The firm shall comply with each requirement of this ASQM unless the requirement is not relevant to the firm because of the nature and circumstances of the firm or its engagements. (Ref: Para. A29)

The individual(s) assigned ultimate responsibility and accountability for the firm’s system of quality management, and the individual(s) assigned operational responsibility for the firm’s system of quality management shall have an understanding of this ASQM, including the application and other explanatory material, to understand the objective of this ASQM and to apply its requirements properly.

The firm shall design, implement and operate a system of quality management. In doing so, the firm shall exercise professional judgement, taking into account the nature and circumstances of the firm and its engagements. The governance and leadership component of the system of quality management establishes the environment that supports the design, implementation and operation of the system of quality management. (Ref: Para. A30‑A31)

Responsibilities

The firm shall assign: (Ref: Para. A32–A35)

1. Ultimate responsibility and accountability for the system of quality management to the firm’s chief executive officer or the firm’s managing partner (or equivalent) or, if appropriate, the firm’s managing board of partners (or equivalent);
2. Operational responsibility for the system of quality management;
3. Operational responsibility for specific aspects of the system of quality management, including:
   1. Compliance with independence requirements; and (Ref: Para. A36)
4. The monitoring and remediation process.

In assigning the roles in paragraph 20 the firm shall determine that the individual(s): (Ref: Para. A37)

1. Has the appropriate experience, knowledge, influence and authority within the firm, and sufficient time, to fulfill their assigned responsibility; and (Ref: Para. A38)
2. Understands their assigned roles and that they are accountable for fulfilling them.

The firm shall determine that the individual(s) assigned operational responsibility for the system of quality management, compliance with independence requirements and the monitoring and remediation process, have a direct line of communication to the individual(s) assigned ultimate responsibility and accountability for the system of quality management.

The firm shall design and implement a risk assessment process to establish quality objectives, identify and assess quality risks and design and implement responses to address the quality risks. (Ref: Para. A39‑A41)

The firm shall establish the quality objectives specified by this ASQM and any additional quality objectives considered necessary by the firm to achieve the objectives of the system of quality management. (Ref: Para. A42–A44)

The firm shall identify and assess quality risks to provide a basis for the design and implementation of responses. In doing so, the firm shall:

1. Obtain an understanding of the conditions, events, circumstances, actions or inactions that may adversely affect the achievement of the quality objectives, including: (Ref: Para. A45‑A47)
   1. With respect to the nature and circumstances of the firm, those relating to:
      1. The complexity and operating characteristics of the firm;
      2. The strategic and operational decisions and actions, business processes and business model of the firm;
      3. The characteristics and management style of leadership;
      4. The resources of the firm, including the resources provided by service providers;
      5. Law, regulation, AUASB standards and the environment in which the firm operates; and
      6. In the case of a firm that belongs to a network, the nature and extent of the network requirements and network services, if any.
   2. With respect to the nature and circumstances of the engagements performed by the firm, those relating to:
      1. The types of engagements performed by the firm and the reports to be issued; and
      2. The types of entities for which such engagements are undertaken.
2. Take into account how, and the degree to which, the conditions, events, circumstances, actions or inactions in paragraph 25(a) may adversely affect the achievement of the quality objectives. (Ref: Para. A48)

The firm shall design and implement responses to address the quality risks in a manner that is based on, and responsive to, the reasons for the assessments given to the quality risks. The firm’s responses shall also include the responses specified in paragraph 34. (Ref: Para. A49–A51)

The firm shall establish policies or procedures that are designed to identify information that indicates additional quality objectives, or additional or modified quality risks or responses, are needed due to changes in the nature and circumstances of the firm or its engagements. If such information is identified, the firm shall consider the information and when appropriate: (Ref: Para. A52‑A53)

1. Establish additional quality objectives or modify additional quality objectives already established by the firm; (Ref: Para. A54)
2. Identify and assess additional quality risks, modify the quality risks or reassess the quality risks; or
3. Design and implement additional responses, or modify the responses.

