AT.

11 – System of Quality Management

Learning Objectives:

 Understand ISQM principles and objectives.

 Identify key ISQM components and requirements.
 Explain the importance of quality management in auditing.
 Analyze ISQM's impact on audit processes.
 Assess ISQM's effects on audit quality.

References:
ISQM 1 – Quality Management for Firms that Perform Audits or Reviews of Financial Statements,
or Other Assurance or Related Services Engagements
ISQM 2 – Engagement Quality Reviews
ISA 220 – Quality Management for an Audit of Financial Statements

Notes:

PSQM 1 - Quality Management for Audit and Assurance Engagements

1. This standard outlines a firm's duty to establish and maintain a quality management
system for audit, review, and assurance engagements.
2. The objective is to ensure compliance with professional standards, legal, and regulatory
requirements, and to issue appropriate engagement reports.
3. Eight components:
 The firm's risk assessment process
 Governance and leadership
 Relevant ethical requirements
 Acceptance and continuance of client relationships and specific engagements
 Engagement performance
 Resources
 Information and communication and
 The monitoring and remediation process.

1. The Firms’ Risk Assessment Process

a. Design and implement a risk assessment process
b. Establish quality objectives
c. Identify and assess quality risks
d. Design and implement responses to address the risks
2. Governance and Leadership
a. Quality Objectives:
i. Demonstrate commitment to quality through firm-wide culture
emphasizing:
1. Serving the public interest
2. Professional ethics, values, and attitudes
3. Personnel responsibility for quality
4. Importance of quality in strategic decisions
ii. Leadership accountability for quality
iii. Demonstrate commitment to quality through actions and behaviors
iv. Ensure appropriate organizational structure, roles, responsibilities, and
authority for quality management system
v. Plan and obtain resources, including financial, to support quality
commitment
3. Relevant ethical requirements
a. Quality Objectives:
i. Firm and Personnel:
1. Understand relevant ethical requirements
2. Fulfill responsibilities related to ethical requirements
ii. Others (Network, Firms, Individuals, Service Providers):
1. Understand relevant ethical requirements
 2. Fulfill responsibilities related to ethical requirements
4. Acceptance and Continuance of Client relationships and Specific Engagements
a. Quality Objectives:
i. Ensure appropriate judgments for client acceptance or continuance based
on:
1. Information gathered about the engagement and client integrity
2. Firm's ability to perform according to standards and requirements
ii. Prevent financial and operational priorities from influencing inappropriate
judgments
5. Engagement Performance
a. Quality Objectives:
i. Ensure engagement teams understand and fulfill their responsibilities
ii. Provide appropriate direction, supervision, and review of work performed
iii. Exercise professional judgment and skepticism as needed
iv. Undertake consultation on difficult or contentious matters
v. Resolve differences of opinion promptly
vi. Maintain timely and appropriate engagement documentation
6. Resources
a. Quality Objectives:
i. Obtain, develop, and allocate resources timely and appropriately
ii. Ensure resources are used, maintained, and assigned effectively
iii. Enable the design, implementation, and operation of the quality
management system
b. Human Resources:
i. Ensure personnel have the necessary competence and capabilities for:
1. Consistent quality performance in engagements
2. Responsibilities related to the quality management system
ii. Personnel demonstrate commitment to quality through actions and
behaviors
iii. Obtain external personnel when internal resources are insufficient
iv. Assign competent team members, including engagement partners
v. Assign individuals with appropriate competence and capabilities to quality
management activities
c. Technological Resources:
i. Obtain, develop, implement, and maintain appropriate technological
resources for quality management system and engagements.
d. Intellectual Resources:
i. Obtain, develop, implement, and maintain appropriate intellectual
resources for quality management system and consistent engagement
performance.
e. Service Providers:
i. Ensure human, technological, or intellectual resources from service
providers are appropriate for quality management system and engagement
performance.
7. Information and Communication
a. Quality Objectives:
i. Obtain, generate, and use information regarding the quality management
system
ii. Communicate information within the firm and to external parties timely
iii. Enable the design, implementation, and operation of the quality
management system
b. Information System:
i. Identify, capture, process, and maintain relevant and reliable information
for quality management.
c. Firm Culture:
i. Recognize and reinforce personnel responsibility to exchange information
internally.
d. Internal Communication:
i. Exchange relevant and reliable information within the firm and with
engagement teams.
 e. External Communication:
i. Communicate relevant and reliable information to external parties.
8. Monitoring and Remediation Process:
a. Provide relevant, reliable, and timely information about the quality management
system.
b. Take appropriate actions to address identified deficiencies promptly.
c. Designing and Performing Monitoring Activities:
i. Design and conduct monitoring activities to identify deficiencies.
ii. Include inspection of completed engagements in monitoring, selecting
engagements and partners.
d. Evaluating Findings and Identifying Deficiencies:
i. Evaluate findings to determine deficiencies, including in monitoring and
remediation.
ii. Assess severity and pervasiveness of deficiencies, design and implement
remedial actions.

