Proposed ISQC 1 (Revised) Karin French, Quality Control Task Force Chair IAASB Meeting, New York Agenda Item 2 September 17, 2018

Structure of Proposed ISQC 1 (Revised) and Interrelationship of the Components

CAG and SMPC Feedback: Overarching Comments CAG Comments Very important standard given the state of the profession, need to improve the perception of the profession and close relationship with firm’s business model and culture September 2018 version much simpler and easier to understand from March 2018 Improve emphasis on risk-based approach Questioned use of the term “reasonable assurance”, i.e., it is a term associated with an assurance engagement and could be misinterpreted SMPC Comments Overall improvement from March 2018 Suggestion to have a more positive tone (i.e., terms such as deficiencies and remediation have a negative tone) Consider reverting back to previous diagram Concern about retaining extant requirements in the revised standard

Structure of Proposed ISQC 1 (Revised) and Interrelationship of the Components Question 1: Paragraph 10 explains how proposed ISQC 1 (Revised) describes the interrelationship of the components. Does the IAASB have any further suggestions for describing or depicting the interrelationships of the components? Question 2: The IAASB is asked to indicate which of the two proposed diagrams is preferred and whether the preferred diagram should be included in the standard.

Introduction CAG Comments: SMPC Comments: Mixed views on reference to public interest – some support, others suggested it has gone too far as not all audits performed in the public interest Further consideration needed of the public interest in the context of the profession – recognition of the paper being developed by the PIOB Concern over broader reference to professional skepticism - standard extends to all engagement types and entities Recent development of IESBA that another term will be used instead of the term “professional skepticism” in the context of all professional accountants (i.e., as it relates to professional skepticism about judgments related to the SOQM) SMPC Comments:

Introduction Question 3: Paragraph References for IAASB Discussion Requirements: 1 – 10 Application material: A1 – A3A Question 3: The IAASB is asked to share their views regarding: (a) How the introductory material has addressed the public interest. (b) The QCTF’s proposal to address professional skepticism at the engagement level as a broad concept in proposed ISQC 1 (Revised).

Authority Question 4: Paragraph References for IAASB Discussion Requirements: 13 – 17 Application material: A4 Question 4: Does the IAASB support the QCTF proposal to locate the authority of the ISQCs in each ISQC individually?

Objective and Definitions CAG Comments: Difference between definition of professional judgment in ISQC 1 and other standards Paragraph References for IAASB Discussion Requirements: 19 – 20 Application material: A5 – A9 Question 5: Does the IAASB support the revisions to the definition for ‘deficiencies’ and agree that this should remain as a definition rather than being located in application material supporting the monitoring and remediation component? Question 6: Does the IAASB support the revisions to the definition of ‘relevant ethical requirements’?

Applying and Complying with Relevant Requirements & System of Quality Management CAG Comments: Application material explaining entities that have a significant public interest may inappropriately limit the scope of entities, however other representatives supported this material Paragraph References for IAASB Discussion Requirements: 21 – 25 Application material: A10 – A12

Governance and Leadership CAG Comments: Concern on paragraph A30 - not appropriate to allow SMPs to avoid undertaking performance evaluations SMPC Comments: Performance evaluations are not possible in some scenarios Paragraph References for IAASB Discussion Requirements: 26 – 28 Application material: A13 – A35 Question 7: The IAASB is asked to share its views on the revisions to the governance and leadership component, in particular whether the IAASB supports the direct reference to the firm’s role in performing engagements in the public interest in the quality objectives?

Firm’s Risk Assessment Process SMPC Comments: Concern about work effort over the identification and assessment of quality risks and that it may result in too many risks being identified Clarity needed on what is meant by additional or more granular quality objectives Paragraph References for IAASB Discussion Requirements: 29 – 35 Application material: A36 – A54 Question 8: Taking into consideration the explanations in paragraphs 30–31, does the IAASB agree that the definitions for ‘quality objectives’ and ‘quality risks’ are no longer needed?

