The Auditing Standards & Ethics Board (ASEB) is issuing this communication to provide crucial updates and guidance regarding the implementation of International Standard on Quality Management (ISQM) 1, Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services, in Pakistan.<\/p>\n
2.\tAs you are aware, the Institute of Chartered Accountants of Pakistan (ICAP) has adopted ISQM 1, along with its consequential amendments to other International Standards, with the following effective dates:<\/p>\n
\u2022\tEffective Date for Designing and Implementing the System of Quality Management: December 15, 2023, for auditors of public interest companies, and December 31, 2024, for auditors of other than public interest companies.<\/p>\n
\u2022\tEvaluation of the System of Quality Management: Within one year following the effective date (i.e., by December 15, 2024, and December 15, 2025 respectively).<\/p>\n
3.\tThe implementation of ISQM 1 marks a significant shift in how audit firms manage and enhance the quality of their engagements. Moving beyond the previous ISQC 1, ISQM 1 emphasizes a proactive and risk-based approach to quality management. It requires firms to establish, implement, and maintain a system of quality management that is tailored to their specific circumstances and the nature and complexity of their engagements. This system is crucial for consistently providing quality engagements and enhancing public trust in the profession.<\/p>\n
4.\tUnder the requirements of ISQM 1, the audit firm must assign: <\/p>\n
\u2022\tUltimate responsibility and accountability for the system of quality management to the firm\u2019s chief executive officer or the firm\u2019s managing partner (or equivalent) or, if appropriate, the firm\u2019s managing board of partners (or equivalent); <\/p>\n
\u2022\tOperational responsibility for the system of quality management; <\/p>\n
\tOperational responsibility for specific aspects of the system of quality management, including:<\/p>\n
I)\tCompliance with independence requirements; and <\/p>\n
ii)\tThe monitoring and remediation process.<\/p>\n
\u2003<\/p>\n
5.\tThe ISQM 1 also requires that, at least annually, the individual(s) assigned ultimate responsibility and accountability for the system of quality management, on behalf of the firm, evaluates the system of quality management and concludes whether the system of quality management provides the firm with reasonable assurance that the objectives of the system stated below are achieved:<\/p>\n
\u2022\tThe firm and its personnel fulfill their responsibilities in accordance with professional standards and applicable legal and regulatory requirements, and conduct engagements in accordance with such standards and requirements; and <\/p>\n
\u2022\tEngagement reports issued by the firm or engagement partners are appropriate in the circumstances.<\/p>\n
6.\tKey Changes Introduced by ISQM 1:<\/p>\n
i)\tRisk-Based Approach: The standard mandates a risk assessment process to identify and respond to quality risks, rather than relying solely on policies and procedures.<\/p>\n
ii)\tSystem of Quality Management: It emphasizes an integrated system encompassing all aspects of the firm’s operations that affect engagement quality.<\/p>\n
iii)\tEmphasis on Governance and Leadership: It places greater responsibility on firm leadership for establishing and maintaining a culture that supports quality.<\/p>\n
iv)\tQuality Objectives: It requires to establish specific quality objectives that relate to the key components of your SOQM.<\/p>\n
v)\tFocus on Information and Communication: Robust information systems and effective internal and external communication are critical.<\/p>\n
vi)\tMonitoring and Remediation Process: Enhanced requirements for monitoring the system of quality management and addressing identified deficiencies.<\/p>\n
vii)\tNetwork Requirements and Network Firms: Specific considerations for firms that are part of a network.<\/p>\n
viii)\tEngagement Quality Reviews: Revised requirements for engagement quality reviews, focusing on the objectivity and competence of the reviewer.<\/p>\n
7.\tTo further assist your firms in the successful implementation of ISQM 1, ICAP has developed comprehensive guidance and a practical toolkit titled \u2018ICAP Guide & Toolkit\u2019. The Toolkit and other resource material are readily available on the ICAP website at: https:\/\/icap.org.pk\/aseb\/audit-and-assurance\/icap_resources.php <\/a><\/p>\n We strongly encourage you to access and utilize these resources. They provide detailed explanations, illustrative examples, and practical templates to aid in understanding and applying the requirements of ISQM 1. These resources are invaluable in developing a robust and effective system of quality management tailored to your firm’s specific needs.<\/p>\n \u2003<\/p>\n 8.\tThe primary purpose of this communication is to:<\/p>\n \u2022\tReiterate the adoption dates of ISQM 1 in Pakistan.<\/p>\n \u2022\tEmphasize the critical importance of establishing and maintaining a robust system of quality management under ISQM 1.<\/p>\n \u2022\tSpecify the assigning of responsibilities for the system of quality management. <\/p>\n \u2022\tHighlight the key changes introduced by ISQM 1 compared to ISQC 1.<\/p>\n \u2022\tDraw your attention to the comprehensive guidance and toolkit available on the ICAP website to support your implementation efforts.<\/p>\n We encourage you to proactively engage with the available resources and seek clarification from ICAP when needed. The AESB will continue to issue relevant guidance relating to ISQM 1 implementation. By implementing the principles of ISQM 1, we can collectively enhance the quality of audit and assurance services, thereby strengthening the credibility and reliability of financial reporting in Pakistan.<\/p>\n