Evaluating the System of Quality Management:

 The designated individual(s) evaluate the system annually.

 Periodic performance evaluations of responsible individuals are conducted.

Documentation:

 Prepare documentation to support understanding, implementation, and evidence of the

system.
 Establish retention period for monitoring and compliance with legal requirements.

PSQM 2 – Engagement Quality Reviews

1. Engagement Quality Review:

a. Objective evaluation of the significant judgments made by the engagement team
and the conclusions reached thereon, performed by the engagement quality
reviewer and completed on or before the date of the engagement report.
2. PSQM 1 Requirements:
a. Required for audits of financial statements of listed entities;
b. Required for audits or other engagements mandated by law or regulation;
c. Applicable when the firm determines an engagement quality review is necessary
to address one or more quality risks.
3. PSQM 2:
a. Addresses the appointment and eligibility of the engagement quality reviewer;
b. Defines the responsibilities of the engagement quality reviewer regarding the
performance and documentation of an engagement quality review.
4. Review – conducted at the engagement level by the engagement quality reviewer on
behalf of the firm.
5. Policies or Procedures for Engagement Quality Reviewer (EQR) Eligibility:
a. Establish criteria for EQR appointment.
b. EQR should not be part of the engagement team.
c. Criteria include:
i. Competence, capabilities, and sufficient time.
ii. Compliance with ethical requirements.
iii. Compliance with relevant laws and regulations.
6. Engagement Quality Review (EQR) Process:
a. Read and Understand:
i. Information from the engagement team about the engagement and entity.
ii. Firm's monitoring and remediation process, focusing on identified
deficiencies.
b. Discuss significant matters and judgments with the engagement partner and
team.
c. Review selected engagement documentation related to significant judgments.
d. Evaluate basis for:
i. Fulfillment of ethical requirements regarding independence.
ii. Consultation on difficult matters and resulting conclusions.
iii. Sufficiency and appropriateness of engagement partner's involvement.
 e. Review:
i. Financial statements and auditor's report (for audits).
ii. Financial statements or financial information (for reviews).
iii. Engagement report and subject matter information (for other
engagements).
7. Engagement Quality Review Feedback:
a. Notify engagement partner of concerns regarding significant judgments or
conclusions.
8. Completion of Engagement Quality Review:
a. Engagement quality reviewer ensures PSQM 2 requirements are met.
b. If complete, notify engagement partner.
9. Documentation:
a. Policies and procedures for engagement quality reviewer's documentation
responsibility.
b. Documentation includes:
i. Names of reviewer and assistants.
ii. Identification of reviewed engagement documentation.
iii. Basis for determination of PSQM 2 requirements fulfillment and
completion date.

