Regulatory updates

On 14 October 2024, the Institute of Chartered Accountants of India (ICAI) issued the following standards:

• 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
• SQM 2: Engagement Quality Reviews.

These standards would override the Standard on Quality Control (SQC) 1, Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements once the SQMs are effective.

Key points covered in these standards is given below:

SQM 1

• SQM 1 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
• 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.
• For the purposes of this SQM, a system of quality management addresses the following eight components.
• The firm’s risk assessment process: Involves identifying and assessing risks to the firms’ quality objectives. This process ensures that the firm understands the potential threats to achieving its quality objectives and can implement appropriate responses.
• Governance and leadership: Establishes the firm's commitment to quality through leadership and governance structures. This includes setting the tone at the top and ensuring that quality is a core value within the organization.
• Relevant ethical requirements: Ensures compliance with ethical standards and regulations. This component addresses the ethical obligations of the firm and its personnel.
• Acceptance and continuance of client relationships and specific engagements: Focuses on the firm's policies and procedures for accepting and continuing client relationships and engagements.
• Engagement performance: Covers the policies and procedures related to the performance of engagements. This ensures that engagements are performed in accordance with professional standards and regulatory requirements.
• Resources: A firm’s quality objectives should appropriately address obtaining, developing, using, maintaining, allocating and assigning resources¹ This includes human resources, technological resources, intellectual resources and service providers in a timely manner to enable the design, implementation and operation of the system of quality management
• Information and communication: Ensures that relevant information is obtained or generated and communicated within the firm and with external parties. Effective communication supports the functioning of the quality management system
• The monitoring and remediation process: Involves ongoing monitoring of the quality management system and taking corrective actions, when necessary.
• Applicability: SQM 1 applies to all firms performing audits or reviews of financial statements, or other assurance or related services engagements.

Effective date: SQM 1 is recommendatory from 1 April 2025 and mandatory from 1 April 2026² Systems of quality management in compliance with SQM 1 may be designed and implemented by 1 April 2025 on a voluntary basis, and the evaluation of the system of quality management may be performed within one year following 1 April 2025.

Systems of quality management in compliance with SQM 1 are required to be designed and implemented by 1 April 2026, and the evaluation of the system of quality management is required to be performed within one year following 1 April 2026. .

SQM 2

SQM 2 deals with the appointment, eligibility, and responsibilities of the engagement quality reviewer.

• Appointment: SQM 2 outlines the process for appointing an engagement quality reviewer
• Eligibility: The eligibility criteria of an engagement quality reviewer includes competence, capability and objectivity of an individual, including whether the individual has sufficient time, the authority of the reviewer in the firm and whether the reviewer complies with ethical requirements.
• Responsibilities and documentation: The engagement quality reviewer would be responsible for inter alia discussions and review of significant matters, significant judgements and conclusions. Further, the review process and the findings should be appropriately documented.

Applicable: SQM 2 applies to all engagements for which an engagement quality review is required to be performed in accordance with SQM 1.

Effective date: SQM 2 is recommendatory for audits and reviews of financial statements for periods beginning on or after 1 April 2025 and other assurance and related services engagements beginning on or after 1 April 2025.

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To access the text of the standards, please click here