Quality Management at the Engagement Level Proposed ISA 220 (Revised) Megan Zietsman, Task Force Chair IAASB Meeting, New York, USA Agenda Item 4 September 18, 2018

Introduction to the Discussion Objectives of the discussion: To obtain the IAASB’s input based on a second read of the Exposure Draft (ED) of Proposed ISA 220 (Revised); and To obtain specific comments from IAASB members about any remaining matters to be addressed in finalizing the ED of proposed ISA 220 (Revised), other than on material related to proposed ISQC 1 (Revised) and proposed ISQC 2. To achieve planned December 2018 approval of ED: Comments on all requirements and application material; At the end of the discussion, indicate whether there are any remaining concerns; and Subsequent to the discussion, provide written comments as soon as possible.

Other significant feedback: IAASB CAG Feedback Support for the direction of changes in ISA 220, linkage between quality management at the firm and engagement level, and the identified public interest issues Scalability: support from SMPC representative, comments on application to group audits, concept of “reliance” on the firm’s systems in non-traditional firms Other significant feedback: Support for material on technological resources Consider more explanation about how ISQC 1 is structured (e.g., eight components), and interrelationship to quality management at the engagement level “Tone at the middle” Are the requirements on ethics too passive?

IESBA Feedback on proposed ISA 220 (Revised) IESBA staff provided input into the draft of proposed ISA 220 (Revised) prior to posting Joint meeting of IAASB QC Projects Chairs and Staff and IESBA Liaison Member on September 12 Definition of “engagement team” - Application material on the definition of “engagement team” l in paragraphs A2JA and A19D has been noted by IESBA in particular)

Emphasized that all three quality control standards should be aligned SMPC Feedback The requirements to follow firm policies or procedures may elevate firm policies or procedures to the level of IAASB requirements Emphasized that all three quality control standards should be aligned The material on “implementing additional responses” (para 3(b)) could incorrectly imply that the EP can disregard the firm’s responses Other possible examples to enhance scalability: Externally purchased software and tools Highlight consultations as an additional example on a requirement that may not be applicable when the EP performs the audit alone

Public Interest; Exercising Professional Judgment and Professional Skepticism Public Interest table: Section B Matters for IAASB Consideration The IAASB is asked for its views on the material dealing with public interest, professional judgment, and professional skepticism in Agenda Item 4–A: Paragraphs 4B–4C Paragraphs A3G–A3I

Appendix A in Agenda Item 4–A Matters for IAASB Consideration Scalability for Firms of Different Sizes, and for Engagements Where Nature and Circumstances Differ Proposed revisions to requirements and application material emphasize scalability Appendix A in Agenda Item 4–A Matters for IAASB Consideration The IAASB is asked: For its views on how the scalability of the requirements and application material has been dealt with in proposed ISA 220 (Revised). Whether there are further examples to include in the standard to demonstrate how the ISA is sufficiently scalability for firms of different sizes, and for engagements with differing nature and circumstances. (The IAASB is requested to provide specific suggestions if possible.)

Firm Policies or Procedures Depending on the Firm’s Policies or Procedures The EP may “depend on the firm’s policies or procedures” Determine whether those policies or procedures are “fit-for-purpose” Matters for IAASB Consideration The IAASB is asked for its views on: The overall approach to dealing with firm policies or procedures in the requirements of proposed ISA 220 (Revised). Proposed application material (e.g. para. A1E, A1F) that acknowledges the EP may depend on the firm’s policies or procedures or other relevant firm level responses, when complying with the requirements of proposed ISA 220 (Revised).

Introduction, Objective, and Definitions Proposed ISA 220 (Revised) – Agenda Item 4–A Section Paragraph(s) Application Material Introduction 1–4C A0–A2F Objective 6 None Definitions 7 AH–A2L Key Changes from June 2018 IAASB Meeting: Explanation that audits are performed in the public interest, importance of applying prof. judgment and prof. skepticism in achieving audit quality (para. 4B) Aligned objective with proposed ISQC 1 (Revised) Alignment of objective: Included specific reference to “conducting audit engagements in accordance with such standards and requirements”

Introduction, Objective, and Definitions Matter for IAASB Consideration Does the IAASB agree with the proposed changes to the introductory paragraphs, objective, and definitions and related application material (paragraphs 1-7 and A0- A2L)?

Proposed ISA 220 (Revised) – Agenda Item 4–A Leadership Responsibilities for Managing and Achieving Quality on Audits Proposed ISA 220 (Revised) – Agenda Item 4–A Paragraph(s) 8–8B Application Material A3C–A3J Key Changes from June 2018 IAASB Meeting: Enhancements to application material to clarify how to apply the requirements

Leadership Responsibilities for Managing and Achieving Quality on Audits Matter for IAASB Consideration Does the IAASB agree with the proposed changes made to paragraphs 8– 8B and the related application material at A3C–A3J in Agenda Item 4–A?

