From Documentation to Demonstrable Audit Quality

Why This Change Matters Now

For years, audit firms operated under SQC 1, focusing on policies and compliance. Yet, inspection findings repeatedly showed a gap:

Well-documented systems did not always result in high-quality audits.

Recognising this, the Institute of Chartered Accountants of India has introduced Standard on Quality Management 1 & Standard on Quality Management 2, aligned with global standards.

The Real Need Behind SQMs

Common issues observed in practice:

• Policies existed but were not followed consistently
• Documentation often completed after audit completion
• Engagement reviews became procedural sign-offs
• Limited linkage between risks and firm responses
• Increasing complexity (Ind AS, estimates) not matched by capability

Compliance was present.
Quality was inconsistent.

What Changes Under SQM 1?

Shift in Approach

Core Framework

1. Quality Objectives

• Governance & leadership
• Ethics & independence
• Engagement performance
• Resources
• Monitoring

2. Identify Risks

• What can go wrong in your firm?

3. Design Responses

• Controls aligned to risks

4. Monitor & Remediate

• Continuous improvement

Practical Questions Every Firm Must Ask

• Are we taking on clients beyond our expertise?
• Is partner review timely or last-minute?
• Are staffing pressures affecting audit quality?
• Are independence systems robust or manual?

SQM 2 – Engagement Quality Review (EQR)

What’s Strengthened?

• Reviewer must be independent & experienced
• Must evaluate significant judgments
• Must challenge engagement team where needed

Proper documentation mandatory

Reality Check:
EQR is no longer a sign-off—it is a quality safeguard.

Effective Date (India)

• Global: 15 December 2022
• India: Expected 1 April 2026

Important:
Implementation requires 12–18 months—start early.
 

SQM & Peer Review – Direct Impact

Under the Peer Review Board of ICAI:

Common observations already include:

• weak documentation
• Inadequate supervision
• Weak audit evidence
• Insufficient review

Future Outlook:

• SQM will become central to peer review
• Strong systems = smoother reviews

Implementation Roadmap (Practical Guide)

Phase 1 – Initiation

• Appoint SQM lead partner
• Form core team
• Perform gap analysis
• Identify high-risk areas

Phase 2 – Risk Assessment

• Define quality objectives
• Identify firm-specific risks:
  • Time pressure (March audits)
  • Skill gaps
  • Review delays
• Avoid generic risk lists

Phase 3 – Design Responses

• Link risks to actions

Examples:

• Review delays → Interim review checkpoints
• Skill gaps → Structured training
• Ensure responses are practical

Phase 4 – Implementation

• Update manuals & templates
• Strengthen independence systems
• Train teams (all levels)

Phase 5 – Monitoring

• Internal inspections
• Root cause analysis
• Track recurring issues
• Continuous improvement

Common Pitfalls to Avoid

• Treating SQM as documentation update
• Copy-paste templates
• Generic risk identification
• Weak root cause analysis
• Late-stage EQR reviews

Final Thought

SQMs are not about more compliance— they are about making audit quality real.

Firms that embrace this shift will:

• Improve audit consistency
• Reduce regulatory risk
• Strengthen credibility

Others may continue to comply— but struggle when quality is tested.