In a significant move aimed at enhancing the quality management systems of CPA firms, the AICPA Auditing Standards Board (ASB) introduced a series of proposals in February 2021. These proposals, open for public commentary until June 11, 2021, signify a crucial step toward improving quality management practices within the accounting profession. This comprehensive update involves the establishment of a new quality management framework and the convergence with international standards, ultimately shaping the landscape for auditors and the industry at large.
Chapter 1: Evolving Standards
Introduction of the Statement on Quality Management Standards (SQMS):
A pivotal aspect of this update is the introduction of a new section within the AICPA Professional Standards – the Statement on Quality Management Standards (SQMS). This section is poised to supersede the existing Statement on Quality Control Standards (SQCS) No. 8. The transition reflects a strategic shift from the term "quality control" to "quality management," emphasizing a more encompassing and proactive approach to ensuring engagement quality.
Revamping AU-C Section 220:
Simultaneously, AU-C Section 220, which outlines quality control for engagements conducted in accordance with Generally Accepted Auditing Standards (GAAS), is undergoing a transformation. The replacement section will be titled "Quality Management for an Engagement Conducted in Accordance with Generally Accepted Auditing Standards." This alteration not only signifies a change in terminology but also points towards a broader perspective on managing quality throughout the engagement process.
Alignment with International Standards:
One of the key objectives of this update is to align with quality management standards set by the International Auditing and Assurance Standards Board (IAASB). The international standards, issued in December 2020, are intended to serve as the foundational framework for updating the Public Company Accounting Oversight Board (PCAOB) quality management standards. This alignment signifies a global effort to establish consistent and high-quality auditing practices across borders.
Chapter 2: Core Components of the New Standards
Transition from "Quality Control" to "Quality Management":
While the terminology is shifting from "quality control" to "quality management," the core principle remains steadfast – ensuring engagement quality. The ASB recognizes the evolving landscape and acknowledges the need for a more adaptive and scalable quality management system. The shift in terminology is not merely semantic but reflects a strategic move toward a proactive and risk-based approach to quality.
Critical Aspects of Quality Management System:
The new standards address various critical aspects of a quality management system. These include:
- Firm Governance and Leadership
- Firm’s Risk Assessment Process
- Relevant Ethical Requirements
- Acceptance and Continuance of Clients and Engagements
- Engagement Performance
- Information and Communication
- Monitoring and Remediation Process
- Roles and Responsibilities of Individuals
- Each of these components plays a vital role in shaping an effective and comprehensive quality management system within CPA firms.
Introduction of Firm’s Risk Assessment Process:
A notable addition to the standards is the introduction of the firm’s risk assessment process. This element underscores the importance of focusing on risks that might impact engagement quality. The proposed three-step process includes:
Establishing quality objectives
Identifying and assessing risks to the achievement of quality objectives
Designing and implementing responses to address quality risks
This new element is designed to enhance the firm's attention to potential risks, aligning with a risk-based approach to quality management.
Chapter 3: The Future Landscape
Global Consistency through Convergence:
The alignment with international standards not only reflects a commitment to global consistency but also sets the stage for a harmonized approach to quality management. As the IAASB's standards influence the update of PCAOB quality management standards, a seamless and standardized auditing environment is envisioned.
Continuous Monitoring and Adaptation:
The nature of the new standards encourages a dynamic and adaptable quality management approach. Continuous monitoring, assessment, and remediation processes are integral to ensure ongoing effectiveness. This adaptability aligns with the ever-evolving landscape of the accounting profession, promoting resilience and responsiveness.
The ASB's strategic upgrade in quality management standards marks a pivotal moment in the evolution of auditing practices. The shift from "control" to "management" signifies a forward-looking approach, emphasizing proactive risk management and adaptability. As the industry progresses toward global convergence, these updated standards pave the way for a consistent and high-quality auditing environment. Auditors, accounting professionals, and regulatory bodies should stay informed and engaged with these developments, recognizing the transformative impact on the future of audit quality management.