NEU CPA REVIEW -RESA- THE REVIEW SCHOOL OF ACCOUNTANCY-AUDITING THEORY-SY 22-23

QUALITY MANAGEMENT
What is ISQM1 (International Standards on Quality Management 1)?

ISQM1 is a more proactive and tailored approach to managing quality, focused on achieving quality
objectives through identifying risks to those objectives and responding to the risks. It deals with a firm’s
responsibilities to design, implement and operate a system of quality management (SOQM) for audits or
reviews of financial statements or other assurance or related services engagements. ISQM 1 promotes
integrating quality management into the culture of the firm, the firm’s strategy, operational activities, and
business processes.
ISQM 1 - - requires the firm to design, implement and operate a SOQM with due consideration to the eight
components of quality management to manage the quality of engagements performed by the firm. The
firm’s SOQM creates an environment that enables and supports engagement teams in performing quality
engagements.

What are the eight components of quality management?

1. The firm’s risk assessment process - - A process established by the firm as part of the SOQM.

• The process the firm is required to follow in implementing the risk-based approach to quality
management.
• Consists of establishing quality objectives, identifying and assessing quality risks to the achievement of
the quality objectives and designing and implementing responses to address the assessed quality risks.

The firm’s risk assessment process - - is the process that is used to establish quality objectives, identify and
assess quality risks, and design and implement responses. It applies to the other components (except for
monitoring and remediation). A risk-based approach helps the firm tailor the SOQM to the firm’s
circumstances, as well as the circumstances of the engagements performed by the firm. It also helps the
firm effectively manage quality by concentrating on what matters most, given the nature and circumstances
of the firm and the engagements it performs.

2. Governance and leadership - - Establishes the environment in which the SOQM operates.
• Deals with matters such as the firm’s culture, leadership responsibility, and accountability, the firm’s
organizational structure, assignment of roles and responsibilities, and resource planning and
allocation.

3. Relevant ethical requirements - - A component fundamental to engagement performance.

• Deals with fulfilling relevant ethical requirements by the firm and its personnel.
• Also deals with relevant ethical requirements to the extent that they apply to others external to the
firm

4. Acceptance and continuance of client relationships and specific engagements - - A component fundamental
to engagement performance.
• Deals with the firm’s judgments about whether to accept or continue a client relationship or specific
engagement.

5. Engagement performance - - A component fundamental to engagement performance.

• Deals with the firm’s actions to promote and support the consistent performance of quality
engagements, including through direction, supervision, and review, consultation, and differences of
opinion.
• Includes how the firm supports engagement teams in exercising professional judgment and, when
applicable to the nature and circumstances of the engagement, exercising professional skepticism

6. Resources - - Enables operation of other components

• Deals with obtaining, developing, using, maintaining, allocating, and assigning resources in a timely
manner to enable the design, implementation, and operation of the SOQM.

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• Includes technological, intellectual, and human resources and addresses service providers. Resources are
needed to support other components, for example: (a) Technological resources in the form of IT
applications may be needed to facilitate the approval of client relationships or specific engagements at
appropriate levels within the firm. (b) Manuals and guides containing the provisions of the relevant
ethical requirements (intellectual resources) that may be needed to support an understanding of the
relevant ethical requirements.
7. Information and communication - - Enables operation of other components.
• Deals with obtaining, generating, or using information regarding the SOQM, and communicating
information within the firm and to external parties on a timely basis to enable the design,
implementation, and operation of the SOQM.
Information and communication are needed to support other components, for example:
• Information is needed to facilitate the appropriate assignment of personnel to engagements.
• Information is needed to support the firm’s judgments about the acceptance and continuance of client
relationships and specific engagements.
• Communication of the relevant ethical requirements is necessary to ensure that personnel is aware of
their responsibilities regarding relevant ethical requirements.

8. Monitoring and remediation process - - A process established by the firm as part of the SOQM
• The process that: o Provides the firm with relevant, reliable, and timely information about the design,
implementation, and operation of the SOQM; and o Addresses taking appropriate actions to respond
to deficiencies such that deficiencies are remediated on a timely basis.

The monitoring and remediation process monitors the entire SOQM, and therefore the monitoring
activities are undertaken for all of the components of the SOQM (including the risk assessment
process).

What are Quality Objectives?

Quality objectives are measurable goals relevant to enhancing the quality of services that would lead
to client satisfaction and are consistent with the firm’s quality policy. ISQM 1 requires the firm to establish
a quality objective that “The firm demonstrates a commitment to quality through a culture that exists
throughout the firm.” It further addresses the need for the culture to recognize and reinforce “the
importance of quality in the firm’s strategic decisions and actions, including the firm’s financial and
operational priorities.” Accordingly, the firm’s strategy, decisions, goals, and resource management needs
to reflect a commitment to quality.

