A CA firm can have technically capable partners and still produce inconsistent engagement quality if its quality controls live only in people’s memory. SQC 1 addresses that firm-level problem. It requires a system of policies and procedures designed to give reasonable assurance that the firm and its personnel comply with professional standards and legal or regulatory requirements, and that reports issued are appropriate in the circumstances.
Framework checked on 13 September 2026: ICAI issued SQM 1 and SQM 2 as the replacement framework, but on 31 March 2026 it deferred their mandatory effective date until further announcement. ICAI expressly stated that SQC 1 continues to remain applicable. The current standards repository also lists SQC 1 with the Engagement and Quality Control Standards.
SQC 1 and SA 220 operate at different levels
SQC 1 governs the firm’s overall quality-control system across covered audits, reviews, assurance and related-service engagements. SA 220 addresses quality control at the level of an individual audit engagement. ICAI’s official SQC 1 text states this distinction. A completed engagement checklist therefore does not replace firm-wide controls over acceptance, independence, staffing, consultation, review and monitoring.
The six elements every SQC 1 system should address
1. Leadership responsibilities for quality
SQC 1 requires policies that promote an internal culture in which quality is essential and places ultimate responsibility for the quality-control system on the firm’s chief executive, managing partners or equivalent leadership. Commercial pressure should not override professional quality. Partner messages, appraisal criteria, resource allocation and review behaviour should reinforce the same expectation.
2. Ethical requirements and independence
The firm needs procedures that help personnel comply with applicable ethical requirements and maintain independence where required. The process should capture relationships, services and threats early enough for action. SQC 1 also requires at least annual written confirmation of compliance with independence policies from personnel required to be independent. Firms should align procedures with the current ICAI Code of Ethics resources.
3. Acceptance and continuance of clients and engagements
Before accepting or continuing a relationship, the firm should consider client integrity, whether it has the competence, time and resources needed, and whether ethical requirements can be met. If significant concerns are identified but the engagement is still accepted or continued, the resolution should be documented. A practical acceptance file should cover background information, conflicts, independence, staffing capacity, specialists, deadlines and unusual risk factors.
4. Human resources
The firm should have enough personnel with the capabilities, competence and commitment to ethical principles needed to perform engagements properly. Assignment, training, coaching, performance evaluation and workload matter as much as recruitment. The practical question is whether the people assigned can perform and review the work to the required standard within the available time.
5. Engagement performance
This element covers consistency in performance, supervision, review, consultation, resolution of differences of opinion, engagement quality control review where applicable and engagement documentation. A useful policy explains who reviews what, when consultation is required, how difficult conclusions are recorded and how disagreements are resolved before a report is released.
6. Monitoring
Monitoring asks whether the quality-control system actually works. SQC 1 describes it as ongoing consideration and evaluation of the system, including periodic inspection of selected completed engagements. The firm should identify recurring deficiencies, assess their significance and change policies, training, supervision or engagement procedures where necessary.
Choose the inspector and the files before the cycle starts
SQC 1, paragraphs 90–92, provides for selected completed engagements to cover at least one engagement per engagement partner over an inspection cycle ordinarily no longer than three years. The inspector must not have performed that engagement or its engagement quality control review. Small firms can arrange a suitably qualified external inspector. Keep an inspection plan showing partner coverage and the basis for file selection.
Distinguish this later inspection from an engagement quality control review. Under paragraphs 60–61, the firm’s policies require that review for all audits of listed entities’ financial statements and set criteria for other covered engagements. Where required, it must be completed before the report is issued. A later inspection cannot replace it.
Put the controls into the firm’s working calendar
- List the engagements the firm performs. Identify the audits, reviews, assurance and related-service engagements performed and the offices, partners and teams involved.
- Assign ownership. Put a responsible person against independence, acceptance, staffing, consultation, review, file completion and monitoring.
- Build preventive controls into engagement start-up. Complete client acceptance or continuance, conflict and independence checks before substantive work begins.
- Match people to risk. Assign partners, reviewers, specialists and staff based on competence, experience, availability and engagement complexity.
- Define consultation triggers. Examples include difficult accounting positions, suspected non-compliance, independence threats, modified reporting and unresolved differences of opinion.
- Make review evidence visible. Working papers should show who prepared and reviewed significant areas and how review points were cleared.
- Close and retain files systematically. ICAI’s amendment states that, for audit engagements, the retention period is ordinarily no shorter than seven years from the auditor’s report date or, if later, the group auditor’s report date. See the official retention-period amendment.
- Inspect and remediate. Record findings, root causes, corrective actions, owners and follow-up. Repeated findings may indicate a system-level weakness rather than a one-file problem.
A two-partner firm finds the same review gap twice
Illustrative situation: a two-partner firm audits owner-managed businesses. Its inspection plan selects completed files from both partners. For each file, the inspector is a suitably qualified person who did not perform that engagement or its engagement quality control review. Annual file selection is this firm’s chosen arrangement, not a universal annual inspection requirement.
Two inspected files contain conclusions on estimates but no record of the reviewer’s challenge to management’s assumptions. The firm cannot treat this as a formatting issue without investigating the work performed. Its follow-up record could read:
| Record | Illustrative entry |
|---|---|
| Finding | Files A and B: review of significant estimates is not evidenced. |
| Immediate action | The engagement partners assess the omitted evidence, work performed and any implications for the reports. Record further action without backdating. |
| Cause identified in this example | The allocation sheet named the preparer but left the reviewer and review date blank. |
| Correction and owner | The managing partner assigns a reviewer and review date when each significant estimate is allocated. |
| Follow-up | An eligible inspector checks the next two relevant completed files. Keep the finding open if review evidence is still missing. |
The entries are a suggested way to track the response, not an ICAI-prescribed form or evidence of a real engagement. A revised manual alone does not establish that the new control worked.
Common mistakes that weaken an SQC 1 system
- Using a quality manual copied from another firm without adapting it to the firm’s services and operating model.
- Obtaining annual independence declarations but failing to capture new relationships or services during the year.
- Accepting work before confirming enough time, competence or specialist support.
- Treating consultation as an informal conversation with no record of the issue and conclusion.
- Equating partner signature with evidence of engagement review.
- Inspecting files without analysing root causes or testing corrective action.
How a small firm should use SQC 1 proportionately
SQC 1 applies to all firms, but its text recognises that the nature of policies and procedures depends on factors such as firm size, operating characteristics and network status. Proportionality does not mean skipping an element; it means designing a workable control. A sole practitioner may use a suitably qualified external person for consultation or review where needed, while a larger firm may use specialist teams and formal quality functions. ICAI also publishes a Firm Manual Model Referencer as a practical documentation reference.
Before signing off the firm’s implementation checklist
For each of the six elements, identify the responsible person, the record that demonstrates operation and the next check date. Test those records against actual engagements. An unexplained gap belongs on the action list with an owner; do not close it merely because a policy exists. Recheck ICAI’s announcement page before making a transition decision about SQM 1 and SQM 2.
