ISQM (UK) 2

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What is ISQM 2?

Introduction to ISQM 2

International Quality Management System (UK) 2 or just simply ISQM 2, is an integrated software application that combines quality assurance and business process management tools to help businesses achieve success. In this blog, we’ll look into the new standards and determine if this is the right choice for your organisation. We’ll be examining the features and benefits of using the system, and how to apply it within your firm. Read on to find out whether ISQM 2 is the right software solution for your business.

Definition of ISQM

The new ISQM 2 standard focuses on the performance and evaluation of the engagement quality reviewer (EQR) conducting an audit review and their responsibilities relating to the conclusions and documentation of the EQ review. It aims to ensure the right person performs the review of the audit at the right time and outlines the responsibilities associated with the role.

Benefits of implementing ISQM 2

A robust and properly functioning ISQM 2 goes beyond just improving quality standards of the firm and undertaking an audit. Not only does it safeguard the firm and the entities being audited but it also enhances compliance with international standards.

According to the IAASB, the changes in ISQM 2 are intended to:

  • extend the scope of related services engagements subject to an EQ review (in addition to audits of financial statements of listed entities)
  • strengthen the eligibility criteria for an individual to be appointed as an EQ reviewer of an audit
  • enhance the EQ reviewer’s responsibilities relating to the performance (including the nature, timing and extent of procedures) and documentation of the EQ review.

Quality management documentation reviews on an audit

ISQM 2 requires the firm to establish policies or procedures so the EQ reviewer can take responsibility for the documentation of the EQ review, and perform the EQ review at appropriate points during the audit engagement.

The requirements of the documentation should specify the audit to be reviewed by the EQ reviewer and demonstrate that the reviewer meets the eligibility requirements and any other assurance.

How to implement ISQM 2

New standard audits and reviews

When to do engagement quality reviews

The regulations for ISQM 1, specifically paragraph 34(f), sets out the circumstances when an engagement quality review (EQR) must be performed in accordance with ISQM (UK) 2. These include:

  • audits of financial statements of listed entities
  • audits or other engagements for which an engagement quality review is required by law or regulation
  • audits or other engagements for which the firm determines that an engagement quality review is an appropriate response to address one or more quality risk(s)
  • audits of financial statements of public interest entities
  • public reporting engagements carried out in accordance with the Standards of Investment Reporting
  • engagements for which an engagement quality review is required by the FRC’s providing assurance on client assets to the Financial Conduct Authority standard (Revised November 2019).

ISQM 2 should be used for audits of entities with accounting periods commencing on or after 15 December 2022. Other than a short period, the new standard will apply for the first time for 31 December 2023 year ends.

Implementation of engagement quality reviews

Where a review is required, ISQM 2 sets out a number of specific requirements for the appointment and eligibility of engagement quality reviewers (EQR) (see below), the performance of the EQR and the documentation required. There are further specific EQR enhancements where the entity is listed and/or a PIE.

For the majority of HAT firms, the listed and/or PIE enhancements are not relevant. However, there are some key enhancements in ISQM 2 for an EQR on an unlisted, non-PIE entity. These are as follows:

  • The engagement quality reviewer needs to meet specific eligibility criteria, including having sufficient time and if they have previously acted as the R.I. on the engagement, they are subject to a minimum cooling off period of two years.
  • The engagement quality reviewer shall consider whether independence requirements have been complied with, whether consultation has taken place on contentious/difficult matters and whether the engagement team’s conclusions are appropriate, given the nature and circumstances of the engagement.
  • There are new requirements to cover circumstances where the engagement quality reviewer’s eligibility to perform the EQR is impaired.
  • Only in the event that no concerns remain is the EQR regarded as being complete, with it not being permissible to sign and date the audit report until this has been confirmed.

Control over reviews

A firm may require a hot review (sometimes referred to as a second partner review) in certain circumstances as an internal safeguard (for example, to deal with the long association threat posed by the R.I acting for more than 10 years). This would not need to comply with the detailed requirements of ISQM (UK) 2. However, the thought processes around this needs to be clearly documented on file. As noted below, enhancements have been made to the HAT methodologies to deal with these new requirements.

Eligibility for EQ reviewers under ISQM 2

Under the new ISQM 2 requirements, there are certain criteria that should apply to EQRs conducting audit reviews. The appointed EQR should have the experience and appropriate authority within the firm to complete and challenge an EQ. They need to be objective and work independently of the audit team, and have sufficient time to complete an engagement quality review.

Role of EQR on audit

The EQR is required to review and understand the judgments made on an audit by the engagement team. The EQR will determine if the audit engagement documentation supports the conclusions and will determine if the engagement team has followed the international standard and professionalism on reaching those decisions. An audit report cannot be finalised until the reviewer determines the process is completed.

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