SQCS No. 2: System of Quality Control

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Peer Review Guide > Summary of Quality Control Standards

Statement on Quality Control Standards No. 2:
System of Quality Control For a CPA Firm’s Accounting and Auditing Practice

n Overview.. The standard supersedes Statement on Quality Control Standards No. 1 and its interpretations. While no new quality control elements are established, the present nine elements have been consolidated into five broader elements. In part, the combination recognizes the often-inseparable interrelationships that exist among various elements of quality control. The revised standard is intended to improve guidance to CPA firms on establishing a system of quality control.

n Effective Date.. The standard became effective for a firm’s system of quality control starting January 1, 1997.

n General Definition of a System of Quality Control.. The standard broadly defines a system of quality control as a "process to provide the firm with reasonable assurance that its personnel comply with applicable professional standards and the firm’s standards of quality."

A QC system includes the firm’s organizational structure and the policies adopted and procedures established.

The firm’s QC system should be appropriately comprehensive and suitably designed, although the nature, extent and formality of a system will vary from firm to firm.

Factors that affect the nature and design of policies and procedures include: the firm’s size, the number of offices, the degree of authority allowed its personnel and its offices, the knowledge and experience of its personnel, the nature and complexity of the firm’s practice, and appropriate cost-benefit considerations.

Variance in an individual’s performance and understanding of professional standards or the firm’s quality control policies and procedures can reduce the effectiveness of the firm’s system.

n Definition of a Firm’s Accounting and Auditing Practice. The standard defines a firm’s accounting and auditing practice to include all audit, attest, and compilation and review, and other services for which professional standards have been established by the AICPA Auditing Standards Board or the AICPA Accounting and Review Services Committee.

In October 1998, the AICPA Peer Review Board released its revision to the Standards for Performing and Reporting on Peer Reviews. Among other things, the revised standard expanded the definition of an accounting and auditing practice as it relates to performing and reporting on peer review to include all engagements performed under Standards for Attestation Engagements.

n Independence, Integrity and Objectivity. This quality control element includes and stresses the importance of the elements of integrity and objectivity. The standard requires a firm’s system of quality control to provide reasonable assurance that personnel maintain independence in fact and in appearance.

n Personnel Management. This quality control element retained the four elements (Hiring, Advancement, Assignment of Personnel and Professional Development) from original quality control standard No. 1 and combined them into one element. The broad underlying objectives of the four original elements were retained.

The firm’s policies and procedures related to personnel management should provide that firm with reasonable assurance that:

Personnel hired have attributes that allow them to perform competently.
Work is assigned to those with the right amount of technical skill and training needed for the assignment.
Personnel participate in general and industry-specific continuing education and participate in professional development activities that enable them to fulfill their assigned responsibilities and the requirements of the AICPA and regulatory agencies.
Personnel selected for advancement possess the necessary qualifications needed to assume advanced responsibility if called upon to do so.

n Acceptance and Continuance of Clients and Engagements. Under this standard, a firm’s system of quality control should provide reasonable assurance that the firm:

Only undertakes engagements that the firm can reasonably expect to be completed with professional competence, and
Appropriately considers risks associated with providing service in particular circumstances.

The standard also requires that a firm’s policies and procedures provide for obtaining an understanding with the client on the nature, scope and limitations of the services to be performed, but defers to professional standards for guidance in determining whether the understanding should be oral or written.

n Engagement Performance. Under this element of quality control, a firm should have in place policies and procedures that provide it with reasonable assurance that:

Engagement work meets professional standards, regulatory requirements and the firm’s standards of quality.
All phases of the design and execution are covered, including planning, performing, supervising, reviewing, documenting, and communicating the results of the engagement.
Personnel have available and refer to authoritative references, whether literature or other sources, and consult when appropriate with individuals within or outside the firm who have the appropriate level of knowledge, competence, judgment and authority.

n Monitoring. This standard recognizes that evaluation of compliance with professional standards is an ongoing process rather than a point-in-time measure. The standard requires all firms to monitor their system of quality control for suitability of design and effectiveness of application. Monitoring addresses four areas:

Relevance and adequacy of the firm’s policies and procedures.
Appropriateness of the firm’s guidance materials and practice aids.
Effectiveness of professional development programs.
Compliance with the firm’s policies and procedures

n Administration of a System of Quality Control. Four considerations combine to provide reasonable assurance that the firm’s system of quality control meets its objectives.

Assignment of responsibilities. Responsibility for the design and maintenance of the firm’s policies and procedures should rest with an appropriate individual(s). Responsibility for compliance with those policies and procedures rests with all members of the firm.

Communication. Personnel should be informed of the firm’s quality control policies and procedures (and changes thereto) in a manner that assures the firm that its policies and procedures are both understood and complied with.

Documentation of quality control policies and procedures. Documentation is a communication tool. The degree of documentation, if any, needed to enhance communication of the firm’s policies and procedures depends on the size, structure and nature of the firm. Written communication usually improves compliance with the firm’s QC policies and procedures, but absence of documentation does not necessarily impair the effectiveness of the firm’s system.

Documentation of compliance. Documentation of the firm’s compliance with its system of quality control is required, but is distinct from documentation of its policies and procedures. Documentation of compliance demonstrates how the firm followed its established system. For example, audit personnel may be required to use certain audit planning practice aids. If this policy is generally understood to be the firm’s policy, even if not a written policy, the firm would still be required to document its compliance with the policy presumably through it completion of the practice aid.

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