The firm shall establish the following quality objectives that address the firm’s governance and leadership, which establishes the environment that supports the system of quality management:

1. The firm demonstrates a commitment to quality through a culture that exists throughout the firm, which recognises and reinforces: (Ref: Para. A55–A56)
   1. The firm’s role in serving the public interest by consistently performing quality engagements;
   2. The importance of professional ethics, values and attitudes;
   3. The responsibility of all personnel for quality relating to the performance of engagements or activities within the system of quality management, and their expected behaviour; and
   4. The importance of quality in the firm’s strategic decisions and actions, including the firm’s financial and operational priorities.
2. Leadership is responsible and accountable for quality. (Ref: Para. A57)
3. Leadership demonstrates a commitment to quality through their actions and behaviours. (Ref: Para. A58)
4. The organisational structure and assignment of roles, responsibilities and authority is appropriate to enable the design, implementation and operation of the firm’s system of quality management. (Ref: Para. A32, A33, A35, A59)
5. Resource needs, including financial resources, are planned for and resources are obtained, allocated or assigned in a manner that is consistent with the firm’s commitment to quality. (Ref: Para. A60‑A61)

The firm shall establish the following quality objectives that address the fulfillment of responsibilities in accordance with relevant ethical requirements, including those related to independence: (Ref: Para. A62–A64, A66)

1. The firm and its personnel:
   1. Understand the relevant ethical requirements to which the firm and the firm’s engagements are subject; and (Ref: Para. A22, A24)
   2. Fulfill their responsibilities in relation to the relevant ethical requirements to which the firm and the firm’s engagements are subject.
2. Others, including the network, network firms, individuals in the network or network firms, or service providers, who are subject to the relevant ethical requirements to which the firm and the firm’s engagements are subject:
   1. Understand the relevant ethical requirements that apply to them; and (Ref: Para. A22, A24, A65)
   2. Fulfill their responsibilities in relation to the relevant ethical requirements that apply to them.

The firm shall establish the following quality objectives that address the acceptance and continuance of client relationships and specific engagements:

1. Judgements by the firm about whether to accept or continue a client relationship or specific engagement are appropriate based on:
   1. Information obtained about the nature and circumstances of the engagement and the integrity and ethical values of the client (including management, and, when appropriate, those charged with governance) that is sufficient to support such judgements; and (Ref: Para. A67–A71)
   2. The firm’s ability to perform the engagement in accordance with AUASB standards and applicable legal and regulatory requirements. (Ref: Para. A72)
2. The financial and operational priorities of the firm do not lead to inappropriate judgements about whether to accept or continue a client relationship or specific engagement.   (Ref: Para. A73‑A74)

The firm shall establish the following quality objectives that address the performance of quality engagements:

1. Engagement teams understand and fulfill their responsibilities in connection with the engagements, including, as applicable, the overall responsibility of engagement partners for managing and achieving quality on the engagement and being sufficiently and appropriately involved throughout the engagement. (Ref: Para. A75)
2. The nature, timing and extent of direction and supervision of engagement teams and review of the work performed is appropriate based on the nature and circumstances of the engagements and the resources assigned or made available to the engagement teams, and the work performed by less experienced engagement team members is directed, supervised and reviewed by more experienced engagement team members. (Ref: Para. A76–A77)
3. Engagement teams exercise appropriate professional judgement and, when applicable to the type of engagement, professional scepticism. (Ref: Para. A78)
4. Consultation on difficult or contentious matters is undertaken and the conclusions agreed are implemented. (Ref: Para. A79‑A81)
5. Differences of opinion within the engagement team, or between the engagement team and the engagement quality reviewer or individuals performing activities within the firm’s system of quality management are brought to the attention of the firm and resolved. (Ref: Para. A82)
6. Engagement documentation is assembled on a timely basis after the date of the engagement report, and is appropriately maintained and retained to meet the needs of the firm and comply with law, regulation, relevant ethical requirements, or AUASB standards. (Ref: Para. A83–A85)

