Document ID: chunk:federal_register_of_legislation:F2023C01118:body:0:p63
Version: federal_register_of_legislation:F2023C01118
Segment Type: other
Provision Reference: 
Character Range: 184752–187886

activities or complaints and allegations) may reveal information about the effectiveness of the monitoring and remediation process. For example, the results of external inspections may provide information about the system of quality management that has not been identified by the firm's monitoring and remediation process, which may highlight a deficiency in that process.

Evaluating Identified Deficiencies (Ref: Para. 41)

A163.      Factors the firm may consider in evaluating the severity and pervasiveness of an identified deficiency include:

           * The nature of the identified deficiency, including the aspect of the firm's system of quality management to which the deficiency relates, and whether the deficiency is in the design, implementation or operation of the system of quality management;

           * In the case of identified deficiencies related to responses, whether there are compensating responses to address the quality risk to which the response relates;

           * The root cause(s) of the identified deficiency;

           * The frequency with which the matter giving rise to the identified deficiency occurred; and

           * The magnitude of the identified deficiency, how quickly it occurred and the duration of time that it existed and had an effect on the system of quality management.

A164.      The severity and pervasiveness of identified deficiencies affects the evaluation of the system of quality management that is undertaken by the individual(s) assigned ultimate responsibility and accountability for the system of quality management.

Root Cause of the Identified Deficiencies (Ref: Para. 41(a))

A165.      The objective of investigating the root cause(s) of identified deficiencies is to understand the underlying circumstances that caused the deficiencies to enable the firm to:

           * Evaluate the severity and pervasiveness of the identified deficiency; and

           * Appropriately remediate the identified deficiency.

    Performing a root cause analysis involves those performing the assessment exercising professional judgement based on the evidence available.

A166.      The nature, timing and extent of the procedures undertaken to understand the root cause(s) of an identified deficiency may also be affected by the nature and circumstances of the firm, such as:

           * The complexity and operating characteristics of the firm.

           * The size of the firm.

           * The geographical dispersion of the firm.

           * How the firm is structured or the extent to which the firm concentrates or centralizes its processes or activities.
Examples of how the nature of identified deficiencies and their possible severity and the nature and circumstances of the firm may affect the nature, timing and extent of the procedures to understand the root cause(s) of the identified deficiencies

      * The nature of the identified deficiency: The firm's procedures to understand the root cause(s) of an identified deficiency may be more rigorous in circumstances when an engagement report related to an audit of a financial report of a listed