Auditing Standard ASQM 1 Quality Management for Firms that Perform Audits or Reviews of Financial Reports and Other Financial Information, or Other Assurance or Related Services Engagements
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The specified responses may address multiple quality risks related to more than one quality objective across different components. For example, policies or procedures for complaints and allegations may address quality risks related to quality objectives in resources (e.g., personnel’s commitment to quality), relevant ethical requirements and governance and leadership. The specified responses alone are not sufficient to achieve the objectives of the system of quality management.
Relevant Ethical Requirements (Ref: Para. 34(a))
Relevant ethical requirements may contain provisions regarding the identification and evaluation of threats and how they are to be addressed. For example, the Code provides a conceptual framework for this purpose and, in applying the conceptual framework, requires that the firm use the reasonable and informed third party test.
Relevant ethical requirements may specify how the firm is required to respond to a breach. For example, the Code sets out requirements for the firm in the event of a breach of the Code and includes specific requirements addressing breaches of the Australian Independence Standards, which includes requirements for communication with external parties.
Matters the firm may address relating to breaches of the relevant ethical requirements include:
The communication of breaches of the relevant ethical requirements to appropriate personnel;
The evaluation of the significance of a breach and its effect on compliance with relevant ethical requirements;
The actions to be taken to satisfactorily address the consequences of a breach, including that such actions be taken as soon as practicable;
Determining whether to report a breach to external parties, such as those charged with governance of the entity to which the breach relates or an external oversight authority; and
Determining the appropriate actions to be taken in relation to the individual(s) responsible for the breach.
Complaints and Allegations (Ref: Para. 34(c))
Establishing policies or procedures for dealing with complaints and allegations may assist the firm in preventing engagement reports from being issued that are inappropriate. It also may assist the firm in:
Identifying and dealing with individuals, including leadership, who do not act or behave in a manner that demonstrates a commitment to quality and supports the firm’s commitment to quality; or
Identifying deficiencies in the system of quality management.
Complaints and allegations may be made by personnel, or others external to the firm (e.g., clients, component auditors or individuals within the firm’s network).
Information That Becomes Known Subsequent to Accepting or Continuing a Client Relationship or Specific Engagement (Ref: Para. 34(d))
Information that becomes known subsequent to accepting or continuing a client relationship or specific engagement may:
Have existed at the time of the firm’s decision to accept or continue the client relationship or specific engagement and the firm was not aware of such information; or
Relate to new information that has arisen since the decision to accept or continue the client relationship or specific engagement.
Examples of matters addressed in the firm’s policies or procedures for circumstances when information becomes known subsequent to accepting or continuing a client relationship or specific engagement that may have affected the firm’s decision to accept or continue a client relationship or specific engagement Undertaking consultation within the firm or with legal counsel. Considering whether there is a professional, legal or regulatory requirement for the firm to continue the engagement. Discussing with the appropriate level of the client’s management and with those charged with governance or the engaging party the action that the firm might take based on the relevant facts and circumstances. When it is determined that withdrawal is an appropriate action:o Informing the client’s management and those charged with governance or the engaging party of this decision and the reasons for the withdrawal.o Considering whether there is a professional, legal or regulatory requirement for the firm to report the withdrawal from the engagement, or from both the engagement and the client relationship, together with the reasons for the withdrawal, to regulatory authorities.
In some circumstances, jurisdictional law or regulation may impose an obligation on the firm to accept or continue a client engagement, or in the case of the public sector, the firm may be appointed through statutory provisions.
Example of matters addressed in the firm’s policies or procedures in circumstances when the firm is obligated to accept or continue an engagement or the firm is unable to withdraw from an engagement, and the firm is aware of information that would have caused the firm to decline or discontinue the engagement The firm considers the effect of the information on the performance of the engagement. The firm communicates the information to the engagement partner, and requests the engagement partner to increase the extent and frequency of the direction and supervision of the engagement team members and review of their work. The firm assigns more experienced personnel to the engagement. The firm determines that an engagement quality review should be performed.
Communication with External Parties (Ref. Para: 34(e))
The firm’s ability to maintain stakeholder confidence in the quality of its engagements may be enhanced through relevant, reliable and transparent communication by the firm about the activities that it has undertaken to address quality, and the effectiveness of those activities.
External parties who may use information about the firm’s system of quality management, and the extent of their interest in the firm’s system of quality management, may vary based on the nature and circumstances of the firm and its engagements.
Examples of external parties who may use information about the firm’s system of quality management Management or those charged with governance of the firm’s clients may use the information to determine whether to appoint the firm to perform an engagement. External oversight authorities may have indicated a desire for the information to support their responsibilities in monitoring the quality of engagements across a jurisdiction and in understanding the work of firms. Other firms who use the work of the firm in the performance of engagements (e.g., in relation to a group audit) may have requested such information. Other users of the firm’s engagement reports, such as investors who use engagement reports in their decision making, may have indicated a desire for the information.
