The Standard on Quality Management (SQM) 1 establishes a framework for firms conducting audits, reviews of financial statements, and other assurance-related engagements. It mandates that firms design, implement, and operate a quality management system tailored to their unique circumstances and engagement types. Key components of the system include risk assessment, governance, ethical requirements, client acceptance, engagement performance, resources, information management, and monitoring processes. The SQM emphasizes a risk-based approach to establish quality objectives and assess quality risks, ensuring consistent performance in quality engagements. Firms must evaluate their quality management systems annually to confirm they meet professional standards and legal requirements. This SQM applies to all relevant firms and has implementation deadlines of April 1, 2025, for recommendation and April 1, 2026, for mandatory compliance. It outlines the responsibilities of engagement quality reviewers and addresses the involvement of network firms and service providers. By adhering to the SQM, firms aim to uphold public interest through the effective management of quality in their engagements. Also Read: Standard on Quality Management (SQM) 2 Engagement Quality Reviews
Standard on Quality Management (SQM) 1
Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance
or Related Services Engagements
Introduction
Scope of this SQM
1. This Standard on Quality Management (SQM) deals with a firm’s responsibilities to design, implement and operate a system of quality management for audits or reviews of financial statements, or other assurance or related services engagements.
2. Engagement quality reviews form part of the firm’s system of quality management and:
(a) This SQM deals with the firm’s responsibility to establish policies or procedures addressing engagements that are required to be subject to engagement quality reviews.
(b) SQM 21 deals with the appointment and eligibility of the engagement quality reviewer, and the performance and documentation of the engagement quality review.
3. Other pronouncements of the Institute of Chartered Accountants of India (ICAI):
(a) Are premised on the basis that the firm is subject to the SQMs; and
(b) Include requirements for engagement partners and other engagement team members regarding quality management at the engagement level. For example, SA 220(Revised), “Quality Management for an Audit of Financial Statements” deals with the specific responsibilities of the auditor regarding quality management at the engagement level for an audit of financial statements and the related responsibilities of the engagement partner. (Ref: Para. A1)
4. This SQM is to be read in conjunction with relevant ethical requirements. Law, regulation or relevant ethical requirements may establish responsibilities for the firm’s management of quality beyond those described in this SQM. (Ref: Para. A2)
5. This SQM applies to all firms performing audits or reviews of financial statements, or other assurance or related services engagements (i.e., if the firm performs any of these engagements, this SQM applies and the system of quality management that is established in accordance with the requirements of this SQM enables the consistent performance by the firm of all such engagements).
The Firm’s System of Quality Management
6. A system of quality management operates in a continual and iterative manner and is responsive to changes in the nature and circumstances of the firm and its engagements. It also does not operate in a linear manner. However, for the purposes of this SQM, a system of quality management addresses the following eight components: (Ref: Para. A3)
(a) The firm’s risk assessment process;
(b) Governance and leadership;
(c) Relevant ethical requirements;
(d) Acceptance and continuance of client relationships and specific engagements;
(e) Engagement performance;
(f) Resources;
(g) Information and communication; and
(h) The monitoring and remediation process.
7. This SQM requires the firm to apply a risk-based approach in designing, implementing and operating the components of the system of quality management in an interconnected and coordinated manner such that the firm proactively manages the quality of engagements performed by the firm. (Ref: Para. A4)
8. The risk-based approach is embedded in the requirements of this SQM through:
(a) Establishing quality objectives. The quality objectives established by the firm consist of objectives in relation to the components of the system of quality management that are to be achieved by the firm. The firm is required to establish the quality objectives specified by this SQM and any additional quality objectives considered necessary by the firm to achieve the objectives of the system of quality management.
(b) Identifying and assessing risks to the achievement of the quality objectives (referred to in this standard as quality risks). The firm is required to identify and assess quality risks to provide a basis for the design and implementation of responses.
(c) Designing and implementing responses to address the quality risks. The nature, timing and extent of the firm’s responses to address the quality risks are based on and are responsive to the reasons for the assessments given to the quality risks.
9. This SQM requires that, at least annually, the individual(s) assigned ultimate responsibility and accountability for the system of quality management, on behalf of the firm, evaluates the system of quality management and concludes whether the system of quality management provides the firm with reasonable assurance that the objectives of the system, stated in paragraph 14(a) and (b), are being achieved. (Ref: Para. A5)
Scalability
10. In applying a risk-based approach, the firm is required to take into account:
(a) The nature and circumstances of the firm; and
(b) he nature and circumstances of the engagements performed by the firm.
Accordingly, the design of the firm’s system of quality management, in particular the complexity and formality of the system, will vary. For example, a firm that performs different types of engagements for a wide variety of entities, including audits of financial statements of listed entities, will likely need to have a more complex and formalized system of quality management and supporting documentation, than a firm that performs only reviews of financial statements or compilation engagements.
