[Analysis] Audit Quality Maturity Model (AQMM) by ICAI – Enhancing Audit Standards and Firm Maturity Levels

The Audit Quality Maturity Model (AQMM) is a framework developed by the Institute of Chartered Accountants of India (ICAI) through its Centre for Audit Quality (CAQ) to assess and enhance the audit quality of Chartered Accountant firms. It evaluates firms' maturity in key areas such as Practice Management, Human Resource Management, and Digital Competency, assigning scores that categorize firms into four maturity levels. AQMM aims to elevate audit standards, boost stakeholder confidence, and ensure that firms provide reliable, independent assurance in financial reporting. The model applies to firms auditing listed entities, banks, and insurance companies, and its results are made publicly accessible to foster transparency and accountability.

Table of Contents

1. Introduction
2. Audit Quality Maturity Model (AQMM)
3. Background of AQMM
4. Applicability of AQMM
5. AQMM v 2.0 – Sections and Scores
6. Firm Maturity Level
7. Interpretation of the Level Obtained by the Firm
8. Who Shall Conduct AQMM?
9. Conclusion

1. Introduction

The Institute of Chartered Accountants of India (ICAI) has established the Centre for Audit Quality (CAQ), which intends to elevate audit standards across Chartered Accountant firms. This initiative aims to boost stakeholder confidence, reliability, and transparency in auditing. Since its launch, CAQ has consistently introduced tools and models to improve “Audit Quality.” A key development is the Audit Quality Maturity Model (AQMM), which assists firms in evaluating their “Audit Maturity” and pinpointing improvement areas. This model is pivotal in ensuring that firms provide dependable independent assurance, thus elevating the confidence of financial statement users.

2. Audit Quality Maturity Model (AQMM)

Developed by the CAQ of ICAI, the AQMM is grounded in thorough Audit Quality Indicators (AQI) research. This comprehensive model evaluates critical aspects of audit engagements and practices at the firm level, organized into three main sections:

• Practice Management (Operations)
• Human Resource Management
• Digital Competence

The AQMM assigns up to 600 points to firms. Scores from each section determine the firm’s categorization into one of four maturity levels, from Level 1 to Level 4.

3. Background of AQMM

Initially introduced as “AQMM v 1.0” in July 2021, the model became mandatory for audit firm assessments on September 13, 2022. Recognizing the need for advancements, the ICAI Council, in its 432nd meeting, approved an exposure draft for “AQMM v 2.0.” This draft was open for public comment from July 12 to August 2, 2024. After considering the feedback, AQMM v 2.0 was officially ratified on August 22, 2024.

4. Applicability of AQMM

The AQMM applies to firms auditing the following types of entities:

• Listed entities
• Banks (excluding cooperative banks)
• Insurance companies

Firms that exclusively conduct branch audits are not included under this model.

5. AQMM v 2.0 – Sections and Scores

AQMM v 2.0 is structured into three critical sections:

• Practice Management – Assurance
• Human Resource Management
• Digital Competency

The scoring and weighting for each section are detailed below:

Section Reference	Maximum Score	% Weightage
Section 1 | Practice Management – Assurance	370	61.67
Section 2 | Human Resource Management	150	25.00
Section 3 | Digital Competency	80	13.33
Total	600	100.00

Each section is further broken down into specific criteria explained in the following paragraphs. To reach a specific maturity level under AQMM, a firm must achieve at least 30% in each section.

5.1 Practice Management – Assurance

Effective practice management is crucial for optimizing workflows, managing client relationships efficiently, and complying with regulatory requirements. It facilitates the smooth operation of a firm and establishes the groundwork for sustainable growth, improved client satisfaction, and long-term success. Within the “Practice Management – Assurance” section, firms can earn 370 points across ten distinct criteria. The criteria and their respective maximum scores are outlined in the table below:

S.N	Score Criteria	Maximum Score
1.	Practice Areas of the Firm	7
2.	Workflow – Practice Manuals	12
3.	Service Delivery – Effort monitoring	20
4.	Quality Control for engagements	8
5.	Client Sensitization	8
6.	Regulatory Compliances	55
7.	Practice Management – Strategic/Functional	12
8.	Infrastructure – Physical	12
9.	Practice Credentials	6
10.	Presence and implementation of Formats/Checklists/Templates	230
Total		370

