
In the context of ISQM 2, these technologies are important for improving engagement quality reviews. Utilizing data analytics for example allows EQRs to assess entire datasets rather than relying solely on sampling methods. This comprehensive approach enhances the identification of risk areas and ensures a more robust evaluation of the engagement team's work.
The broader framework of quality management standards, particularly ISQM 1, encourages firms to consider technological factors. The implementation of tools such as Circit, an audit evidence collection platform, facilitates seamless collaboration, real-time data sharing, and efficient documentation, all of which are critical for effective engagement quality reviews.
ISQM 2 does not directly talk about AI. However, ISQM 1 does mention using technological resources as part of a firm’s system of quality management, which could be interpreted to extend to AI as part of quality management systems.
Seeing as AI can assist in automating routine tasks, can analyze complex datasets, and identify patterns that may not be immediately apparent to human reviewers, we can be sure of its place in audit quality management and its inclusion in future versions of the quality management standard.
Alignment with the FRC's Revised Ethical Standard: Integrity, Objectivity, and Independence
The Financial Reporting Council's (FRC) Revised Ethical Standard 2024, effective from December 15, 2024, emphasizes the fundamental principles of integrity, objectivity, and independence in the audit profession. These principles are intrinsically linked to the effective implementation of ISQM 2.
Integrity: EQRs must uphold the highest standards of honesty and ethical behaviour. The use of technology should be aligned with these ethical standards, ensuring that data analytics and AI are employed responsibly to enhance the quality and reliability of audits.
Objectivity: The standard requires EQRs to maintain impartiality, avoiding any biases that could compromise their evaluations. Technological tools can aid in providing objective analyses by minimizing human biases in data assessment.
Independence: Both ISQM 2 and the FRC's Ethical Standard stress the importance of independence in fact and appearance. EQRs must be free from conflicts of interest, and the technology utilized should not impair their independence.
Enhancing Audit Quality Management with Circit
In the evolving landscape of audit quality management, platforms like Circit have emerged as valuable tools that align with the objectives of ISQM 2 and the FRC's Ethical Standard.
Circit enables the fully automated creation and processing of audit confirmations from banks, law firms, and other evidence providers. This automation reduces manual errors and accelerates the confirmation process, ensuring timely and accurate audit evidence.
The platform allows auditors to verify transactional data obtained directly from source, ensuring audit evidence is untampered with and independently obtained. This comprehensive verification enhances the reliability of audit conclusions and empowers auditors to conduct detailed analyses and identify potential anomalies or areas of risk.
Finally, Circit integrates legal e-signing of engagement letters and financial statements, streamlining the documentation process and ensuring compliance with regulatory requirements.
Conclusion
The implementation of ISQM 2 represents a significant advancement in audit quality management, emphasizing the critical role of engagement quality reviews. Technology, like AI and data analytics, makes these reviews more effective. It allows for thorough data analysis and better decision-making.
Platforms like Circit exemplify how technological solutions can align with professional standards, supporting auditors in upholding the principles of integrity, objectivity, and independence, as emphasized in the FRC's Revised Ethical Standard.
By embracing these advancements, audit quality management can continue to evolve, ensuring the delivery of high-quality audits in an increasingly complex financial environment.
