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.
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.
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:
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.
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:
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.
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:
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.
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.
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.