INTRODUCTION
In May 1996, the AICPA Auditing Standards Board issued Statement on Quality Control Standards (SQCS) No. 2, System of Quality Control for a CPA Firms Accounting and Auditing Practice (AICPA Professional Standards, vol. 2, QC sec. 20), and No. 3, Monitoring a CPA Firms Accounting and Auditing Practice (AICPA Professional Standards, vol. 2, QC sec. 30). These Statements supersede SQCS No. 1, System of Quality Control for a CPA Firm. The provisions of SQCS Nos. 2 and 3 became effective on January 1, 1997.
STATEMENT ON QUALITY CONTROL STANDARDS NO. 2
SQCS No.1 applied to a CPA firms quality control for its auditing services (SASs) and accounting and review services (SSARSs). SQCS No. 2 expands that applicability to include attest services (SSAE) performed by a CPA firm. SQCS No. 2 defines an accounting and auditing practice as
all audit, attest, accounting and review, and other services for which standards have been established by the AICPA Auditing Standards Board or the AICPA Accounting and Review Services Committee under rule 201 or 202 of the AICPA Code of Professional Conduct (AICPA Professional Standards, vol. 2, ET secs. 201 and 202).
SQCS No. 2 also combines the original nine elements of quality control into five broader elements (see Exhibit 1) and adds five new requirements. The five elements are
- Independence, Integrity, and ObjectivityExpands the independence element under SQCS No. 1 to include integrity and objectivity.
New RequirementThe firm is now required to establish policies and procedures to assure that personnel perform all professional responsibilities with integrity and maintain objectivity while performing those responsibilities.
- Personnel ManagementCombines the SQCS No. 1 elements of hiring, advancement, assigning personnel to engagements, and professional development. The firms policies and procedures related to personnel management should provide it will reasonable assurance that
Personnel hired have the characteristics needed to perform competently.
Work assigned to personnel who have the technical training and proficiency required for the assignment.
Personnel selected for advancement have the qualifications needed to perform the responsibilities they will be called on to assume.
New RequirementPersonnel participate in general and industry-specific continuing professional education (CPE) and other professional development activities that enable them to fulfill their assigned responsibilities and the requirements of the AICPA and regulatory agencies. Personnel refers to all individuals who perform professional services for which the firm is responsiblewhether or not they are CPAs. Personnel would include
- CPAs and individuals qualified to seek that status.
- Part-time employees who work year round on accounting and auditing engagements.
- Individuals who provide client services on accounting and auditing engagements regardless of their education, depending on the type of duties performed.
A peer reviewer may question decisions that appear to be unreasonable. However, it is the firms judgement that decides whether an individual is a professional subject to the CPE requirements.
SQCS No. 2 clarifies SQCS No. 1 by making it clear that firms must do more than just provide CPE hours. SQCS No. 2 requires the firm to ensure that all personnel have both general and industry specific knowledge and skills that relate to the types of clients and services they perform. Rather than just counting CPE hours, firms must give careful thought about the subject matter of CPE courses taken by its professionals and how best to provide them with the skills they need.
- Acceptance and Continuance of Clients and EngagementsExpands the acceptance and continuance of clients element under SQCS No.1 to included engagements.
New RequirementThe firm must establish policies and procedures that provide reasonable assurance that it will accept only engagements it can complete with due professional competence. (Professional pronouncements already required a CPA firm to accept only those engagements it can complete with professional competence.)
New RequirementThe firm must establish policies and procedures that provide for obtaining an understanding with the client about the nature, scope, and limitations of the services to be performed. SQCS No. 2 refers the firm to professional standards for guidance on whether the understanding should be oral or written.
- Engagement PerformanceCombines SQCS No. 1 elements of supervision and consultation. Under this element the firm is required to establish policies and procedures for
Planning, performing, supervising, reviewing, documenting, and communicating the results of each engagement.
Assuring personnel consult, when appropriate, on a timely basis within or outside the firm.
- MonitoringExpands the inspection element under SQCS No 1 to the broader concept of monitoring. Monitoring is an ongoing process of evaluating the firms system of quality control which inspection is a measure of the system of quality control at a point in time.
New RequirementThe firm must establish policies and procedures that provide an ongoing consideration and evaluation of
Relevance and adequacy of its policies and procedures.
Appropriateness of its guidance materials and any practice aids.
Effectiveness of professional development activities.
Compliance with its policies and procedures.
Even though SQCS No. 2 adds five new requirements that a firm must consider when establishing its system of quality control, the new quality control standards do not establish any new elements and should not have a significant effect on a firm that already has an established system of quality control.
ADMINISTRATION OF A SYSTEM OF QUALITY CONTROL
To comply with SQCS No. 2, a firm should
- Assign ResponsibilityThe firm should assign an appropriate individual(s) within the firm to be responsible for the design and maintenance of its quality control policies and procedures. In making that assignment, the firm should consider
Proficiency of the individual(s).
Authority to be delegated to the individual(s).
Extent of supervision to be provided over the individual(s).
- CommunicateThe firm should communicate its quality control policies and procedures to its personnel on a timely basis in a manner that provides reasonable assurance that they are understood and complied with.
- Document ComplianceThe firm should prepare documentation to demonstrate compliance with its quality control policies and procedures. The documentation should be retained long enough to enable the individuals performing the firms monitoring procedures and its peer review to evaluate the extent of compliance with its quality control policies and procedures. The form and content of the documentation is a matter of judgement and depends on such factors as
- Firm size.
- Number of offices.
- Degree of authority allowed personnel and offices.
- Nature and complexity of accounting and auditing practice.
- Firm organization.
- Cost-benefit.
The documentation requirement pertains to documenting compliance with the firms system of quality control. Neither the old quality control standard nor the new one requires that the firm have a written quality control document. The firm should consider its size, structure, and nature of practice when determining whether documentation is necessary for effective communication of its quality control policies and procedures and, if so, the extent of such documentation. In some firms an appropriate practice aid published by an outside vendor would be sufficient.
GUIDANCE ON IMPLEMENTATION OF REVISED QUALITY CONTROL STANDARDS
In 1996, the AICPA issued the Guide for Establishing and Maintaining a System of Quality Control for a CPA Firms Accounting and Auditing Practice (the guide). The guide presents the recommendations of the AICPA Joint Task Force on Quality Control Standards on the application of SQCS Nos. 2 and 3. It provides examples of policies and procedures a firm should consider for each of the five elements of quality control, using four hypothetical firms ranging from a large national firm to a sole practitioner who performs no audits. The guide is incorporated into the 1997 AICPA Accounting and Auditing Manual. It can also be ordered separately from the AICPA Order Department (product no. 067020). The price is $25 to AICPA members and $27.50 to non-members.
SQCS No. 3 provides guidance on implementing the monitoring element and Section 10000 of the AICPA Peer Review Program Manual and section 18000 of the SECPS Peer Review Program Manual include guidance material on performing monitoring procedures.
SUMMARY OF MAJOR CHANGES MADE BY SQCS NO. 2
SQCS No. 2 makes the following major changes to its predecessor SQCS No. 1:
Condenses the nine elements of a system of quality control for an accounting and auditing practice into five elements. See Exhibit 1 for a conversion chart.
Broadens the independence element to include integrity and objectivity.
Expands the acceptance and continuance of clients element to include engagements.
Adds that acceptance and continuance of clients and engagements provide for obtaining an understanding with the client regarding the services to be performed.
Adds that personnel participate in industry-specific continuing professional education (CPE) and satisfy the CPE requirements of the AICPA and regulatory agencies.
Changes the inspection element into the broader concept of monitoring.