The information about the system of quality management provided to external parties, including information communicated to those charged with governance about how the system of quality management supports the consistent performance of quality engagements, may address such matters as:
The nature and circumstances of the firm, such as the organisational structure, business model, strategy and operating environment.
The firm’s governance and leadership, such as its culture, how it demonstrates a commitment to quality, and assigned roles, responsibilities and authority with respect to the system of quality management.
How the firm fulfills its responsibilities in accordance with relevant ethical requirements, including those related to independence.
Factors that contribute to quality engagements, for example, such information may be presented in the form of engagement quality indicators with narrative to explain the indicators.
The results of the firm’s monitoring activities and external inspections, and how the firm has remediated identified deficiencies or is otherwise responding to them.
The evaluation undertaken in accordance with paragraphs 53–54 of whether the system of quality management provides the firm with reasonable assurance that the objectives of the system are being achieved and the conclusion thereon, including the basis for the judgements made in undertaking the evaluation and concluding.
How the firm has responded to emerging developments and changes in the circumstances of the firm or its engagements, including how the system of quality management has been adapted to respond to such changes.
The relationship between the firm and the network, the overall structure of the network, a description of network requirements and network services, the responsibilities of the firm and the network (including that the firm is ultimately responsible for the system of quality management), and information about the overall scope and results of network monitoring activities across the network firms.
Communication with Those Charged with Governance (Ref. Para: 34(e)(i))
How the communication with those charged with governance is undertaken (i.e., by the firm or the engagement team) may depend on the firm’s policies or procedures and the circumstances of the engagement.
ASA 260 deals with the auditor’s responsibility to communicate with those charged with governance in an audit of a financial report, and addresses the auditor’s determination of the appropriate person(s) within the entity’s governance structure with whom to communicate[21] and the communication process.[22] In some circumstances, it may be appropriate to communicate with those charged with governance of entities other than listed entities (or when performing other engagements), for example, entities that may have public interest or public accountability characteristics, such as:
Entities that hold a significant amount of assets in a fiduciary capacity for a large number of stakeholders including financial institutions, such as certain banks, insurance companies, and superannuation funds.
Entities with a high public profile, or whose management or owners have a high public profile.
Entities with a large number and wide range of stakeholders.
Public sector considerations
The firm may determine it is appropriate to communicate to those charged with governance of a public sector entity about how the firm’s system of quality management supports the consistent performance of quality engagements, taking into account the size and complexity of the public sector entity, the range of its stakeholders, the nature of the services it provides, and the role and responsibilities of those charged with governance.
Determining When it is Otherwise Appropriate to Communicate with External Parties (Ref. Para: 34(e)(ii))
The firm’s determination of when it is appropriate to communicate with external parties about the firm’s system of quality management is a matter of professional judgement and may be influenced by matters such as:
The types of engagements performed by the firm, and the types of entities for which such engagements are undertaken.
The nature and circumstances of the firm.
The nature of the firm’s operating environment, such as customary business practice in the firm’s jurisdiction and the characteristics of the financial markets in which the firm operates.
The extent to which the firm has already communicated with external parties in accordance with law or regulation (i.e., whether further communication is needed, and if so, the matters to be communicated).
The expectations of stakeholders in the firm’s jurisdiction, including the understanding and interest that external parties have expressed about the engagements undertaken by the firm, and the firm’s processes in performing the engagements.
Jurisdictional trends.
The information that is already available to external parties.
How external parties may use the information, and their general understanding of matters related to firms’ system of quality management and audits or reviews of financial reports and other financial information, or other assurance or related services engagements.
The public interest benefits of external communication and whether it would reasonably be expected to outweigh the costs (monetary or otherwise) of such communication.
The above matters may also affect the information provided by the firm in the communication, and the nature, timing and extent and appropriate form of communication.
Nature, Timing and Extent and Appropriate Form of Communication with External Parties (Ref. Para: 34(e)(iii))
The firm may consider the following attributes in preparing information that is communicated to external parties:
The information is specific to the circumstances of the firm. Relating the matters in the firm’s communication directly to the specific circumstances of the firm may help to minimize the potential that such information becomes overly standardized and less useful over time.
The information is presented in a clear and understandable manner, and the manner of presentation is neither misleading nor would inappropriately influence the users of the communication (e.g., the information is presented in a manner that is appropriately balanced towards positive and negative aspects of the matter being communicated).
The information is accurate and complete in all material respects and does not contain information that is misleading.
The information takes into consideration the information needs of the users for whom it is intended. In considering the information needs of the users, the firm may consider matters such as the level of detail that users would find meaningful and whether users have access to relevant information through other sources (e.g., the firm’s website).