Relevant Ethical Requirements, Including Independence Requirements Proposed ISA 220 (Revised) – Agenda Item 4–A Paragraph(s) 9–10A Application Material A4–A7, A11C Key Changes from June 2018 IAASB Meeting: Enhanced material related to the identification and evaluation of threats to compliance with relevant ethical requirements (para. A4DA–A4DC) Included application material on low audit fees (para. A4DB)

Relevant Ethical Requirements, Including Independence Requirements Matter for IAASB Consideration Does the IAASB agree with the proposed changes made to paragraphs 9– 10A and A4–A7 and A11C of Agenda Item 4–A?

Proposed ISA 220 (Revised) – Agenda Item 4–A Acceptance and Continuance of Client Relationships and Audit Engagements Proposed ISA 220 (Revised) – Agenda Item 4–A Paragraph(s) 12–13A Application Material A7A–A9 Key Changes from June 2018 IAASB Meeting: Reordered paragraphs 13 and 13A

Acceptance and Continuance of Client Relationships and Audit Engagements Matter for IAASB Consideration Does the IAASB agree with the proposed changes made to paragraphs 12– 13A and the related application material at A7A–A9 in Agenda Item 4–A?

Proposed ISA 220 (Revised) – Agenda Item 4–A Engagement Resources Proposed ISA 220 (Revised) – Agenda Item 4–A Paragraph(s) 14–14C Application Material A9A–A12 Key Changes from June 2018 IAASB Meeting: “Competence and capabilities” of the ET, including sufficient time (para. 14A) Elevated material regarding communicating with the appropriate person(s) within the firm when the resources are insufficient (para 14B) Acknowledgement that the EP may be able to depend on the firm’s related policies or procedures when determining whether resources are sufficient and appropriate (para. A9A, A10F)

Engagement Resources Matter for IAASB Consideration Does the IAASB agree with the proposed changes made to paragraphs 14– 14C and the related application material at A9A–A12 in Agenda Item 4–A?

Engagement Performance – Direction, Supervision, and Review Proposed ISA 220 (Revised) – Agenda Item 4–A Paragraph(s) 15–17C Application Material A12A–A19E Key Changes from June 2018 IAASB Meeting: Clarify that the EP’s review shall occur at appropriate points in time (para. 17A) EP to use professional judgment in determining which audit documentation to review beyond documentation required to be reviewed (para. 17A(c)) Matter for IAASB Consideration Does the IAASB agree with the proposed changes made to paragraphs 15– 17C and the related application material at A12A–A19E in Agenda Item 4–A?

Other Sections Section Paragraph(s) Application Material Consultation 18 A19G–A22A Engagement Quality Review 19 A23–A25A Differences of Opinion 22–22A A32A–A32B Monitoring and Remediation 23 A33–A35 Key Changes from June 2018 IAASB Meeting: Consultation – Examples of matters that may necessitate consultation outside the ET (para. A19G) Engagement Quality Review – The EP’s responsibility to cooperate with the engagement quality reviewer and to inform other members of the ET of their responsibility to do so (para. 19B)

Other Sections (Cont.) Key Changes from June 2018 IAASB Meeting: Monitoring and Remediation – Deleted the reference to “sufficient” understanding in relation to the firm’s monitoring and remediation process by all members of the ET (para. 23(a)) Matter for IAASB Consideration Does the IAASB agree with the proposed changes made to paragraphs 18– 23 and A19G–A35 in Agenda Item 4–A? Consultation Engagement Quality Review Differences of Opinion Monitoring and Remediation

Taking Overall Responsibility for Managing and Achieving Quality Proposed ISA 220 (Revised) – Agenda Item 4–A Paragraph(s) 23A Application Material A35A–A35B Key Changes from June 2018 IAASB Meeting: Align the requirement with the objective of the standard -Deleted A35B in response to comments that it wasn’t relevant to the requirement -removed reference to “inappropriate” involvement

Taking Overall Responsibility for Managing and Achieving Quality Matter for IAASB Consideration Does the Board agree with the proposed changes made to paragraphs 23A and A35A–A35B in Agenda Item 4–A?

Proposed ISA 220 (Revised) – Agenda Item 4–A Documentation Proposed ISA 220 (Revised) – Agenda Item 4–A Paragraph(s) 24 Application Material A35C–A36 Matter for IAASB Consideration Does the Board agree with the proposed changes made to paragraph 24 and A35C–A36 in Agenda Item 4–A?

Conforming Amendments Most conforming amendments are relatively minor Conforming amendments to ISA 300 more substantive—Proposed only those amendments that are necessary to align with proposed ISA 220 (Revised) and explain the interaction between the two standards. Matter for IAASB Consideration Does the IAASB support the proposed conforming and consequential amendments, in particular the approach to the conforming amendments proposed for ISA 300?

Way Forward Upcoming Outreach (Q4 2018) Forum of Firms IFIAR Standards Coordination Working Group IOSCO Continued coordination with the task forces working on ISQC 1 and ISQC 2, as well as with the IESBA Matter for IAASB Consideration Are there any other matters the IAASB wish to raise for further consideration by the Task Force that they expect the Task Force to respond to prior to the December 2018 IAASB meeting and finalization of proposed ISA 220 (Revised) as an ED? If so, please be specific as to any such issues, and provide detailed suggestions as to how they should be addressed.