The AICPA’s new System of Quality Management Standards (SQMS) No. 2 is set to transform engagement quality reviews (EQRs) within CPA firms. With a compliance deadline for audits or reviews with periods beginning on or after December 15, 2025, it is crucial for firms to understand the implications of these changes. Here are five key points about SQMS No. 2, highlighting its significance and the challenges ahead.
- Comprehensive Guidelines for EQRs
SQMS No. 2 establishes clear guidelines for the appointment, eligibility, and responsibilities of engagement quality reviewers. This framework ensures that EQRs are appropriately qualified to provide objective evaluations of significant judgments made by the engagement team. By enhancing the criteria for EQRs, firms can ensure that their reviews are conducted with a focus on quality and integrity, reinforcing the reliability of audit findings.
- Focus on Competence and Time Allocation
Under SQMS No. 2, EQRs must meet specific competence and independence standards and have sufficient time to perform their duties effectively. This focus ensures that reviewers are not only knowledgeable but also have the capacity to engage in a thorough evaluation process. By prioritizing both qualifications and time, firms can enhance the quality of their reviews and promote a more robust auditing process.
- Emphasis on Deeper Evaluations
The new standard enhances the role of EQRs by requiring a deeper evaluation of significant judgments. This includes applying professional skepticism and thoroughly assessing the rationale behind major decisions. By emphasizing this critical aspect, SQMS No. 2 encourages EQRs to take a more proactive stance in identifying potential risks and ensuring that the engagement team has thoroughly addressed them. This shift will help foster a culture of quality and continuous improvement within firms.
- Mandated Documentation for Transparency
SQMS No. 2 mandates comprehensive documentation of the nature, timing, and extent of engagement quality review procedures performed. This requirement is essential for ensuring transparency and accountability in the review process. Proper documentation not only supports the integrity of the review but also provides a clear reference for future audits, making it easier to address any questions or concerns that may arise.
- Utilizing External Resources
Firms have the option to engage external individuals as EQRs or assistants if they lack qualified internal resources with sufficient time. This flexibility allows firms to maintain high-quality standards even when facing staffing challenges. By bringing in external expertise, firms can ensure that their engagement quality reviews remain thorough and effective, enhancing overall audit quality.
Conclusion
SQMS No. 2 represents a significant advancement in the regulatory framework governing engagement quality reviews for CPA firms. As firms prepare for these new requirements, a proactive approach to quality management will be essential. By understanding the implications of SQMS No. 2 and implementing its guidelines, CPA firms can improve the quality of their audits and reviews, enhance accountability, and foster greater trust in the financial reporting process. While the transition may pose challenges, the commitment to quality will be invaluable for the future of the profession.
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