SQMS No. 1 — System of Quality Management

Exam: CPA — Certified Public Accountant Chapter: Chapter 3 — AUD Ethics, Independence, and Engagement Acceptance Standard: SQMS No. 1 (Statement on Quality Management Standards No. 1) Effective Date: December 15, 2025 (for calendar-year firms) Testable: AUD Blueprint updated January 1, 2026 — SQMS No. 1 is now the tested standard Last Updated: 2026-06-26

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Key Takeaways

• SQMS No. 1 replaces the old quality control framework (QC standards under SAS/SSAE) with a risk-based, proactive quality management system.
• Firms must now design a System of Quality Management (SQM) — not just maintain quality control policies.
• Eight components must be present in every firm's SQM.
• The firm's network and service providers are now within scope of quality management responsibilities.
• SQMS No. 1 is effective for December 15, 2025 for most calendar-year accounting firms.
• AUD exam questions previously asking about "quality control" at the firm level now test SQMS No. 1 language and concepts.

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Background: Old vs. New Framework

| Feature | Old Quality Control (QC) Standards | SQMS No. 1 | |---|---|---| | Standard name | SAS No. 122 (AICPA SQCS No. 8) | SQMS No. 1 | | Approach | Compliance-based: establish policies | Risk-based: design and monitor a system | | Scope | Individual firm | Firm + network + service providers | | Effective date | Various (replaced by SQMS) | December 15, 2025 | | Monitoring | Annual cold-file review | Ongoing monitoring information process | | Engagement partner role | Engagement quality review | Engagement quality review + EQCR responsibility defined differently |

Exam Tip: If an AUD question asks about "firm-level quality control," frame your answer in SQMS No. 1 language: "system of quality management," "risk assessment process," and "eight components." Old SQC terminology is no longer the tested framework.

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The Eight Components of SQMS No. 1

SQMS No. 1 requires each firm to establish a SQM with eight components:

1. Governance and leadership — The firm's culture, leadership accountability, and commitment to quality 2. Relevant ethical requirements — Independence, integrity, objectivity, and professional behavior 3. Acceptance and continuance — Client and engagement acceptance/continuance decisions 4. Engagement performance — Planning, supervision, review, and documentation policies 5. Resources — Human resources, technological resources, and intellectual resources 6. Information and communication — How quality information flows within the firm 7. Risk assessment process — Identifying, assessing, and responding to quality risks 8. Monitoring and remediation — Evaluating the system's effectiveness and fixing deficiencies

Exam Tip: Memorize all eight components. AUD TBSs may present a scenario and ask which component is being described or which component a deficiency falls under.

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The Risk Assessment Process — The Heart of SQMS No. 1

Unlike the old compliance-based approach, SQMS No. 1 centers on a formal risk assessment process:

1. Establish quality objectives for each component 2. Identify and assess quality risks that could prevent achieving objectives 3. Design responses to address assessed risks 4. Implement and monitor responses on an ongoing basis

This makes SQMS No. 1 more dynamic than the old QC standards — the firm must continuously monitor and update its SQM, not just conduct an annual file review.

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Monitoring and Remediation (New Concept)

• Firms must establish a monitoring and remediation process (not just "inspection")
• The process must provide timely information about whether the SQM is functioning effectively
• Deficiencies must be evaluated, communicated, and remediated
• The "annual cold-file review" still exists but is now part of a broader monitoring process

Types of monitoring activities:

• Engagement quality reviews (during engagements)
• Post-issuance reviews (cold-file reviews)
• Internal inspections
• External inspections (peer review, PCAOB, regulatory)

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Networks and Service Providers

A key expansion in SQMS No. 1: the firm's SQM must address:

• Networks: If the firm is part of a network (e.g., a global accounting network), the firm must understand and consider the network's quality management processes
• Service providers: If the firm uses external service providers (e.g., outsourced IT, software tools, specialists), the firm must evaluate whether those providers support the firm's quality objectives

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Engagement Quality Reviews (EQR)

• Required for listed entities (public companies) and other engagements the firm designates
• EQR is performed by an engagement quality reviewer (EQR) — a professional not part of the engagement team
• EQR must be completed before the audit report is issued
• Under SQMS No. 1, EQR responsibilities and qualifications are more explicitly defined

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What This Means for AUD Exam Candidates

The AUD exam updated its Blueprint effective January 1, 2026 to integrate SQMS No. 1. Expect:

• MCQs asking which of the eight components is implicated in a given scenario
• TBSs requiring you to evaluate whether a firm's quality management system is appropriately designed
• Questions distinguishing SQMS No. 1 monitoring concepts from old inspection terminology
• Scenarios involving network relationships and service provider responsibilities

No longer tested on AUD:

• References to the old SQCS No. 8 / SAS No. 122 quality control framework
• Peer review as the primary monitoring vehicle (peer review still exists but is now just one monitoring tool)

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Quick Reference

| SQMS No. 1 Concept | Key Fact | |---|---| | Effective date | December 15, 2025 (calendar-year firms) | | Number of components | 8 | | Central approach | Risk-based | | Replaces | Old QC standards (SQCS No. 8) | | Scope expansion | Now includes networks and service providers | | Monitoring | Ongoing; not just annual | | EQR timing | Must be complete before report issued |

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Tags: #CPA #AUD #chapter3 #QualityManagement #SQMS #SQMS1 #QualityControl #EngagementQuality #FirmLevelControls #2026Blueprint