PSA 220 - Quality Management for an Audit of Financial Statements

1. PSA Objective - Manage engagement-level quality to ensure:

i. Compliance with professional standards and laws.
ii. Appropriateness of issued audit reports.
2. Engagement Partner Responsibility - Ultimate responsibility for PSA compliance.
3. Focus - Auditor's specific responsibilities for quality management at engagement level.
4. Leadership Responsibilities for Managing and Achieving Quality on Audits
a. Engagement partner ensures quality on the audit, fostering a culture aligned with
the firm's expectations.
5. Relevant Ethical Requirements, Including Those Related to Independence
a. Engagement partner understands and ensures compliance with relevant ethical
standards.
b. Address any threats to compliance promptly.
6. Acceptance and Continuance of Client Relationships and Audit Engagements
a. Ensure adherence to firm policies for accepting and continuing client relationships
and audit engagements.
b. Promptly communicate any information affecting acceptance or continuance
decisions to the firm.
7. Engagement Resources:
a. Ensure sufficient and appropriate resources are provided to the engagement team
promptly.
b. Verify that team members have the necessary competence and time to perform
the engagement effectively.
c. Responsible use of allocated resources according to the engagement's nature and
requirements.
8. Engagement Performance:
a. Direction, Supervision, and Review:
i. Direct and supervise the engagement team, reviewing their work.
ii. Review audit documentation, focusing on significant matters, judgments,
and other relevant aspects.
b. Consultation:
i. Oversee consultation on difficult or contentious matters and other
necessary issues.
ii. Ensure appropriate consultation occurs and that resulting conclusions are
implemented.
c. Engagement Quality Review:
i. Confirm the appointment of an engagement quality reviewer.
ii. Collaborate with the reviewer and discuss significant matters and
judgments.
 iii. Do not date the auditor's report until the completion of the engagement
quality review.
9. Monitoring and Remediation:
a. Obtain an understanding of information from the firm's monitoring and
remediation process, including network-wide data.
b. Assess the relevance of this information to the audit engagement and take
necessary action.
c. Stay vigilant throughout the audit for relevant information and communicate it to
those overseeing the process.
10. Documentation:
a. Discussions and conclusions regarding compliance with ethical requirements and
client acceptance.
b. Details of consultations during the audit and actions taken based on those
consultations.
c. Confirmation of completion of the engagement quality review, if applicable, by the
date of the auditor's report.
1. This refers to the system designed, implemented and operated by a firm to provide the
firm with reasonable assurance that:
(i) The 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
(ii) Engagement reports issued by the firm or engagement partners are appropriate in the
circumstances.

A. Internal controls
B. Control environment
C. System of quality management (SoQM)
D. Assurance standards

2. The nature, timing and extent of an audit firm’s quality control policies and procedures
depend on

The Nature of the CPA Appropriate Cost-

The CPA Firm’s Size
Firm’s Practice Benefit Considerations
A. Yes Yes No
B. Yes Yes Yes
C. No Yes No
D. Yes No Yes

3. The firm shall establish and maintain a system of quality control that includes policies and
procedures the following elements, except

A. Leadership responsibilities for quality within the firm

B. Relevant ethical requirements
C. Acceptance and continuance of client relationships and specific engagements
D. None of the above.

4. Which of the following are elements of a CPA firm’s SoQM that should be considered in
establishing its quality control policies and procedures?
Human Resources Monitoring Engagement Performance
A. Yes Yes No
B. Yes Yes Yes
C. No Yes Yes
D. Yes No Yes

5. The firm shall establish policies and procedures designed to promote an internal culture
recognizing that quality is essential in performing engagements. The firm’s leadership
includes the following:

Managing board of
Chief executive officer Chief financial officer
partners
A. Yes Yes Yes
B. Yes Yes No
C. Yes No Yes
D. No Yes Yes

6. Actions and messages that encourage a culture that recognizes and rewards high quality
work may be communicated through

A. Training seminars, meetings, formal or informal dialogue

B. Mission statements, newsletters, or briefing memoranda
C. Internal documentation and training materials, and in partner and staff appraisal
procedure
D. All of the above
7. The firm’s independence policies and procedures shall require

A. Engagement partners to provide the firm with relevant information about client
engagements
B. Personnel to promptly notify the firm of circumstances and relationships that create a
threat to independence
C. Accumulation and communication of relevant information to appropriate personnel to
maintain its compliance with independence requirements
D. All of the above.

8. The rotation of the engagement partner and the individuals responsible for engagement
quality control review, and, where applicable, others subject to rotation requirements, after
a specified period is required for

A. Audits of financial statements of listed entities

B. Audits of financial statements of public interest entities (PIE)
C. Both A and B
D. Neither A nor B

9. The firm shall establish policies and procedures for the acceptance and continuance of
client relationships and specific engagements, designed to provide the firm with
reasonable assurance that it will only undertake or continue relationships and
engagements where the firm has established the following, except

A. Is competent and capable to perform the engagement

B. Can comply with relevant ethical requirements
C. Has considered the integrity of the client, and does have information that would lead
it to conclude that the client lacks integrity
D. None of the above.

10. A firm obtained information that would have caused it to decline an engagement had the
information been available earlier. Actions available to the auditor include the following,
except

A. Report the information and its implications to the person(s) who appointed the CPA
B. Withdraw from the engagement
C. Withdraw from both the engagement and the client relationship
D. Continue the engagement as it would be unethical to withdraw from engagements
which have already started

11. Select the best answer:

1. Resources as a component of ISQM 1 provides that the firm shall establish the following
objectives that address appropriately obtaining, developing, using, maintaining, allocating
and assigning resources in a timely manner to enable the design, implementation and
operation of a system of quality management.