Networks and Service Providers
11. This SQM addresses the firm’s responsibilities when the firm:
(a) Belongs to a network, and the firm complies with network requirements or uses network services in the system of quality management or in the performance of engagements; or
(b) Uses resources from a service provider in the system of quality management or in the performance of engagements.
Even when the firm complies with network requirements or uses network services or resources from a service provider, the firm is responsible for its system of quality management.
Authority of this SQM
12. Paragraph 14 contains the objective of the firm in following this SQM. This SQM contains: (Ref: Para. A6)
(a) Requirements designed to enable the firm to meet the objective in paragraph 14; (Ref: Para. A7)
(b) Related guidance in the form of application and other explanatory material; (Ref: Para. A8)
(c) Introductory material that provides context relevant to a proper understanding of this SQM; and
(d) Definitions. (Ref: Para. A9)
Effective Date
Recommendatory
13. Systems of quality management in compliance with this SQM are required to be designed and implemented by April 1, 2025, and the evaluation of the system of quality management required by paragraphs 53–54 of this SQM is required to be performed within one year following April 1, 2025.
Mandatory
13. Systems of quality management in compliance with this SQM are required to be designed and implemented by April 1, 2026, and the evaluation of the system of quality management required by paragraphs 53–54 of this SQM is required to be performed within one year following April 1, 2026.
Objective
14. The objective of the firm is to design, implement and operate a system of quality management for audits or reviews of financial statements, or other assurance or related services engagements performed by the firm, that provides the firm with reasonable assurance that:
(a) The firm and its personnel fulfill their responsibilities in accordance with professional standards and applicable legal and regulatory requirements, and conduct engagements in accordance with such standards and requirements; and
(b) Engagement reports issued by the firm or engagement partners are appropriate in the circumstances.
15. The public interest is served by the consistent performance of quality engagements. The design, implementation and operation of the system of quality management enables the consistent performance of quality engagements by providing the firm with reasonable assurance that the objectives of the system of quality management, stated in paragraph 14(a) and (b), are achieved. Quality engagements are achieved through planning and performing engagements and reporting on them in accordance with professional standards and applicable legal and regulatory requirements. Achieving the objectives of those standards and complying with the requirements of applicable law or regulation involves exercising professional judgment and, when applicable to the type of engagement, exercising professional skepticism.
Definitions
16. For purposes of this SQM, the following terms have the meanings attributed below:
(a) Deficiency in the firm’s system of quality management (referred to as “deficiency” in this SQM) – This exists when: (Ref: Para. A10, A159–A160)
(i) A quality objective required to achieve the objective of the system of quality management is not established;
(ii) A quality risk, or combination of quality risks, is not identified or properly assessed; (Ref: Para. A11)
(iii) A response, or combination of responses, does not reduce to an acceptably low level the likelihood of a related quality risk occurring because the response(s) is not properly designed, implemented or operating effectively; or
(iv) An other aspect of the system of quality management is absent, or not properly designed, implemented or operating effectively, such that a requirement of this SQM has not been addressed. (Ref: Para. A12)
(b) Engagement documentation – The record of work performed, results obtained, and conclusions the practitioner reached (terms such as “working papers” or “work papers” are sometimes used).
(c) Engagement partner – The partner or other individual, appointed by the firm who is a member of the Institute of Chartered Accountants of India and is in full time practice and is responsible for the engagement and its performance, and for the report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body.
(d) Engagement quality review – An objective evaluation of the significant judgments made by the engagement team and the conclusions reached thereon, performed by the engagement quality reviewer and completed on or before the date of the engagement report.
(e) Engagement quality reviewer – A partner, other individual in the firm2, or an external individual3, appointed by the firm to perform the engagement quality review.
(f) Engagement team – All partners and staff performing the engagement, and any other individuals who perform procedures on the engagement, excluding an external expert4 and internal auditors who provide direct assistance on an engagement. (Ref: Para. A13)
(g) External inspections – Inspections or investigations, undertaken by an external oversight authority, related to the firm’s system of quality management or engagements performed by the firm. (Ref: Para. A14)
(h) Findings (in relation to a system of quality management) – Information about the design, implementation and operation of the system of quality management that has been accumulated from the performance of monitoring activities, external inspections and other relevant sources, which indicates that one or more deficiencies may exist. (Ref: Para. A15–A17)
(i) Firm – A sole practitioner/proprietor, partnership including limited liability partnership or any such entity of professional accountants, as may be permitted by law. (Ref: Para. A18)
(j) Listed entity – An entity whose shares, stock or debt are quoted or listed on a recognized stock exchange, or are marketed under the regulations of a recognized stock exchange or other equivalent body.
(k) Network firm – A firm or entity that belongs to the firm’s network.
(l) Network – A larger structure: (Ref: Para. A19)
(i) That is aimed at cooperation; and
(ii) That is clearly aimed at profit or cost-sharing or shares common ownership, control or management, common quality management policies or procedures, common business strategy, the use of a common brand name, or a significant part of professional resources.
