SQCS No. 7  

The ASB has issued Statement on Quality Control Standards (SQCS) No. 7, A Firm’s System of Quality Control, which replaces all previously issued SQCSs. The new SQCS requires a CPA firm to establish a system of quality control to provide it with reasonable assurance that the firm’s accounting and auditing practice as well as its personnel comply with professional standards and applicable regulatory and legal requirements, and that reports issued by the firm or engagement partners are appropriate in the circumstances.

Leadership responsibilities related to quality within the firm (“tone at the top”). The SQCS recognizes the importance of a quality-oriented firm culture, and requires a firm to establish policies mandating that management responsibilities be assigned so that commercial considerations do not override those related to the quality of the work performed. To demonstrate the firm’s overarching commitment to quality, a firm also should establish policies and procedures that address performance evaluation, compensation, and advancement of personnel.

Acceptance and continuance of client relationships and specific engagements. The SQCS provides detailed guidance on client acceptance and continuance, requires documentation of the resolution of significant issues, and requires that policies and procedures provide for obtaining an understanding with the client, either orally or in writing, regarding the services to be performed.

• Determining capabilities and competencies

• Assigning personnel to engagements, if applicable

• Professional development, and

• Performance evaluation, compensation, and advancement.

The SQCS provides detailed guidance on the capabilities and competencies expected of an engagement partner, and on the assignment of engagement teams.

Engagement performance. The SCQS includes guidance on engagement supervision, review, and documentation, as well as on consultation policies and procedures. The Statement requires firms to establish policies and procedures for resolving differences of opinion, including a requirement that reports not be released until differences of opinion are resolved. The Statement also requires that firms establish criteria to determine which engagements are to be subject to an engagement quality control review. The SQCS defines engagement quality control review as a process designed to provide an objective evaluation, by an individual or individuals who are not members of the engagement team, of the significant judgments the engagement team made and the conclusions they reached in formulating the report. Firms are required to establish criteria for determining whether an engagement should be selected for review; all engagements meeting the criteria should undergo an engagement quality control review. In performing the review, the reviewer should read the financial statements or other subject matter information and the report, and consider whether the report is appropriate. The process should include a review of selected engagement documentation relating to the significant judgments the engagement team made and the conclusions they reached as well as a discussion with the engagement partner regarding significant findings and issues. The extent of the engagement quality control review may depend, among other things, on the complexity of the engagement and the risk that the report might not be appropriate in the circumstances.

Monitoring. The SQCS requires the performance of monitoring procedures that are sufficiently comprehensive to enable the firm to assess compliance with all applicable professional standards, regulatory requirements, and the firm’s quality control policies and procedures. Monitoring procedures may be accomplished by performing engagement quality control reviews; post-issuance reviews of working papers, reports, and financial statements for selected engagements; or inspection procedures.

For small firms that have a limited number of personnel with sufficient and appropriate experience and authority, monitoring procedures may need to be performed by some of the same individuals responsible for compliance with the firm's quality control policies and procedures. The standard notes that having an individual inspect his or her own compliance with a quality control system may be less effective than having such compliance inspected by another qualified individual. Accordingly, a firm that has a limited number of personnel with sufficient and appropriate experience and authority may find it beneficial to engage a qualified individual from outside the firm to perform inspection procedures. However, firms are not required to do so.

A firm is required to document its quality control policies and procedures and communicate them to its personnel. The extent of the documentation is based on the size, structure, and nature of the firm’s practice. Although communication is enhanced when it is in writing, SQCS No. 7 does not require that the communication be in writing.

The new SQCS defines the terminology it uses to describe the degree of responsibility imposed on the firm with respect to the following two categories of requirements:

• Unconditional requirements. The firm is required to comply with an unconditional requirement in all cases in which the circumstances exist to which the unconditional requirement applies. SQCSs use the words must or is required to indicate an unconditional requirement.

To assist practitioners in implementing the standard, the ASB has issued a Practice Aid, Establishing and Maintaining a System of Quality Control for a CPA Firm’s Accounting and Auditing Practice.