2. ISQM 1 - Resources Enhanced the discussion of the firm’s resources which includes 4
different components namely: 1. Human resources; 2. Technological resources; 3.
Intellectual resources; and 4. Service providers. This new guidance of the new standards
is the same as ISQC 1.

A. Statement 2 is true but statement 1 is false

B. Neither of the statement is true
C. Statement 1 is true but statement 2 is false
D. Both statements are true

12. The engagement team has engaged an Information Technology (IT) expert to assist in the
evaluation of operating effectiveness of the general IT controls. What is the requirement
for the core audit team in relation to the involvement of the expert?

A. Include an “other matter paragraph in the auditor’s report”

B. Evaluate the IT expert’s competence and capabilities
C. Replicate the work performed by the expert and document in the file
 D. Limit the expert’s work only to consultation to avoid confusion on intended users

13. Technological resources may serve several purposes within the firm, some of this may not
be related to SoQM. Which of the following are not part of the technological resources that
are relevant to the purpose of ISQM?

A. Those that are directly used in designing, implementing, or operating the firm’s system
of quality management;
B. Those that are used directly by client management teams in fulfilling the requirements
of the audit engagement
C. Those that are used directly by the engagement teams in the performance of the
engagement
D. Those that are resources that are essential to enabling the effective operation of the
above, such as, in relation to an IT application, the IT infrastructure and IT processes
supporting the IT application.

14. Supremo, a Partner of CME, VEPJ and Associates used a different independent Third
Party Pricing source during review and validation of fair value of equity securities of his
assigned client and departed to use the Firm’s approved pricing source. Which of the
following statements is incorrect:

A. Access to information sources (i.e. third party pricing sources) is an example of Intellectual
resources that the firm uses to enable the operation of the system of quality management
and promote consistency in the performance of engagements.
B. The Partner should have a formal consultation with the appropriate personnel in the Firm
before using a different third party pricing source.
C. The Partner can choose at his discretion any pricing source without consultation and
approval of appropriate personnel in the Firm, After all he is the person accountable for
this audit engagement.
D. Appropriate intellectual resources are obtained or developed, implemented, maintained,
and used, to enable the operation of the firm’s system of quality management and the
consistent performance of quality engagements, and such intellectual resources are
consistent with professional standards and applicable legal and regulatory requirements,
where applicable.

15. Select the best answer:

1. If the Firm is using an off-the-shelf system software, it’s acceptable to purely rely on
automatic software updates to ensure IT security.
2. The Firm should perform information security tests in developing, changing and
maintaining IT systems and tools prior to their release and on a regular basis as
appropriate.

A. Statement 2 is true but statement 1 is false

B. Neither of the statement is true
C. Statement 1 is true but statement 2 is false
D. Both statements are true

16. A CPA firm should establish procedures for conducting and supervising work at all
organizational levels to provide reasonable assurance that the work performed meets the
firm’s standards of quality. To achieve this goal, the firm most likely would establish
procedures for
A. Evaluating prospective and continuing client relationships. > A&C
B. Reviewing engagement working papers and reports.
C. Requiring personnel to adhere to the applicable independence rules. > Independence
D. Maintaining personnel files containing documentation related to the evaluation of
personnel. > Not the best answer

17. The following must be observed when assigning engagement teams

A. The identity and role of the engagement partner are communicated to the network firm
B. The engagement partner has the appropriate competence, capabilities, and authority
to perform the role
 C. The responsibilities of the engagement partner are clearly defined and communicated
to regulatory authorities
D. All of the above

18. Performance evaluation, compensation and promotion procedures give due recognition
and reward to the development and maintenance of competence and commitment to
ethical principles. Steps a firm may take in developing and maintaining competence and
commitment to ethical principles include

A. Making personnel aware of the firm’s expectations regarding performance and ethical
principles
B. Providing personnel with evaluation of, and counseling on, performance, progress and
career development
C. Helping personnel understand that advancement to positions of greater responsibility
depends, among other things, upon performance quality and adherence to ethical
principles, and that failure to comply with the firm’s policies and procedures may result
in disciplinary action
D. All of the above

