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The FRC’s new requirements of auditors

Author: Syedur Rahman  21 July 2021
2 min read

Syed Rahman of Rahman Ravelli outlines the Financial Reporting Council’s new management standards for auditing firms.

The Financial Reporting Council (FRC) has issued revised quality management standards for audit firms. 

The standards relate to firms’ responsibilities to design, implement and operate a system of quality management. They are:

  • International Standard on Quality Management (UK) 1:  Quality Management For Firms That Perform Audits Or Reviews Of Financial Statements, Or Other Assurance Or Related Services Engagements.
  • International Standard on Quality Management (UK) 2: Engagement Quality Reviews.
  • International Standard on Auditing (UK) 220 (Revised July 2021): Quality Control For An Audit Of Financial Statements

The FRC believes these standards will ensure a proactive approach to identifying and responding to risks to quality. The standards become effective for audits of financial statements for periods beginning on or after 15 December 2022.

Background

In December 2020, the FRC issued a public consultation on the proposal to adopt International Standard on Quality Management (UK) 1 Quality Management For Firms That Perform Audits Or Reviews Of Financial Statements, Or Other Assurance Or Related Services Engagements and International Standard on Quality Management (UK) 2 Engagement Quality Reviews. The consultation also covered the proposed revision of International Standard on Auditing (UK) 220 (Revised November 2019) Quality Control For An Audit Of Financial Statements. This was prompted by recent revisions to the international standards on auditing issued by the International Auditing and Assurance Standards Board (IAASB). The consultation closed on 19 March 2021.

The new approach arising from the new standards is expected to:

  • Ensure that quality management is tailored to the nature and circumstances of each firm and the work it performs.
  • Promote a proactive response from firms regarding the management or mitigation of risks.
  • Place an increased emphasis on monitoring and promote improvement.
  • Promote an ongoing process of improvement.

The Main Changes

ISQM (UK) 1 introduces a new approach to quality management and emphasises the responsibility of a firm for proactively managing quality. It requires firms to design and implement a risk assessment process to establish quality objectives, identify and assess quality risks and implement responses to address those risks.

Systems of quality management in compliance with this are required to be designed and implemented by 15 December 2022. Evaluation of the system of quality management required by paragraph 53-54 of this ISQM (UK) is required to be performed within one year following 15 December 2022.

ISQM (UK) 2 revises the criteria for appointing an individual as an engagement quality reviewer, enhances their responsibilities and widens the circumstances where an engagement quality review is required. This is effective for audits and reviews of financial statements for periods beginning on or after 15 December 2022 and for other assurance or related services engagements beginning on or after 15 December 2022.

ISA (UK) 220 has undergone substantial revision, with a clear description now having been made about the responsibilities of the engagement partner and engagement team in relation to managing and achieving quality at the engagement level. There is also an increased focus on taking into account the nature and circumstances of the audit engagement. It is effective for audits of financial statements for periods beginning on or after 15 December 2022.

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Syedur Rahman

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Syedur Rahman is known for his in-depth experience of serious fraud, white-collar crime and serious crime cases, as well as his expertise in worldwide asset tracing and recovery, civil recovery, cryptocurrency and high-stakes commercial disputes.

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