The firm shall establish the following quality objectives that address appropriately obtaining, developing, using, maintaining, allocating and assigning resources in a timely manner to enable the design, implementation and operation of the system of quality management: (Ref: Para. A86–A87)

Human Resources

1. Personnel are hired, developed and retained and have the competence and capabilities to: (Ref: Para. A88–A90)
   1. Consistently perform quality engagements, including having knowledge or experience relevant to the engagements the firm performs; or
   2. Perform activities or carry out responsibilities in relation to the operation of the firm’s system of quality management.
2. Personnel demonstrate a commitment to quality through their actions and behaviours, develop and maintain the appropriate competence to perform their roles, and are held accountable or recognised through timely evaluations, compensation, promotion and other incentives. (Ref: Para. A91–A93)
3. Individuals are obtained from external sources (i.e., the network, another network firm or a service provider) when the firm does not have sufficient or appropriate personnel to enable the operation of firm’s system of quality management or performance of engagements. (Ref: Para. A94)
4. Engagement team members are assigned to each engagement, including an engagement partner, who have appropriate competence and capabilities, including being given sufficient time, to consistently perform quality engagements. (Ref: Para. A88–A89, A95–A97)
5. Individuals are assigned to perform activities within the system of quality management who have appropriate competence and capabilities, including sufficient time, to perform such activities.

Technological Resources

6. Appropriate technological resources are obtained or developed, implemented, maintained, and used, to enable the operation of the firm’s system of quality management and the performance of engagements. (Ref: Para. A98–A101, A104)

Intellectual Resources

7. 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 AUASB standards and applicable legal and regulatory requirements, where applicable. (Ref: Para. A102‑A104)

Service Providers

8. Human, technological or intellectual resources from service providers are appropriate for use in the firm’s system of quality management and in the performance of engagements, taking into account the quality objectives in paragraph 32 (d),(e),(f) and (g). (Ref: Para. A105–A108)

The firm shall establish the following quality objectives that address obtaining, generating or using information regarding the system of quality management, and communicating information within the firm and to external parties on a timely basis to enable the design, implementation and operation of the system of quality management: (Ref: Para. A109)

1. The information system identifies, captures, processes and maintains relevant and reliable information that supports the system of quality management, whether from internal or external sources. (Ref: Para. A110–A111)
2. The culture of the firm recognises and reinforces the responsibility of personnel to exchange information with the firm and with one another. (Ref: Para. A112)
3. Relevant and reliable information is exchanged throughout the firm and with engagement teams, including: (Ref: Para. A112)
   1. Information is communicated to personnel and engagement teams, and the nature, timing and extent of the information is sufficient to enable them to understand and carry out their responsibilities relating to performing activities within the system of quality management or engagements; and
   2. Personnel and engagement teams communicate information to the firm when performing activities within the system of quality management or engagements.
4. Relevant and reliable information is communicated to external parties, including:
   1. Information is communicated by the firm to or within the firm’s network or to service providers, if any, enabling the network or service providers to fulfill their responsibilities relating to the network requirements or network services or resources provided by them; and (Ref: Para. A113)
   2. Information is communicated externally when required by law, regulation or AUASB standards, or to support external parties’ understanding of the system of quality management. (Ref: Para. A114–A115)

In designing and implementing responses in accordance with paragraph 26, the firm shall include the following responses: (Ref: Para. A116)

