Have You Asked the Five Whys?

by John McCarthy Consulting Ltd. | Dec 6, 2022 | Blog, News

Root cause analysis (RCA) is a requirement of the new ISQM 1 which comes into effect in less than 10 days. It is one of the eight main components of that standard.

Audit firms will be expected to carry out RCA from 15 December 2022 and have the results and implementation action plan available for inspection by audit monitoring teams in 2023.

RCAs main objective is to examine the more serious audit deficiencies that have occurred during either hot or cold file reviews and involves asking ‘why’ questions, typically five times. The ultimate aim being to prevent them from happening again.

Known as the ‘5 Whys’ technique – it is allegedly attributed to the famously successful Toyota vehicle manufacture process.

In the audit world you might find that the source of a problem is lack of adequate staff training or staff performing audit work with an out of date disclosure checklist – the root problem occurs there.

But what is the root cause of the problem? The answer lies in going deeper by asking why the problem occurred. Asking “Why?” five times requires taking the answer to the first why and then asking why that occurs.

Typically, the process of asking “Why?” leads upstream in the process. It may be a defect that occurs in planning, but the root cause may be in the poor quality of client records, or perhaps a lack of sufficiently critical sceptical thinking on the part of the audit team.

Some typical root cause that we have come across include:

• risk assessment at the planning stage of the audit;
• the extent of audit evidence obtained and the level of documentation; and
• the degree of disclosure within the financial statements.

A common reason for these types of issue is a lack of understanding of the ISAs (Ireland) or accounting standards. Some firms insist on staff reading the ISAs as a basic starting point. What a good idea?

The 2022 book of the ISAs (Ireland) is available from the CAI store here. (We promise we don’t get a commission!). These standards are essential reading for all audit teams, especially with so many modifications to the standards coming into play for accounting periods ending 31 December 2022.

Other reasons that can be root causes include:

• flaws in the design of audit tests and
• inadequate review by senior audit team personnel (i.e. the audit manager or the audit engagement partner) as well as;
• Client familiarity which can play a part in leading to poorer quality audit documentation.

For more assistance please see our new ISQM TOOLKIT or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please call or e-mail John McCarthy FCA or e-mail him at john@jmcc.ie

Publications and AML webinar

• The ISQM TOOLKIT 2022 is available to purchase here.
• See our latest Anti-Money Laundering Policies Controls & Procedures Manual (March 2022) – View the Table of Contents click here.
• Also we have an updated AML webinar (March 2022) available here, which accompanies the AML Manual. It explains the current legal AML reporting position for accountancy firms and includes a quiz. Upon completion, you receive a CPD Certificate of attendance in your inbox.

To ensure your letters of engagement and similar templates are up to date visit our site here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items if bought together.

What are the Main Elements Within a System of Quality Control?

by John McCarthy Consulting Ltd. | Nov 25, 2022 | Blog, News

Continuing our series of blogs where we looked at the scalability of the ISQM(Ireland) 1, this week we look at the question: ‘What are the Main Elements Within a System of Quality Control (SoQM)?

Establishing the SoQM

ISQM 1.6 requires each audit firm to establish and maintain a system of quality control (SoQM) which includes policies and procedures addressing each of the following six processes:

1. Governance and leadership;
2. Relevant ethical requirements;
3. Acceptance and continuance;
4. Engagement performance;
5. Resources; and
6. Information and communication.

There are two other elements of the SoQM that we have covered in our other blogs –

• The risk assessment and responses;
• The monitoring/remediation stage which includes Root Cause Analysis as a key component.

Each audit firm must have written policies and procedures which ensure that its independence and objectivity cannot be jeopardised by the intervention of any partner or member of staff in the carrying out of an audit engagement.

As well as the above policies/procedures, each audit firm must also have:

• Sound administrative and accounting procedures;
• Internal quality control mechanisms;
• Effective procedures for risk assessment; and
• Effective control and safeguard arrangements for information processing

For more assistance please see our new ISQM TOOLKIT or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please call or e-mail John McCarthy FCA or e-mail him at john@jmcc.ie

Publications and AML webinar

• The ISQM TOOLKIT 2022 is available to purchase here.
• See our latest Anti-Money Laundering Policies Controls & Procedures Manual (March 2022) – View the Table of Contents click here.
• Also we have an updated AML webinar (March 2022) available here, which accompanies the AML Manual. It explains the current legal AML reporting position for accountancy firms and includes a quiz. Upon completion, you receive a CPD Certificate of attendance in your inbox.

To ensure your letters of engagement and similar templates are up to date visit our site here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items if bought together.

Is The New ISQM 1 Scalable?

by John McCarthy Consulting Ltd. | Nov 21, 2022 | Blog, News

Continuing our series of blogs where we last looked at the key differences between ISQM(Ireland) 1 and its predecessor the ISQC 1 establish quality objectives . This week we look at the question: ‘Is the new ISQM 1 scalable?’

Scalability

According to ISQM 1:34D-3 when designing, implementing and operating a system of quality management (SoQM), each audit firm must take into account the nature and circumstances of the firm and its engagements and ensure that its approach is appropriate. In doing this, the firm shall:

• take into consideration the scale and complexity of the firm’s activities; and
• be able to demonstrate to the firm’s regulatory body and to the Irish Audit & Accounting Supervisory Authority, that the policies and procedures are appropriate.

Saleability example:

For firms with low complexity and flat structures, (for example smaller partnerships) objectives about, for example, the firm’s organisational structure and the assignment of roles, responsibilities and authority may not need to contain a lot of detail. Likewise, sole practitioner auditors or firms with only one or two audit staff, objectives relating to HR much are less likely to be very complex.

Another potential factor to take into account is where there are staff working on audits, who have chosen to opt out of the audit exam topic in their professional examinations, this additional risk factor may need to feature in a firm’s risk assessment. Such staff may need additional one-to-one audit training in the auditing basics, as they have not had the benefit of such a foundation to enhance their audit skills and scepticism.

Networks: There are important objectives in the ISQM 1 for firms that are involved in international Networks. Where firms are not members of networks, they don’t need to consider any of the objectives relating to network resources or requirements.

Group audits: Firms that never participate in group audits are unlikely to need objectives surrounding the cooperation with component or group auditors.

Additional objectives

The standard expects the firm’s SoQM to reflect the firm’s nature and circumstances. This means that there could be circumstances where extra objectives will be required in addition to those provided within the standard.

E.g. in a large, complex firm with multiple offices and strategies including mergers and acquisitions, it is likely that the firm may need to expand the mandatory objectives or provide more granular detail in its objectives and risk assessment. Completely new objectives may need to be added in these circumstances.

In smaller, less complex firms it is much less likely to need to expand the mandatory objectives, although additional granular detail may be useful depending on the circumstances.

In subsequent years, firms must take account of feedback from around the firm and from the RCA (Root Cause Analysis) work to mould new or amended objectives, as the entire SoQM is a continuously iterative process.

Where in doubt, external professional expert advice should be sought.

For more assistance please see our new ISQM TOOLKIT or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please call or e-mail John McCarthy FCA or e-mail him at john@jmcc.ie

Publications and AML webinar

• The ISQM TOOLKIT 2022 is available to purchase here.
• See our latest Anti-Money Laundering Policies Controls & Procedures Manual (March 2022) – View the Table of Contents click here.
• Also we have an updated AML webinar (March 2022) available here, which accompanies the AML Manual. It explains the current legal AML reporting position for accountancy firms and includes a quiz. Upon completion, you receive a CPD Certificate of attendance in your inbox.

To ensure your letters of engagement and similar templates are up to date visit our site here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items if bought together.