5.2 Human Resource Management

Human Resource Management is crucial for any firm as it focuses on managing its most valuable asset—people. This section supports the firm in critical areas such as Recruitment and Staffing, Training and Development, Compensation and Benefits, and Strategic Planning. Given its significant impact on maintaining firm quality, the CAQ has designated “Human Resource Management” as the second section in the AQMM. Within this section, firms can achieve a total score of 150, distributed across six criteria. The specific criteria and their maximum possible scores are detailed in the table below:

S.N	Score Criteria	Maximum Score
1.	Policies and Practices	21
2.	Resource Planning & Monitoring as per the firm’s policy	12
3.	Employee Training & Development	52
4.	Resources Turnover & Compensation Management	21
5.	Qualification Skill Set of employees	28
6.	Performance evaluation measures carried out by the firm (KPI’s)	16
Total		150

5.3 Digital Competency

Adopting advanced technology has significantly enhanced the quality of audits conducted by firms. However, careless application of technology can lead to adverse outcomes. The CAQ believes that firms must be well-prepared to handle the challenges of technological advancements. Given these considerations, “Digital Competency” has been established as the third section of the AQMM. In this section, firms can achieve a total score of eighty, divided among fifteen distinct criteria. Below is a table detailing each of these criteria and the maximum scores that can be awarded:

S.N	Score Criteria	Maximum Score
1.	Managing Digital Identity	8
2.	Operational Process Automation	6
3.	Centralized file storage system/server	8
4.	Application for invoicing and receivable management	2
5.	Redundancy and Continuity	4
6.	Laptop and Data Security	11
7.	Copyright and Licenses	2
8.	Digital Media for Communication	4
9.	Protecting Personal Data and Privacy	6
10.	Information Systems Related Audits/ Reviews	3
11.	Design of Application Level Controls	1
12.	Custody of Digital Assets	4
13.	Availability of qualified resource pool and talent development relating to digital competencies	9
14.	Level of automation relating to audit processes and nature of audit services being rendered	11
15.	Adaptation of advanced and emerging technologies	1
Total		80

6. Firm Maturity Level

The following range of scores determines the firm’s maturity level under AQMM v 2.0:

Level	Scores Received
	Greater than or equal to	Less than
Level 1 Firm	30%	50%
Level 2 Firm	50%	70%
Level 3 Firm	70%	85%
Level 4 Firm	85%	100%

7. Interpretation of the Level Obtained by the Firm

• Level 1 – Indicates that the firm is in its developmental stages and must urgently enhance its competencies to prevent lagging in industry standards.
• Level 2 – Shows that the firm has made notable progress but needs to refine its efforts to ascend to higher competency levels.
• Level 3 – Signifies significant advancement, with the firm encouraged to polish its practices further to reach the pinnacle of industry competency.
• Level 4 – Represents the highest level of maturity, indicating that the firm has excellently adopted and integrated standards and procedures. The focus at this stage should be on continual optimization and innovation.

8. Who Shall Conduct AQMM?

The AQMM review is conducted by a member of the Institute of Chartered Accountants of India, who is also empanelled as a peer reviewer. The Peer Review Board appoints such reviewers to conduct AQMM assessments anytime before a firm’s scheduled peer review cycle is due. Following the review, the determined level of the firm, along with the details of the peer review certificate, will be published on the ICAI website for public access.

9. Conclusion

Implementing the AQMM represents a crucial advancement by the ICAI in elevating the audit quality of Chartered Accountant firms. This model is essential in fostering trust and confidence among stakeholders by ensuring that audit firms adhere to rigorous standards. The transparency provided by making the AQMM results publicly accessible on the ICAI website boosts client confidence. It supports the ICAI’s broader mission to enhance transparency, reliability, and trust in financial reporting. Overall, the AQMM serves as a pivotal tool in upholding the integrity and quality of the auditing profession, benefiting both the firms and their clients.