Quality Management Standards (SQMS): CPA Exam Guide
Understand the AICPA quality management standards for the CPA AUD exam. Covers SQMS No. 1 and No. 2, risk-based quality management, and engagement quality reviews.
Evolution to Quality Management Standards
The AICPA replaced its quality control standards (SQCS) with the Statements on Quality Management Standards (SQMS), effective December 15, 2025. SQMS No. 1, "A Firm's System of Quality Management," and SQMS No. 2, "Engagement Quality Reviews," establish a modernized, risk-based approach to quality management for accounting firms. These standards align with the International Auditing and Assurance Standards Board's (IAASB) International Standards on Quality Management (ISQM 1 and ISQM 2). CPA exam candidates should understand the key changes from the prior standards and the components of the new framework.
SQMS No. 1: A Firm's System of Quality Management
Risk-Based Approach
The most significant change under SQMS No. 1 is the shift from a compliance-based approach to a risk-based approach. Firms must establish quality objectives, identify and assess quality risks (risks that have a reasonable possibility of occurring and would adversely affect achievement of the quality objectives), and design and implement responses to address those risks. This is a proactive approach that requires firms to customize their quality management systems to their specific circumstances rather than simply applying a uniform set of policies.
Components of the System
SQMS No. 1 identifies eight components of a system of quality management: governance and leadership, relevant ethical requirements, acceptance and continuance of client relationships and specific engagements, engagement performance, resources (human, technological, and intellectual), information and communication, the monitoring and remediation process, and the firm's risk assessment process. Each component has associated quality objectives that the firm must establish and achieve.
Governance and Leadership
The firm must assign ultimate responsibility and accountability for the quality management system to a firm leader or leadership team. The firm's culture must recognize and reinforce the importance of quality through its actions and communications. This includes establishing policies related to financial and operational matters that support quality, such as performance evaluation and compensation structures that do not undermine quality.
Monitoring and Remediation
The firm must design and perform monitoring activities to provide a basis for identifying deficiencies and evaluating the system's overall effectiveness. Monitoring includes inspections of completed engagements, analysis of information from external sources (such as peer reviews and regulatory inspections), and evaluation of root causes of identified deficiencies. When deficiencies are identified, the firm must implement appropriate remedial actions and evaluate whether they are effective.
Annual Evaluation
At least annually, the individual with ultimate responsibility must evaluate whether the quality management system provides reasonable assurance that the objectives are being achieved. The conclusion may be that the system provides reasonable assurance, that except for certain matters it provides reasonable assurance, or that it does not provide reasonable assurance. This evaluation must be documented.
SQMS No. 2: Engagement Quality Reviews
When an EQR Is Required
An engagement quality review (EQR) is an objective evaluation of the significant judgments made by the engagement team and the conclusions reached. Under SQMS No. 2, the firm establishes policies and procedures specifying which engagements require an EQR. At a minimum, EQRs are required for audits of financial statements of listed entities and any other engagements for which the firm determines an EQR is an appropriate response to quality risks.
EQR Reviewer Qualifications
The EQR reviewer must have the competence and capabilities necessary to perform the review, including sufficient technical knowledge and experience. The reviewer must also be independent and objective, meaning the reviewer should not have been involved in performing the engagement or making the significant judgments being reviewed. The firm must establish a cooling-off period before an individual who served as the engagement partner can serve as the EQR reviewer on the same engagement.
EQR Procedures
The EQR reviewer evaluates the engagement team's basis for conclusions, including significant judgments, the proposed audit report, and whether appropriate consultation has occurred. The reviewer discusses significant matters with the engagement partner and reviews selected engagement documentation. The engagement report cannot be dated before the EQR is completed.
CPA Exam Focus Areas
- SQMS No. 1 uses a risk-based approach: firms identify quality risks and design responses, rather than following a standardized checklist.
- The eight components of the quality management system should be familiar, especially monitoring and remediation.
- An annual evaluation of the quality management system is required by the individual with ultimate responsibility.
- EQRs are required for listed entity audits and must be completed before the report is dated.
- The EQR reviewer must be independent of the engagement team and have the necessary competence and experience.
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