(m) Partner – Any individual with authority to bind the firm with respect to the performance of a professional services engagement.
(n) Personnel – Partners and staff in the firm. (Ref: Para. A20–A21)
(o) Professional judgment – The application of relevant training, knowledge and experience, within the context of professional standards, in making informed decisions about the courses of action that are appropriate in the design, implementation and operation of the firm’s system of quality management.
(p) Professional standards – Engagement Standards, as defined in the “Preface to the Standards on Quality Management, Auditing, Review, Other Assurance, and Related Services”, and relevant ethical requirements.
(q) Quality objectives – The desired outcomes in relation to the components of the system of quality management to be achieved by the firm.
(r) Quality risk – A risk that has a reasonable possibility of:
(i) Occurring; and
(ii) Individually, or in combination with other risks, adversely affecting the achievement of one or more quality objectives.
(s) Reasonable assurance – In the context of the SQMs, a high, but not absolute, level of assurance.
(t) Relevant ethical requirements – Principles of professional ethics and ethical requirements that are applicable to professional accountants when undertaking engagements that are audits or reviews of financial statements or other assurance or related services engagements. Relevant ethical requirements ordinarily comprise the provisions of the Code of Ethics issued by ICAI (“the Code of Ethics”) related to audits or reviews of financial statements, or other assurance or related services engagements. (Ref: Para. A22–A24, A62)
(u) Response (in relation to a system of quality management) – Policies or procedures designed and implemented by the firm to address one or more quality risk(s): (Ref: Para. A25–A27, A50)
(i) Policies are statements of what should, or should not, be done to address a quality risk(s). Such statements may be documented, explicitly stated in communications or implied through actions and decisions.
(ii) Procedures are actions to implement policies.
(v) Service provider (in the context of this SQM) – An individual or organization external to the firm that provides a resource that is used in the system of quality management or in the performance of engagements. Service providers exclude the firm’s network, other network firms or other structures or organizations in the network. (Ref: Para. A28, A105)
(w) Staff – Professionals, other than partners, including any experts which the firm employs.
(x) System of quality management – A system designed, implemented and operated by a firm to provide the firm with reasonable assurance that:
(i) The firm and its personnel fulfill their responsibilities in accordance with professional standards and applicable legal and regulatory requirements, and conduct engagements in accordance with such standards and requirements; and
(ii) Engagement reports issued by the firm or engagement partners are appropriate in the circumstances.
Requirements
Applying, and Complying with, Relevant Requirements
17. The firm shall comply with each requirement of this SQM unless the requirement is not relevant to the firm because of the nature and circumstances of the firm or its engagements. (Ref: Para. A29)
18. 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 SQM, including the application and other explanatory material, to understand the objective of this SQM and to apply its requirements properly.
System of Quality Management
19. The firm shall design, implement and operate a system of quality management. In doing so, the firm shall exercise professional judgment, 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
20. The firm shall assign: (Ref: Para. A32–A35)
(a) 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);
(b) Operational responsibility for the system of quality management;
(c) Operational responsibility for specific aspects of the system of quality management, including:
(i) Compliance with independence requirements; and (Ref: Para. A36)
(ii) The monitoring and remediation process.
21. In assigning the roles in paragraph 20, the firm shall determine that the individual(s): (Ref: Para. A37)
(a) Has the appropriate experience, knowledge, influence and authority within the firm, and sufficient time, to fulfill their assigned responsibility; and (Ref: Para. A38)
(b) Understands their assigned roles and that they are accountable for fulfilling them.
22. 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’s Risk Assessment Process
23. 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)
24. The firm shall establish the quality objectives specified by this SQM and any additional quality objectives considered necessary by the firm to achieve the objectives of the system of quality management. (Ref: Para. A42–A44)
25. 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:
(a) 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)
(i) With respect to the nature and circumstances of the firm, those relating to:
a. The complexity and operating characteristics of the firm;
b. The strategic and operational decisions and actions, business processes and business model of the firm;
c. The characteristics and management style of leadership;
d. The resources of the firm, including the resources provided by service providers;
e. Law, regulation, professional standards and the environment in which the firm operates; and
f. In the case of a firm that belongs to a network, the nature and extent of the network requirements and network services, if any.
(ii) With respect to the nature and circumstances of the engagements performed by the firm, those relating to:
a. The types of engagements performed by the firm and the reports to be issued; and
b. The types of entities for which such engagements are undertaken.
Notes:
1 SQM 2, Engagement Quality Reviews.
2 Such other person should be a member of the Institute of Chartered Accountants of India.
3 Such other person should be a member of the Institute of Chartered Accountants of India.
4 SA 620, “Using the Work of an Auditor’s Expert”, paragraph 6(a), defines the term “auditor’s expert.”