There are no quality objectives for the components: the firm’s risk assessment process and the monitoring
and remediation process because these components are processes, and ISQM 1 sets out specific
requirements of how these processes need to be applied. The quality objectives in each of the six
components aid the firm in properly identifying and assessing quality risks because the quality objectives
focus the firm more specifically on what needs to be achieved and what could go wrong in achieving the
quality objectives.
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ISQM 1 includes the objective of the firm in managing quality, which is - - to design, implement and operate
a system of quality management (SOQM). Like any system of internal control, the SOQM needs to have a
purpose. The purpose is important for designing the SOQM and determining whether the SOQM is effective
(i.e., whether it achieved its purpose). Therefore, paragraph 14 of ISQM 1 includes both the objective of the
firm and the objective of the SOQM.

What is Quality Risk?

These are risks that could adversely affect the achievement of the quality objectives. However, not
all risks are considered quality risks in ISQM 1 because it is not reasonable or practicable for the
firm to identify and assess every possible risk and to design and implement responses for every
risk.
ISQM 1 aims to focus the firm on risks that have the greatest impact on achieving the quality
objectives so that those risks are appropriately addressed by the firm. The definition of quality risk
in ISQM 1 includes a threshold for what risks are considered quality risks.

A risk qualifies as a quality risk when it meets both criteria in the definition:
--The risk has a reasonable possibility of occurring.
--The risk has a reasonable possibility of individually, or in combination with other risks, adversely
affecting the achievement of one or more quality objectives

In identifying a quality risk, think about the conditions, events, circumstances, actions, or inaction that may
have an adverse impact on your firm’s ability to achieve its quality objectives. Take, for example, a quality
objective related to governance and leadership.

Other requirements of ISQM1:

The other requirements in ISQM 1 that address specific topics in addition to the eight components deal
with:

• Assigning responsibilities related to the SOQM;

• Specified responses that the firm is required to design and implement;
• Circumstances when the firm belongs to a network and uses network requirements or network services
in its SOQM;
• The annual evaluation of the SOQM by leadership, and leadership’s performance evaluations; and
• Documentation.

The firm, regardless of its size, is required to comply with ISQM 1, and if applicable, ISQM 2. Engagement
teams performing audits of financial statements are required to comply with ISA 220 (Revised). For some
aspects of the SOQM, a smaller firm may determine that there is no need to establish firm-wide responses,
and the firm may instead design and implement responses that operate concurrently with the engagement-
level quality management.

This means that by December 15, 2022, the firm is expected to: (a) Establish the quality objectives, identify
and assess the quality risks, and design and implement the responses; and (b) Design and implement the
monitoring activities. The operation of the responses and monitoring activities is only required to
commence from December 15, 2022, onwards. Early adoption of ISQM 1 is permitted; however, the firm is
required to adopt all three quality management standards at the same time.

ISQM 2 (Engagement Quality Reviews) deals with:

a. The appointment and eligibility of the engagement quality reviewer; and

b. The engagement quality reviewer’s responsibilities relating to the performance and
documentation of an engagement quality review.

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What is an engagement quality review?
An engagement quality review is an objective evaluation of the significant judgments made by the
engagement team and the conclusions reached thereon. The engagement quality reviewer’s evaluation
of significant judgments is performed in the context of professional standards and applicable legal and
regulatory requirements. However, an engagement quality review is not intended to be an evaluation of
whether the entire engagement complies with professional standards and applicable legal and
regulatory requirements or with the firm’s policies or procedures.

Who is an engagement quality reviewer?

Engagement quality reviewer – is a partner, other individuals in the firm, or an external individual,
appointed by the firm to perform the engagement quality review.

What are the qualifications of an engagement quality reviewer?

The firm shall establish policies or procedures that set forth the criteria for eligibility to be appointed as
an engagement quality reviewer. Those policies or procedures shall require that the engagement quality
reviewer is not be a member of the engagement team and:
a. Has the competence and capabilities, including sufficient time and the appropriate authority to
perform the engagement quality review;
b. Complies with relevant ethical requirements, including in relation to threats to objectivity and
independence of the engagement quality reviewer; and
c. Complies with provisions of law and regulation, if any, that are relevant to the eligibility of the
engagement quality reviewer. (Ref: Para. A16)

Matters that the firm may consider in determining that an individual has the necessary competence to perform
an engagement quality review include:
▪ An understanding of professional standards and applicable legal and regulatory requirements and
the firm’s policies or procedures relevant to the engagement;
▪ Knowledge of the entity’s industry;
▪ An understanding of, and experience relevant to, engagements of a similar nature and complexity;
and
▪ An understanding of the responsibilities of the engagement quality reviewer in performing and
documenting the engagement quality review, which may be attained or enhanced by receiving
relevant training from the firm.

