With the transition from ISQC 1 to ISQM 1, audit firms face a significant paradigm shift: quality management is no longer a passive, annual compliance obligation—it is now a continuous, firm-wide, and actively monitored process.
In her recent webinar, ISQM1 Requirements 2025, Elaine Jackson explained that ISQM 1 introduces the concept of "active quality management," compelling firms to not only implement but also evidence ongoing efforts to uphold and improve audit quality.
From Passive to Proactive: Understanding the Change
Under ISQC 1, firms typically performed an annual compliance review, filed the results, and revisited them a year later. ISQM 1 demands a different mindset—one where quality is assessed and improved on a rolling basis. This new approach means firms must embed quality into everyday practices, continually assess risks, and respond promptly with improvements.
Evidencing Quality Across the Eight Objectives
ISQM 1 identifies eight quality objectives, and firms must demonstrate how they are achieving and evidencing each. Here are key practices for evidencing active quality management:
1. Regular File Reviews
Quarterly or bi-monthly live file reviews, including both hot (in-process) and cold (completed) reviews, help identify real-time issues. These reviews must be documented with clear follow-up actions and demonstrate how previous issues were addressed through root cause analysis and action plans.
2. Integrated Monitoring and Evaluation
Monitoring is not just a box-ticking exercise—it’s the foundation of quality assurance. Evidence should include:
- Evaluation of engagement team performance
- Review of CPD records
- Documentation of technical consultations and outcomes
- Follow-up on root cause analyses and implemented solutions
3. Firm-wide Buy-in and Communication
Quality management cannot rest on the shoulders of one Responsible Individual (RI). It requires firm-wide engagement, from partners to juniors. Teams must communicate effectively, especially regarding ethical threats like fee dependency or non-audit services, and ensure all staff understand their roles in upholding audit quality.
4. Addressing Ethical Risks
ISQM 1 emphasizes ethics and independence. Firms must evidence procedures for identifying and mitigating risks such as overfamiliarity, bias, and conflicts of interest. Regular discussions, documentation of independence confirmations, and safeguards against long associations are crucial.
5. Engagement Performance
Active evaluation of engagement teams is essential. This includes tracking:
- Audit quality indicators
- Technical competence
- Compliance with audit standards
- Timeliness and accuracy of documentation
Where deficiencies are found, corrective actions such as additional training or staff restructuring should be documented.
6. Resource Management
Adequate staffing is a cornerstone of quality. Firms must demonstrate how they assess resource needs, allocate experienced staff to engagements, and respond to capacity constraints. Evidence might include revised team structures, hiring plans, or time budgets for complex audits.
7. Continuous Improvement
ISQM 1 requires that improvement is not deferred until year-end reviews. Firms must actively track trends in deficiencies, implement training or procedural updates, and measure the effectiveness of these interventions.
8. Client Relationship Management
Regular communication with clients is necessary to identify any changes affecting audit risks or independence. This includes discussions on new services, organizational changes, or overdue fees. Documentation of these interactions supports ethical compliance and proactive risk management.
Documentation: The Key to Evidence
Throughout all these areas, documentation is essential. Whether it’s a file review, a training session, or a root cause analysis, firms must maintain a comprehensive audit trail. This enables firms to demonstrate quality initiatives during regulatory inspections and internal assessments.
ISQM 1 challenges firms to shift from reactive compliance to proactive quality enhancement. The firms that succeed will be those that embed quality into their culture, ensure firm-wide participation, and continually refine their systems based on real-time feedback and monitoring.
In this new landscape, quality is not a goal—it is an ongoing commitment, visibly evidenced in every aspect of the audit process.
For the full webinar, please click here. In this course Elaine Jackson covers the following topics:
- A reminder of the requirements of ISQM1, ISQM2, ISA 220
- Evidencing Active Quality Management
- The Annual Evaluation Requirements
- Addressing Failures and Breaches
- What do our Institutes inspect?
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article. The information at the time of publishing was accurate and could be subject to final changes.