1. The firm establishes policies or procedures for:
   1. Identifying, evaluating and addressing threats to compliance with the relevant ethical requirements; and (Ref: Para. A117)
   2. Identifying, communicating, evaluating and reporting of any breaches of the relevant ethical requirements and appropriately responding to the causes and consequences of the breaches in a timely manner. (Ref: Para. A118–A119)
2. The firm obtains, at least annually, a documented confirmation of compliance with independence requirements from all personnel required by relevant ethical requirements to be independent.
3. The firm establishes policies or procedures for receiving, investigating and resolving complaints and allegations about failures to perform work in accordance with AUASB standards and applicable legal and regulatory requirements, or non-compliance with the firm’s policies or procedures established in accordance with this ASQM. (Ref: Para. A120–A121)
4. The firm establishes policies or procedures that address circumstances when:
   1. The firm becomes aware of information subsequent to accepting or continuing a client relationship or specific engagement that would have caused it to decline the client relationship or specific engagement had that information been known prior to accepting or continuing the client relationship or specific engagement; or (Ref: Para. A122‑A123)
   2. The firm is obligated by law or regulation to accept a client relationship or specific engagement. (Ref: Para. A123)
5. The firm establishes policies or procedures that: (Ref: Para. A124-A126)
   1. Require communication with those charged with governance when performing an audit of a financial report of listed entities about how the system of quality management supports the consistent performance of quality audit engagements; (Ref: Para. A127–A129)
   2. Address when it is otherwise appropriate to communicate with external parties about the firm’s system of quality management; and (Ref: Para. A130)
   3. Address the information to be provided when communicating externally in accordance with paragraphs 34(e)(i) and 34(e)(ii), including the nature, timing and extent and appropriate form of communication. (Ref: Para. A131‑A132)
6. The firm establishes policies or procedures that address engagement quality reviews in accordance with ASQM 2, and require an engagement quality review for:
   1. Audits of financial reports of listed entities;
   2. Audits or other engagements for which an engagement quality review is required by law or regulation; and (Ref: Para. A133)
   3. Audits or other engagements for which the firm determines that an engagement quality review is an appropriate response to address one or more quality risk(s). (Ref: Para. A134‑A137)

The firm shall establish a monitoring and remediation process to: (Ref: Para. A138)

1. Provide relevant, reliable and timely information about the design, implementation and operation of the system of quality management.
2. Take appropriate actions to respond to identified deficiencies such that deficiencies are remediated on a timely basis.

Designing and Performing Monitoring Activities

The firm shall design and perform monitoring activities to provide a basis for the identification of deficiencies.

In determining the nature, timing and extent of the monitoring activities, the firm shall take into account: (Ref: Para. A139‑A142)

1. The reasons for the assessments given to the quality risks;
2. The design of the responses;
3. The design of the firm’s risk assessment process and monitoring and remediation process; (Ref: Para. A143–A144)
4. Changes in the system of quality management; (Ref: Para. A145)
5. The results of previous monitoring activities, whether previous monitoring activities continue to be relevant in evaluating the firm’s system of quality management and whether remedial actions to address previously identified deficiencies were effective; and (Ref: Para. A146–A147)
6. Other relevant information, including complaints and allegations about failures to perform work in accordance with AUASB standards and applicable legal and regulatory requirements or non-compliance with the firm’s policies or procedures established in accordance with this ASQM, information from external inspections and information from service providers. (Ref: Para. A148–A150)

The firm shall include the inspection of completed engagements in its monitoring activities and shall determine which engagements and engagement partners to select. In doing so, the firm shall: (Ref: Para. A141, A151–A154)

1. Take into account the matters in paragraph 37;
2. Consider the nature, timing and extent of other monitoring activities undertaken by the firm and the engagements and engagement partners subject to such monitoring activities; and
3. Select at least one completed engagement for each engagement partner on a cyclical basis determined by the firm.

The firm shall establish policies or procedures that:

1. Require the individuals performing the monitoring activities to have the competence and capabilities, including sufficient time, to perform the monitoring activities effectively; and
2. Address the objectivity of the individuals performing the monitoring activities. Such policies or procedures shall prohibit the engagement team members or the engagement quality reviewer of an engagement from performing any inspection of that engagement. (Ref: Para. A155–A156)

Evaluating Findings and Identifying Deficiencies

The firm shall evaluate findings to determine whether deficiencies exist, including in the monitoring and remediation process. (Ref: Para. A157‑A162)

Evaluating Identified Deficiencies

The firm shall evaluate the severity and pervasiveness of identified deficiencies by: (Ref: Para. A161, A163–A164)

1. Investigating the root cause(s) of the identified deficiencies. In determining the nature, timing and extent of the procedures to investigate the root cause(s), the firm shall take into account the nature of the identified deficiencies and their possible severity. (Ref: Para. A165–A169)
2. Evaluating the effect of the identified deficiencies, individually and in aggregate, on the system of quality management.