Firm’s Risk Assessment Process Question 9: The IAASB is asked to share its views on the proposed revisions to the firm’s RAP, in particular whether the IAASB supports: (a) The reference to ‘a reasonable possibility of occurrence’ in the threshold for the identification of quality risks. (b) The approach to linking responses required by the standard to quality risks. Question 10: The IAASB is asked to share its views on the review of the quality objectives and responses required by the standard

Other Components CAG Comments: Various suggestions for acceptance and continuance, e.g.: Shouldn’t be a binary decision – rather reflect spectrum of risk and firm responds to the risk Clarify meaning of what is meant by financial and operational priorities

Other Components Question 11: Paragraph References for IAASB Discussion Requirements: 36 – 43 Application material: A55 – A114 Question 11: The IAASB is asked to share its views on the proposed revisions to the following components: (a) Relevant ethical requirements. (b) Engagement acceptance and continuance. (c) Resources. (d) Engagement performance.

Information and Communication CAG Comments: Support for how standard addresses communication externally, including increased emphasis on transparency reporting Requirement not clearly articulating the “strong encouragement” to communicate – needs improvement Suggestion that standard should more explicitly indicate circumstances when external communication is necessary

Information and Communication Paragraph References for IAASB Discussion Requirements: 44 – 45 Application material: A115 – A130 Question 12: The IAASB is asked to share its views on the proposed revisions to the information and communication component, in particular whether: (a) The interrelationships with the other components are clear and sufficiently emphasized. (b) The response addressing the communication with external parties is appropriate and adequately addresses the public interest need for such communication. (c) The scalability of the quality objective addressing the firm’s information system is appropriately highlighted.

Monitoring and Remediation SMPC Comments: Should be more focused on improvement, e.g., title of component (improvement instead of remediation) and in requirements

Monitoring and Remediation Paragraph References for IAASB Discussion Requirements: 46 – 59 Application material: A131 – A163 Question 13: The IAASB is asked to share its views on: (a) The proposed revisions to the monitoring and remediation component. (b) Whether the revisions to the requirements addressing the inspection of engagements improves the flexibility of the nature, timing and extent of the firm’s monitoring activities while retaining the necessary robustness. If not, how does the IAASB suggest this be further addressed.

Network Requirements or Services CAG Comments: Improvement, but further work needed to properly address undue reliance on networks Some representatives still seeking requirements for networks – establishing expectations for networks and implications for the firm if such expectations are not met Reputation of the profession is significantly affected by actions of networks Need to better address issue that users perceive that quality is consistent across the network, when it is not Clarity needed on what information the firm is expected to obtain from the network that would facilitate reliance on the network requirements or services Increase emphasis on the firm and the network communicating best practices in addition to deficiencies Mixed views on application material addressing transparency about relationship between firm and network (paragraph A129), i.e., whether it is enough

Network Requirements or Services Paragraph References for IAASB Discussion Requirements: 60 – 65 Application material: A164 – A173 Question 14: The IAASB is asked to share its views regarding the requirements and application material for networks, including: (a) Whether the public interest issues in relation to networks have been appropriately addressed in the standard. If not, what further actions should the QCTF take to address these issues? (b) The revisions that link the requirements for networks with the components of the SOQM.

Service Providers Question 15: Paragraph References for IAASB Discussion Requirements: 66 – 67 Application material: A174 – A179 Question 15: The IAASB is asked to share its views regarding the requirements and application material for service providers.

Documentation Question 16: Paragraph References for IAASB Discussion Requirements: 68 – 71 Application material: A180 – A183 Question 16: In the view of the IAASB, are there any further revisions needed to the documentation requirements and application material?

Appendix CAG comments Replace appendix with diagram Paragraph References for IAASB Discussion Appendix 1 paragraphs 1 – 22

Title of the ISQCs Question 17: Does the IAASB support the QCTF’s proposal to retain the title of the ISQCs?

Length and Simplicity Question 18: Does the IAASB support the revisions made to proposed ISQC (Revised) to reduce the length of the standard and to improve its simplicity? If not, does the IAASB have any further suggestions in this regard?

Scalability and Additional Guidance CAG comments Good progress made with scalability, although some areas continue to be complex and signposting would be helpful Support for supporting materials and encouragement to provide these with the ED

Scalability and Additional Guidance Question 19: Does the IAASB support how scalability has been addressed in proposed ISQC 1 (Revised)? If not, what further actions should be taken to address scalability? Question 20: In relation to the reference materials in Agenda Item 2–D and Agenda Item 2–E, the IAASB is asked to share their views about: (a) Whether these materials should be published with the explanatory memorandum of the ED of proposed ISQC 1 (Revised). (b) Whether an additional example should be developed to illustrate the scalability of the standard, and if so, the nature of the additional example.