19. The firm’s review responsibility policies and procedures shall be determined on the basis
that

A. All audit documentation must be reviewed by the engagement partner

B. Technical consultation must be conducted for auditing and accounting matters faced
by the engagement team
C. Work of less experienced team members is reviewed by more experienced
engagement team members
D. The engagement quality control process must be finalized before the assurance report
is issued

20. The audit work performed by each assistant should be reviewed to determine whether it
was adequately performed and to evaluate whether the

A. Auditor’s system of quality control has been maintained at a high level.

B. Results are consistent with the conclusions to be presented in the auditor’s report.
C. Audit procedures performed are approved in the professional standards.
D. Audit has been performed by persons having adequate technical training and
proficiency as auditors.

21. Who should take responsibility for the overall quality of each engagement?

A. Engagement quality control reviewer

B. Engagement partner
C. Engagement team
D. Technical review committee

22. The following statements relate to the engagement partner’s responsibility to conduct
timely reviews of the audit documentation to be satisfied that sufficient appropriate
evidence has been obtained to support the conclusions reached and for the auditor’s
report to be issued. Which is false?

A. The engagement partner’s review of the audit documentation allows significant

matters to be resolved on a timely basis to his/her satisfaction before the auditor’s
report is issued
B. The engagement partner should review all documentation
C. The engagement partner should document the extent and timing of the reviews
 D. The reviews cover critical areas of judgment, especially those relating to difficult or
contentious matters identified during the course of the engagements, significant risks,
and other areas the engagement partner considers important

23. For audits of financial statements of listed entities, the engagement partner should

A. Determine that an engagement quality control reviewer has been appointed.

B. Discuss significant matters arising during the audit engagement, including those
identified during the engagement quality control review, with the engagement quality
reviewer.
C. Not issue the auditor’s report until the completion of the engagement quality control
review.
D. All of the above.

24. Which of the following appropriately relates to firm’s consultation requirements?

A. Appropriate consultation takes place on difficult or contentious matters

B. Sufficient resources are available to enable appropriate consultation to take place
C. The nature, scope and conclusions from consultations are documented and are
agreed by both the individual seeking consultation and the individual consulted
D. All of the above.

25. In a certain audit engagement, several key members of the engagement team had
differences of opinion regarding a certain matter. In this case:

A. The engagement partner shall issue a disclaimer of opinion due to a scope limitation
B. an increase in the audit fee will be requested due to the extension of the time required
to complete the engagement
C. Documentation will be made regarding the unresolved matter, and the auditor will
withdraw from the engagement altogether
D. The report shall not be issued until the matter is resolved

26. This is a review that provides an objective evaluation of the significant judgments made
by the engagement team and the conclusions reached in formulating the report

A. Engagement quality control review

B. System of quality control
C. Technical review process
D. Assurance practice evaluation

27. A process that includes an ongoing consideration and evaluation of the firm’s system of
quality control including, on a cyclical basis, inspection of completed engagements,
designed to enable the firm to obtain reasonable assurance that its system of quality
control is operating effectively

A. Inspection
B. Quality assurance review
C. Monitoring
D. Quality milestone checks

28. According to PSQC 1, a firm should establish policies and procedures to provide it with
reasonable assurance that the policies and procedures relating to the system of quality
control are relevant, adequate, operating effectively and complied with in practice. Such
policies and procedures should include an ongoing consideration and evaluation of the
firm’s system of quality control, including a periodic inspection of a selection of completed
engagements is ordinarily performed on a cyclical basis. Engagements selected for
inspection include
 A. At least one engagement for each engagement partner over an inspection cycle, which
ordinarily spans no more than 2 years.
B. At least one engagement for each engagement partner over an inspection cycle, which
ordinarily spans no more than 1 year.
C. At least 3 engagement for each engagement partner over an inspection cycle, which
ordinarily spans no more than 5 years
D. At least one engagement for each engagement partner over an inspection cycle, which
ordinarily spans no more than 3 years.

29. Under PSQC 1, the firm should communicate the results of the monitoring of its quality
control system to engagement partners and other appropriate individuals within the firm
at least
A. Monthly
B. Weekly
C. Quarterly
D. Annually

30. A firm’s system of quality control should ordinarily provide for the maintenance of
A. A file of minutes of staff meetings.
B. Updated personnel files.
C. Documentation to provide evidence of the operation of each element of its system of
quality control.
D. Documentation to demonstrate compliance with regulatory requirements.