Responding to Identified Deficiencies

The firm shall design and implement remedial actions to address identified deficiencies that are responsive to the results of the root cause analysis. (Ref: Para. A170–A172)

The individual(s) assigned operational responsibility for the monitoring and remediation process shall evaluate whether the remedial actions:

1. Are appropriately designed to address the identified deficiencies and their related root cause(s) and determine that they have been implemented; and
2. Implemented to address previously identified deficiencies are effective.

If the evaluation indicates that the remedial actions are not appropriately designed and implemented or are not effective, the individual(s) assigned operational responsibility for the monitoring and remediation process shall take appropriate action to determine that the remedial actions are appropriately modified such that they are effective.

Findings About a Particular Engagement

The firm shall respond to circumstances when findings indicate that there is an engagement(s) for which procedures required were omitted during the performance of the engagement(s) or the report issued may be inappropriate. The firm’s response shall include: (Ref: Para. A173)

1. Taking appropriate action to comply with relevant AUASB standards and applicable legal and regulatory requirements; and
2. When the report is considered to be inappropriate, considering the implications and taking appropriate action, including considering whether to obtain legal advice.

Ongoing Communication Related to Monitoring and Remediation

The individual(s) assigned operational responsibility for the monitoring and remediation process shall communicate on a timely basis to the individual(s) assigned ultimate responsibility and accountability for the system of quality management and the individual(s) assigned operational responsibility for the system of quality management: (Ref: Para. A174)

1. A description of the monitoring activities performed;
2. The identified deficiencies, including the severity and pervasiveness of such deficiencies; and
3. The remedial actions to address the identified deficiencies.

The firm shall communicate the matters described in paragraph 46 to engagement teams and other individuals assigned activities within the system of quality management to enable them to take prompt and appropriate action in accordance with their responsibilities.

When the firm belongs to a network, the firm shall understand, when applicable: (Ref: Para. A19, A175)

1. The requirements established by the network regarding the firm’s system of quality management, including requirements for the firm to implement or use resources or services designed or otherwise provided by or through the network (i.e., network requirements);
2. Any services or resources provided by the network that the firm chooses to implement or use in the design, implementation or operation of the firm’s system of quality management (i.e., network services); and
3. The firm’s responsibilities for any actions that are necessary to implement the network requirements or use network services. (Ref: Para. A176)

The firm remains responsible for its system of quality management, including professional judgements made in the design, implementation and operation of the system of quality management. The firm shall not allow compliance with the network requirements or use of network services to contravene the requirements of this ASQM. (Ref: Para. A177)

Based on the understanding obtained in paragraph 48, the firm shall:

1. Determine how the network requirements or network services are relevant to, and are taken into account in, the firm’s system of quality management, including how they are to be implemented; and (Ref: Para. A178)
2. Evaluate whether and, if so, how the network requirements or network services need to be adapted or supplemented by the firm to be appropriate for use in its system of quality management. (Ref: Para. A179–A180)

Monitoring Activities Undertaken by the Network on the Firm’s System of Quality Management

In circumstances when the network performs monitoring activities relating to the firm’s system of quality management, the firm shall:

1. Determine the effect of the monitoring activities performed by the network on the nature, timing and extent of the firm’s monitoring activities performed in accordance with paragraphs 36–38;
2. Determine the firm’s responsibilities in relation to the monitoring activities, including any related actions by the firm; and
3. As part of evaluating findings and identifying deficiencies in paragraph 40, obtain the results of the monitoring activities from the network in a timely manner. (Ref: Para. A181)

Monitoring Activities Undertaken by the Network Across the Network Firms

The firm shall:

1. Understand the overall scope of the monitoring activities undertaken by the network across the network firms, including monitoring activities to determine that network requirements have been appropriately implemented across the network firms, and how the network will communicate the results of its monitoring activities to the firm;
2. At least annually, obtain information from the network about the overall results of the network’s monitoring activities across the network firms, if applicable, and: (Ref: Para. A182–A184)
   1. Communicate the information to engagement teams and other individuals assigned activities within the system of quality management, as appropriate, to enable them to take prompt and appropriate action in accordance with their responsibilities; and
   2. Consider the effect of the information on the firm’s system of quality management.