Multiples Choice Questions:

1. Evaluate the following statements:
I. Under ISQM 1, firms are required to design a system of quality management to manage the quality of
engagements performed by the firm.
II. Under ISQM 1, firms are required to have their system of quality management designed and
implemented by December 31, 2023.
A. True, False
B. True, True
C. False, True
D. True, True

2. The following are the components of ISQM 1, except

A. Remediation of Violations and Monitoring
B. Relevant ethical requirements
C. Governance and Leadership
D. Acceptance and Continuance of Client Relationship

3. The process that provides the firm with relevant, reliable, and timely information about the design,
implementation, and operation of the system of quality management (or SOQM) and addresses taking
appropriate actions to respond to deficiencies such that deficiencies are remediated on a timely basis.
A. Monitoring and remediation process
B. Risk assessment process

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C. Governance& Leadership and Resources
D. Acceptance and Continuance of Client Relationship

4. An ISQM component that deals with matters such as the firm’s culture, leadership responsibility, and
accountability, the firm’s organizational structure, assignment of roles and responsibilities, and resource
planning and allocation.
A. Governance and Leadership
B. Relevant Ethical Requirements
C. Monitoring and remediation process
D. Risk assessment process
5. This is a mechanism that creates an environment that enables and supports engagement teams in
performing quality engagements.
A. System of Quality Management (or SOQM)
B. International Standard on Quality Management 1
C. International Standard on Quality Management 2
D. International Standard on Quality Control

6. The following are true statements about ISQM 1, except

A. Only large firms with adequate resources, are required to comply with ISQM 1.
B. For some aspects of the SOQM, a smaller firm may determine that there is no need to
establish firm-wide responses, and the firm may instead design and implement responses
that operate concurrently with the engagement-level quality management.
C. The ISQM has eight (8) interrelated components.
D. If the firm currently complies with ISQC 1, it will already have policies and procedures in
place that may still be relevant and appropriate for the firm’s new SOQM, or may need to
be revised or enhanced to be appropriate for the new SOQM.

7. Engagement quality reviews from part of the firm’s system of quality management. ISQM2 builds upon
ISQM1 by including the following specific requirements, except:
A. The appointment and eligibility of the engagement quality reviewer.
B. The performance of the engagement quality review.
C. The documentation of the engagement quality review
D. The designation of the engagement partners as quality reviewers.

8. The quality objectives in each component aid the firm in properly identifying and assessing quality risks.
Quality objectives must be defined in each of the following components, except on:
A. Governance and leadership
B. Risk assessment process
C. Relevant ethical requirements
D. Engagement performance

9. The three quality management standards (ISQM1, ISQM2, and PSA 220 -Revised) will be effective by
December 15, 2022. Firms are expected to accomplish the following by the said date, except:
A. Establish the quality objectives, identify and assess the quality risks, and design and
implement the responses.
B. Design and implement the monitoring activities.
C. Adopt all three quality management standards at the same time.
D. Appoint the firm’s engagement quality reviewer.

10. Resources, as a component of ISQM1, enables the operation of other components and pertains to the
following, except:
A. Obtaining, developing, using, maintaining, allocating, and assigning the firm’s resources in a
timely manner.
B. The process of designing, implementing, and operating the system of quality management.
C. The use of technological resources in the form of IT applications to facilitate the approval of
client relationships.
D. The development and use of manuals and guides containing relevant ethical requirements.

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11. Information and communication, as a component of ISQM1, pertains to the following, except:
A. Obtaining, generating, or using information regarding the system of quality management, and
communicating information within the firm and to external parties.
B. Information needed to facilitate the appropriate assignment of engagement quality
reviewers to engagements.
C. Information needed to support the firm’s judgments about the acceptance and continuance
of client relationships.
D. Communication of the relevant ethical requirements necessary to ensure that personnel is
aware of their responsibilities regarding relevant ethical requirements.

12. ISQM1 aims to focus the firm on risks that have the most significant impact on achieving the quality
objectives (i.e., quality risk). A risk qualifies as a quality risk when it meets the following criteria:

I. The risk has a reasonable possibility of occurring.

II. The risk has a reasonable possibility of individually, or in combination with other risks, adversely
affecting the achievement of one or more quality objectives.
A. Only statement I is correct.
B. Both statements I and II are correct.
C. Only statement II is correct
D. Both statements I and II are incorrect.

13. Scalability, and tailoring the firm’s system of quality management have been embedded in the requirements
of ISQM1 in several ways. The following are the fundamental ways of determining scalability, except:
A. The quality objectives are outcomes-based, and the firm determines how to achieve the
quality based on the nature and circumstances of the firm.
B. The quality risks are tailored to the firm, and in identifying and assessing quality risks, the firm
focuses on understanding conditions, events, circumstances, actions or inactions that relate
to the nature and circumstances of the firm and its engagements.
C. There are only a limited number of required specified responses, and the firm is expected to
design and implement responses that are responsive to the firm’s quality objectives.
D. The requirements for the monitoring and remediation process set out what the firm is
expected to have to address monitoring and remediation, and how the firm implements that
process is tailored to the firm’s circumstances.

