A Quick Guide to the Differences between ISQC 1 and ISQM 1

ISQM 1 – Succeeding ISQC 1

ISQM 1, or International Standard on Quality Management 1, represents a paradigm shift in how audit and assurance firms approach the management of quality for the services they provide. This new standard has been introduced to replace ISQC 1, which focused on quality control. The change from a control to a management perspective signifies an evolution from reactive quality checks to a proactive, comprehensive, and risk-based approach to quality management.

The significance of ISQM 1 in replacing ISQC 1 lies in its broader, more dynamic framework for quality management, which aligns with the complexities of today’s business and regulatory landscapes. ISQM 1 mandates firms to establish a system of quality management that includes policies and procedures addressing eight components of quality management, ranging from the firm’s risk assessment processes to monitoring and remediation activities.

One of the central tenets of ISQM 1 is the risk-based approach, requiring firms to identify and respond to risks that could affect the quality of their engagements. This approach encourages firms to consider both the nature and circumstances of their engagements and tailor their quality management efforts accordingly. It’s a shift that acknowledges the diverse and nuanced challenges faced by different firms, promoting scalability and flexibility.

Moreover, ISQM 1 places a greater emphasis on the role of leadership and governance in embedding a quality-oriented culture within the firm. Leaders are now explicitly tasked with promoting an environment where quality is foundational and where all personnel understand and are engaged in their role in maintaining quality.

In terms of practical changes, ISQM 1 demands more rigorous processes for monitoring the effectiveness of the quality management system and for taking timely and appropriate actions when issues are identified. This continuous improvement aspect is crucial in a profession where standards and regulatory demands are ever-evolving.

Key Updates and Changes from ISQC 1 to ISQM 1Risk-Based Approach:
ISQM 1 introduces a risk-based approach to quality management, requiring firms to proactively identify and respond to risks to quality at the firm and engagement levels.
Quality Management Components:
The new standard specifies eight components of quality management, whereas ISQC 1 had five elements of quality control. This expansion acknowledges the complexity of managing audit quality.
Leadership and Governance:
ISQM 1 places a greater emphasis on the role of leadership and governance in promoting quality, including a culture that supports quality within the firm.
Monitoring and Remediation:
Under ISQM 1, firms are required to establish a more rigorous process for monitoring the system of quality management and taking remedial action when deficiencies are identified.
Engagement Quality Reviews:
The new standard introduces more robust requirements for engagement quality reviews, including the eligibility criteria for engagement quality reviewers.
Resources:
ISQM 1 has expanded on the nature of resources, including technological and intellectual resources, and requires firms to consider the availability, sufficiency, and appropriateness of resources.
Information and Communication:
There is a greater focus on the role of information and communication in supporting the system of quality management.
Scalability:
ISQM 1 emphasizes that the system of quality management should be scalable to the size and nature of the firm and the engagements it performs.
New Terminologies in ISQM 1Quality Objectives:
ISQM 1 introduces specific objectives that the firm’s system of quality management should achieve, reflecting a shift from the more procedural focus of ISQC 1.
Quality Risks:
This term relates to the new risk-based approach, referring to risks that can adversely affect the quality of engagements.
Quality Management:
The shift from ‘quality control’ to ‘quality management’ signifies a more proactive and comprehensive approach to achieving quality in audit engagements.
Responses to Quality Risks:
ISQM 1 requires firms to design and implement responses that are appropriate to the identified and assessed quality risks.
Relevant Ethical Requirements:
This term encompasses all ethical requirements that are relevant to the firm, replacing the more narrow focus on independence that was prevalent in ISQC 1.
Engagement Quality Reviewer:
ISQM 1 provides a detailed description of the role and responsibilities of the engagement quality reviewer, replacing the term “engagement quality control review” used in ISQC 1.

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