Overview of the New Quality Management Standards

By Jaclyn Veno, CPA, Galasso Learning Solutions – March 20, 2024
Overview of the New Quality Management Standards

New quality management standards from the American Institute of CPAs (AICPA) affect every firm with an accounting and auditing practice. Design and implementation of a system of quality management (QM) is required to be completed by Dec. 15, 2025, with an evaluation required within a year.

Background

In June 2022, the AICPA’s Auditing Standards Board issued the quality management standards, including Statements on Quality Management Standards (SQMS) No. 1 and No. 2, along with Statements on Auditing Standards No. 146. Additionally, Statement on Standards for Accounting and Review Services (SSARS) 26 was issued by the Accounting and Review Services Committee.

These new standards were prompted by the evolving business landscape. The power and use of technological resources have increased exponentially, both by businesses and firms. Additionally, the expectations of regulators, given high-profile business failures, are higher now than ever.

SQMS NO. 1

SQMS No. 1 introduces a new, risk-based quality management approach, moving away from a policies-based model. It underscores leadership responsibility, requiring firms to tailor their systems to the unique circumstances of their accounting and auditing practices, allowing for scalability. The individuals assigned ultimate responsibility and accountability for the system of QM, on behalf of the firm, evaluate the system annually and conclude whether it provides the firm with reasonable assurance that the objectives of the system are being achieved.

The key components of this SQMS encompass the firm’s risk assessment process, governance and leadership, relevant ethical requirements, acceptance and continuance, engagement performance, resources, infor­mation and communication, and monitoring and remediation.

The firm’s risk assessment process is a new component that comprises the process the firm is required to follow in implementing the risk-based approach to quality management. The process entails the following three steps:

  1. Establish quality objectives — additional quality objectives when necessary to achieve the objective of the system of quality management.
  2. Identify and assess quality risks with a reasonable possibility of occurring and affecting the achievement of a quality objective.
  3. Design and implement the firm’s responses and include certain responses specified in the standard.

The governance and leadership component addresses the importance of quality in the firm’s strategic decisions and actions, including financial and operational priorities, as well as firm leadership’s ability to influence decisions about the firm’s resources. Other matters such as the firm’s culture, how it demonstrates a commitment to quality and how responsibilities with respect to the system of QM are assigned may also be addressed. Relevant ethical requirements align quality objectives with ethical standards, ensuring compliance with relevant ethical requirements, including independence.

Acceptance and continuance involve judgments based on client information, engagement nature and the firm’s ability to meet professional standards. Engagement performance ensures understanding, supervision, professional judgment, consultations and proper documentation. The resources component emphasizes aligning human, technological and intellectual resources with professional standards.

The new information and communication component underscores the importance of an integrated information system supporting quality management. The monitoring and remediation process is an iterative, integrated system for continuous improvement, involving design and performance monitoring activities.

In summary, all these components operate in a highly integrated, non-linear manner. SQMS No. 1 signifies a proactive, tailored and scalable system that provides reasonable assurance of meeting objectives.

SQMS NO. 2

SQMS No. 2 addresses the appointment and eligibility of engagement quality reviewers (EQRs) and the performance of engagement quality reviews. Applicable to engagements requiring a review under SQMS No. 1, it emphasizes flexibility based on the level of significant judgments in engagements. SQMS No. 1 allows firms to decide when an EQR is necessary, while SQMS No. 2 outlines processes for appointing eligible EQRs, focusing on competence, capabilities and authority when an EQR is determined to be an appropriate risk response.

SAS 146 AND SSARS 26

Statement on Auditing Standards (SAS) 146 emphasizes the auditor’s responsibilities for quality management, stressing professional skepticism, enhanced documentation and robust communication. The engagement partner (EP) assumes overall responsibility for managing and achieving quality, ensuring appropriate involvement, and considering audit nature, circumstances and firm policies before dating the report.

SSARS 26, the final standard in the suite, amends AR-C sections 60, 70, 80 and 90 to align with SQMS.

These new standards enhance firm leadership, accountability and governance through a risk-based approach. They address technology and external service providers, and they emphasize continuous information flow, proactive monitoring and effective communication. Additionally, they reinforce EQR requirements and enhance the EP’s responsibility for audit leadership and quality. 

This article appeared in the Spring 2024 issue of New Jersey CPA magazine. Read the full issue.