Deficiencies in Network Requirements or Network Services Identified by the Firm

If the firm identifies a deficiency in the network requirements or network services, the firm shall: (Ref: Para. A185)

1. Communicate to the network relevant information about the identified deficiency; and
2. In accordance with paragraph 42, design and implement remedial actions to address the effect of the identified deficiency in the network requirements or network services. (Ref: Para. A186)

The individual(s) assigned ultimate responsibility and accountability for the system of quality management shall evaluate, on behalf of the firm, the system of quality management. The evaluation shall be undertaken as of a point in time, and performed at least annually. (Ref: Para. A187–A189)

Based on the evaluation, the individual(s) assigned ultimate responsibility and accountability for the system of quality management shall conclude, on behalf of the firm, one of the following: (Ref: Para. A190, A195)

1. The system of quality management provides the firm with reasonable assurance that the objectives of the system of quality management are being achieved; (Ref: Para. A191)
2. Except for matters related to identified deficiencies that have a severe but not pervasive effect on the design, implementation and operation of the system of quality management, the system of quality management provides the firm with reasonable assurance that the objectives of the system of quality management are being achieved; or (Ref: Para. A192)
3. The system of quality management does not provide the firm with reasonable assurance that the objectives of the system of quality management are being achieved. (Ref: Para. A192‑A194)

If the individual(s) assigned ultimate responsibility and accountability for the system of quality management reaches the conclusion described in paragraph 54(b) or 54(c), the firm shall: (Ref: Para. A196)

1. Take prompt and appropriate action; and
2. Communicate to:
   1. Engagement teams and other individuals assigned activities within the system of quality management to the extent that it is relevant to their responsibilities; and (Ref: Para. A197)
   2. External parties in accordance with the firm’s policies or procedures required by paragraph 34(e). (Ref: Para. A198)

The firm shall undertake periodic performance evaluations of the individual(s) assigned ultimate responsibility and accountability for the system of quality management, and the individual(s) assigned operational responsibility for the system of quality management. In doing so, the firm shall take into account the evaluation of the system of quality management. (Ref: Para. A199–A201)

The firm shall prepare documentation of its system of quality management that is sufficient to: (Ref: Para. A202–A204)

1. Support a consistent understanding of the system of quality management by personnel, including an understanding of their roles and responsibilities with respect to the system of quality management and the performance of engagements;
2. Support the consistent implementation and operation of the responses; and
3. Provide evidence of the design, implementation and operation of the responses, to support the evaluation of the system of quality management by the individual(s) assigned ultimate responsibility and accountability for the system of quality management.

In preparing documentation, the firm shall include:

1. The identification of the individual(s) assigned ultimate responsibility and accountability for the system of quality management and operational responsibility for the system of quality management;
2. The firm’s quality objectives and quality risks; (Ref: Para. A205)
3. A description of the responses and how the firm’s responses address the quality risks;
4. Regarding the monitoring and remediation process:
   1. Evidence of the monitoring activities performed;
   2. The evaluation of findings, and identified deficiencies and their related root cause(s);
   3. Remedial actions to address identified deficiencies and the evaluation of the design and implementation of such remedial actions; and
   4. Communications about monitoring and remediation; and
5. The basis for the conclusion reached pursuant to paragraph 54.

The firm shall document the matters in paragraph 58 as they relate to network requirements or network services and the evaluation of the network requirements or network services in accordance with paragraph 49(b). (Ref: Para. A206)

The firm shall establish a period of time for the retention of documentation for the system of quality management that is sufficient to enable the firm to monitor the design, implementation and operation of the firm’s system of quality management, or for a longer period if required by law or regulation.