14. In circumstances when the network performs monitoring activities relating to the firm’s system of quality
management, the firm shall:
A. determine the effect of the monitoring activities performed by the network on the nature,
timing and extent of the firm’s monitoring activities performed.
B. determine the firm’s responsibilities in relation to the monitoring activities, including any
related actions by the firm.
C. obtain the results of the monitoring activities from the network in a timely manner.
D. All of the above.

15. In preparing documentation of its system of quality management, the firm shall include:
A. the firm’s quality objectives and quality risks.
B. a description of the responses and how the firm’s responses address the quality risks.
C. the basis for the conclusion reached.
D. All of the above.

16. Evaluate the following statements:

Statement 1: The performance of an engagement quality review for an audit of group financial statements
may involve additional considerations for the individual appointed as the engagement quality
reviewer for the group audit, depending on the size and complexity of the group. (True)

Statement 2: The firm’s policies or procedures may specify the individuals in the firm to be notified if the
engagement quality reviewer has unresolved concerns that the significant judgments made
by the engagement team, or the conclusions reached thereon, are not appropriate. (True)

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A. Only statement 1 is correct. C. Only statement 2 is correct.
B. Both statements are correct. D. Both statements are incorrect.

17. The performance and notification of the completion of the engagement quality review may be documented
in a number of ways. Which of the following is not among them?
A. The engagement quality reviewer may document the review of engagement documentation
electronically in the IT application for the performance of the engagement.
B. The engagement quality reviewer may document the review through means of a
memorandum.
C. The engagement quality reviewer’s procedures may also be documented in the minutes of
the engagement team’s discussions where the engagement quality reviewer was present.
D. All of the above are acceptable ways of documentation.

18. Evaluate the following statements:

Statement 1: It may be appropriate for the engagement team, in the context of the firm’s policies or
procedures, to consult outside the firm where the firm lacks appropriate internal resources.

Statement 2: The engagement team are not allowed to seek for advisory services provided by firms,
professional and regulatory bodies or commercial organizations that provide relevant quality
control services.

A. Only statement 1 is correct. C. Only statement 2 is correct.

B. Both statements are correct. D. Both statements are incorrect.

19. In some circumstances, the engagement partner may not be satisfied with the resolution of the difference
of opinion. In such circumstances, appropriate actions for the engagement partner may include:
I: Seeking legal advice
II: Withdrawing from the audit engagement, when withdrawal is possible under applicable law
or regulation
A. Only I C. Only II
B. Both I and II D. Neither I nor II

20. Which of the following is/are should be communicated by the individual(s) assigned operational
responsibility for monitoring and remediation to the individual(s) assigned ultimate responsibility and
accountability for the system of quality management?
I. A description of the monitoring activities performed.
II. The identified deficiencies, including the severity and pervasiveness of such deficiencies.
III. The remedial actions to address the identified deficiencies.
A. I only C. Both I and II
B. II only D. I, II, and III

21. Evaluate the following statements:

I. The firm shall design and implement remedial actions to address identified deficiencies that
are responsive to the results of the root cause analysis.
II. The firm shall design and perform monitoring activities to provide a basis for the
identification of deficiencies.
III. The firm shall include the inspection of completed engagements in its monitoring activities
and shall determine which engagements and engagement partners to select.
A. I only C. Both I and II
B. II only D. I, II, and III

22. Which of the following shall be included in the firm’s response to circumstances that indicate an
engagement team omitted a required audit procedure or the report issued may be inappropriate?

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I. Take appropriate action to comply with relevant professional standards and applicable legal and
regulatory requirements
II. When the report is considered to be inappropriate, consider the implications and take appropriate
action, but avoid obtaining legal advice.
A. I only C. Both I and II
B. II only D. Neither I nor II

23. Evaluate the following statements regarding a firm system of quality management.

I.
The evaluation of the firm’s system of quality management shall be undertaken as of a point in time
and performed at least annually.
II. The firm shall undertake periodic performance evaluations of the individual(s) assigned ultimate
responsibility and accountability for the system of quality management, and the individual(s) assigned
operational responsibility for the system of quality management.
Which is/are the primary purpose(s) of the SOQM?
A. I only
B. II only
C. Both I and II
D. Neither I nor II

24. Which of the following should be included in the firm’s documentation of its system of quality
management?

I. The identification of the individual(s) assigned ultimate responsibility and accountability for the system
of quality management and operational responsibility for the system of quality management;
II. The firm’s quality objectives and quality risks
III. A description of the responses and how the firm’s responses address the quality risks;

A. I only
B. II only
C. Both I and II
D. I, II and III

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