By Justin McLaughlin / Bridget Noonan
Due to the ever-changing landscape of the Canadian environment, the Auditing and Assurance Standards Board (AASB) proposed a new standard for quality management in April 2019. The AASB is proposing to adopt the international standard, ISQM 1, as CSQM 1. An additional standard, CSQM 2 will be created and will focus on engagement quality reviews. Canadian Auditing Standard (CAS) 220 will also see an update for the changes in quality management for audits.
Currently, CSQC 1 only applies to firms who perform audits, reviews and other assurance engagements. Should the exposure draft be accepted as proposed all firms performing any engagements under the CPA Handbook such as compilation engagements, agreed-upon procedures engagements and engagements to report on supplementary matters arising from an audit or a review engagement (CSRS 4460) will fall within scope of the quality management standards.
A key driver behind the proposed changes to expand the scope to non-assurance engagements is that companies are now often distributing compilation engagement reports to third parties, including lenders. In addition, there is an increased demand for agreed upon procedures (including multi-scope) engagements from regulators and funders. The previous quality control standards for assurance engagements were issued in 2008, more than ten years ago.
What does all of this mean to your firm?
The new standards under CSQM 1 will effect firms very differently. For some firms that do not have assurance work, the adoption of CSQM 1 will present a monumental change where quality management policies at the firm level and the engagement level need to be formalized, documented and monitored. For the firms that are already in compliance with CSQC 1 changes will be required but they may be less in extent depending on how they implement the current requirements.
For firms that comply with existing CSQC 1 a system of quality control is already documented and in place. However, that does not mean that the firm will immediately comply with the new standards. Here are some of the changes you should consider if your firm falls into this category.
- The new standard changes the approach for quality control to a risk-based approach as opposed to taking corrective action only once quality deficiencies have been identified. The risks to quality will need to be identified and documented in the firm’s quality management manual. CSQC 1 had minimal requirements for firm policies and procedures. CSQM 1 will require firms to identify and assess quality risks, design responses to address the quality risks and design processes for monitoring and remediation. Some firms may have already adopted a risk-based approach to quality and these firms will require minimal changes to their quality management process.
- There is enhanced two way communication required between the engagement quality reviewer and the engagement teams. The days are gone when the engagement quality control reviewer would be call in to a planning meeting and would not be seen again until two days prior to sign-off. Some firms have very conservative EQCR policies and require them on all, or virtually all, assurance engagements. With these expanded requirements for the involvement of an EQCR it may be time to rethink these approaches.
- If you are a part of a network you will need to watch this new proposed standard. You will be required to evaluate the quality and effectiveness of the network and the services or resources being provided. We see this as one of the most significant changes to member network assurance firms that were compliant with CSQC 1.
Firms that have not needed to comply with CSQC 1 in the past will have the most significant changes to make. Although all non-assurance firms follow some sort of standard of quality management in order to comply with the code of professional conduct as well as internal standards, there tends to be little formality in the documentation of the policies and procedures. If you work within a non-assurance firm these are the key changes that you will need to consider:
- Documenting the quality management manual will require a significant time commitment. This will be a new process and it may be worth getting external assistance when drafting an appropriate quality management manual.
- If you have read the exposure draft, you are most likely wondering how to interpret the scalability of the new standards. The following questions will likely need to be considered: are all compilations alike? Are some ‘riskier’ than others? Should certain engagements be subject to more rigorous controls in the firm’s quality management process?
- Implementation of client acceptance or continuance procedures is required. There must be sufficient and appropriate information of the client and the nature and circumstances of the engagement to base these decisions.
- Some level of continuous monitoring will be required internally. This was formally referred to as annual or ongoing monitoring and can be completed in-house.
- Completed file monitoring will need to be completed on a cyclical basis (currently interpreted as a minimum 3-year cycle) by an independent individual. For sole practitioners this will likely result in an additional expense to have a consultant perform your monitoring.
Although exposure drafts may be altered, it is inevitable that changes are coming. It is better to get ahead of the changes and start to make updates to your processes so that your firm is not stuck trying to implement firm wide changes in a narrow transition period. If you are only performing compilation engagements, your world is going to change. The new compilation standard plus the introduction of quality management standards will have your head spinning if significant upgrades are not made over the next couple of years in anticipation of these standards. The good news is implementation dates are looking into 2021 and beyond; there is no need to panic just yet.
How can Clearline Consulting help?
Clearline Consulting provides practitioners and their staff with the tools, training and advice they need to succeed and build thriving accounting firms. We provide file monitoring, professional development courses, staff training, assistance with the update of quality control / management manuals and customized consulting solutions. If you would like to discuss an implementation plan which will spread the workload over two to three years or schedule us to update or create a quality control / management manual or conduct monitoring of your engagement files please contact us.