A high-level overview of Statement on Quality Management Standards (SQMS) No. 1, A Firm’s System of Quality Management, and offers suggestions for the implementation of the standards.
by Nicole K. Cradic, CPA Mar 21, 2023, 07:00 AM
The PICPA’s Accounting & Auditing Steering Committee (A&A Committee) has been monitoring the Auditing Standards Board’s deliberation and ultimate issuance of four quality management (QM) standards:
The QM standards were issued in June 2022. Admittedly, I often check the effective date of any new standard to determine its place on my to-do list. At a quick glance, a standard with an effective date in 2025 may not appear to be a priority item. However, my plea to you in writing this article is to make addressing these QM standards a priority. The implementation for the QM standards is lengthy: it requires a multiyear effort by those firms performing attest engagements in accordance with SAS, SSARS, or Statements on Standards for Attestation Engagements.
PICPA’s A&A Committee is planning to provide more information in a series of articles in upcoming journal publications, so I will use this article for a high-level overview of SQMS No. 1 and offer some suggestions for the implementation of the standards. Ultimately, the QM standards need to be implemented by Dec. 15, 2025, and an evaluation of the system of quality management must be performed by Dec. 15, 2026.
SQMS No. 1 introduces a risk-based approach to a firm’s system of quality management. I found it helpful to compare the concepts to the risk-based audit approach. Just like we use the audit risk assessment to focus more audit effort on riskier parts of an engagement, we now analyze our firm’s attest practices along similar thought processes.
SQMS No. 1 segments a firm’s system of quality management into eight highly integrated components. I like to parallel them to the concept of audit areas. Even if your firm does not perform audits, you should recognize these key areas of engagement risk and vulnerability:
For each component, firms need to establish quality objectives that can be taken right out of SQMS No. 1. Here are a few examples:
Once the quality objectives are determined, firms can begin to assess the risk that those quality objectives will not be achieved due to quality risks. Quality risks are hazards with a reasonable possibility of occurring and affecting the achievement of a quality objective. Questions to ask in this process could be as follows:
Firms will design and implement responses to reduce identified quality risks.
I will discuss SQMS No. 2, SAS No. 146, and SSARS No. 26 in an upcoming issue. Those standards focus on the qualifications of the engagement quality reviewer (EQR), the performance of EQRs, the engagement partner’s responsibilities relating to the EQR, and the quality of the engagement overall.
In closing, I would like to offer some suggestions to help practitioners ready their firms for the new QM standards:
Nicole K. Cradic, CPA, is a partner at Trout CPA in Mechanicsburg. She can be reached at ncradic@troutcpa.com.
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