The firm uses professional judgement in determining, in the circumstances, the appropriate form of communication with the external party, including communication with those charged with governance when performing an audit of a financial report of listed entities, which may be made orally or in writing. Accordingly, the form of communication may vary.
Examples of form of communication to external parties A publication such as a transparency report or audit quality report. Targeted written communication to specific stakeholders (e.g., information about the results of the firm’s monitoring and remediation process). Direct conversations and interactions with the external party (e.g., discussions between the engagement team and those charged with governance). A webpage. Other forms of digital media, such as social media, or interviews or presentations via webcast or video.
Engagements Subject to an Engagement Quality Review
Engagement Quality Review Required by Law or Regulation (Ref: Para. 34(f)(ii))
Law or regulation may require an engagement quality review to be performed, for example, for audit engagements for entities that:
Are public interest entities as defined in a particular jurisdiction;
Operate in the public sector or which are recipients of government funding, or entities with public accountability;
Operate in certain industries (e.g., financial institutions such as banks, insurance companies and superannuation funds);
Meet a specified asset threshold; or
Are under the management of a court or judicial process (e.g., liquidation).
Engagement Quality Review as a Response to Address One or More Quality Risk(s) (Ref: Para. 34(f)(iii))
The firm’s understanding of the conditions, events, circumstances, actions or inactions that may adversely affect the achievement of the quality objectives, as required by paragraph 25(a)(ii), relates to the nature and circumstances of the engagements performed by the firm. In designing and implementing responses to address one or more quality risk(s), the firm may determine that an engagement quality review is an appropriate response based on the reasons for the assessments given to the quality risks.
Examples of conditions, events, circumstances, actions or inactions giving rise to one or more quality risk(s) for which an engagement quality review may be an appropriate responseThose relating to the types of engagements performed by the firm and reports to be issued: Engagements that involve a high level of complexity or judgement, such as:o Audits of financial reports for entities operating in an industry that typically has accounting estimates with a high degree of estimation uncertainty (e.g., certain large financial institutions or mining entities), or for entities for which uncertainties exist related to events or conditions that may cast significant doubt on their ability to continue as a going concern.o Assurance engagements that require specialised skills and knowledge in measuring or evaluating the underlying subject matter against the applicable criteria (e.g., a greenhouse gas statement in which there are significant uncertainties associated with the quantities reported therein). Engagements on which issues have been encountered, such as audit engagements with recurring internal or external inspection findings, unremediated significant deficiencies in internal control, or a material restatement of comparative information in a financial report. Engagements for which unusual circumstances have been identified during the firm’s acceptance and continuance process (e.g., a new client that had a disagreement with its previous auditor or assurance practitioner). Engagements that involve reporting on financial or non-financial information that is expected to be included in a regulatory filing, and that may involve a higher degree of judgement, such as pro forma financial information to be included in a prospectus.Those relating to the types of entities for which engagements are undertaken: Entities in emerging industries, or for which the firm has no previous experience. Entities for which concerns were expressed in communications from securities or prudential regulators. Entities other than listed entities that may have public interest or public accountability characteristics, for example:o Entities that hold a significant amount of assets in a fiduciary capacity for a large number of stakeholders including financial institutions, such as certain banks, insurance companies, and superannuation funds for which an engagement quality review is not otherwise required by law or regulation.o Entities with a high public profile, or whose management or owners have a high public profile.o Entities with a large number and wide range of stakeholders.
The firm’s responses to address quality risks may include other forms of engagement reviews that are not an engagement quality review. For example, for audits of financial reports, the firm’s responses may include reviews of the engagement team’s procedures relating to significant risks, or reviews of certain significant judgements, by personnel who have specialised technical expertise. In some cases, these other types of engagement reviews may be undertaken in addition to an engagement quality review.
In some cases, the firm may determine that there are no audits or other engagements for which an engagement quality review or another form of engagement review is an appropriate response to address the quality risk(s).
Public sector considerations
The nature and circumstances of public sector entities (e.g., due to their size and complexity, the range of their stakeholders, or the nature of the services they provide) may give rise to quality risks. In these circumstances, the firm may determine that an engagement quality review is an appropriate response to address such quality risks. Law or regulation may establish additional reporting requirements for the auditors of public sector entities (e.g., a separate report on instances of non-compliance with law or regulation to the legislature or other governing body or communicating such instances in the auditor’s report on the financial report). In such cases, the firm may also consider the complexity of such reporting, and its importance to users, in determining whether an engagement quality review is an appropriate response.
Section Specified Responses (Ref: Para. 34) - Auditing Standard ASQM 1 Quality Management for Firms that Perform Audits or Reviews of Financial Reports and Other Financial Information, or Other Assurance or Related Services Engagements - Specified Responses (Ref: Para. 34) | Zoe