Differences Between QC 1000 and SQMS 1
Accounting firms in the U.S. are required to implement new quality management standards (QC 1000 and SQMS 1) later this year. And, while the two standards are very similar, there are differences which firms should understand. In this post we’ll explore the major differences between QC 1000 and SQMS 1.
Introducing SQMS 1 and QC 1000
In previous posts we’ve provided an overview SQMS 1 and QC 1000 so we won’t repeat ourselves here. However, before jumping straight into the differences, let’s make sure we get our terminology and scope of the standards straight.
SQMS 1 deals with a firm’s responsibilities to design, implement, and operating a system of quality management (SOQM) for its accounting and auditing practice. It is applicable to firms who conduct audits, attestations, reviews, compilations, and any other services for which standards have been promulgated by the AICPA’ Auditing Standards Board (ASB) or Accounting and Review Services Committee (ARSC).
QC 1000 is applicable for PCAOB-registered firms and sets forth the requirements for a firm with respect to the design, implementation, and operation of a QC system.
In a nutshell, both standards require firms to design, implement, and operate a quality management system (SOQM or QC system) no later than December 15, 2025. Such systems should provide firms with reasonable assurance that the firm and its people are doing what they should be doing and that the reports the firm issues are appropriate.
PCAOB comparison document
On the Quality Control page of its website, the PCAOB has provided a comparison of QC 1000 with ISQM 1 and SQMS 1. This comparison document was prepared by the staff of the Office of the Chief Auditor as a reference tool and represents the views of the PCAOB staff. As such, it is not rule, policy, or statement of the PCAOB.
The comparison document differentiates, paragraph by paragraph, the three standards and is quite thorough. It’s over 100 pages and we’ve read them, so you don’t have to! Below are the “big ticket” differences between QC 1000 and SQMS 1.
Due professional care
AS 1000 requires auditors to exercise due professional care in all matters related to the audit. Due professional care concerns what the auditor does and how well the auditor does it. It means acting with reasonable care and diligence, exercising professional skepticism, acting with integrity, and complying with applicable professional and legal requirements (APLR).
QC 1000 requires that all firm personnel and other participants involved in the design, implementation, and operation of the QC system must exercise due professional care in all matters related to the QC system. As we discuss in this post, the individuals affected by this requirement extends well beyond engagement teams.
SQMS 1 does not have a similar requirement.
Mandatory training requirements
As we discuss in this post, QC 1000 sets the following mandatory training requirements for firm personnel:
- Firm personnel must receive training on ethics and independence requirements at the time of their initial employment and at least annually thereafter.
- Firm personnel must receive annual training, including training on APLR, to develop and maintain their competence and enable them to fulfill their assigned QC and engagement roles.
There are no mandatory training requirements within SQMS 1.
Resources component
QC 1000 requires firms to design, implement, and maintain policies and procedures for firm personnel to adhere to appropriate standards of conduct, which include:
- Fulfilling engagement and QC responsibilities with competence, integrity, objectivity, and due professional care; and
- Complying with APLR and the firm’s policies and procedures.
With respect to the engagement partner and firm personnel participating in the engagement, QC 1000 requires firms to design, implement, and maintain policies and procedures so they can fulfill their assigned engagement roles. Paragraph .47 sets out very specific things that engagement teams need to understand.
SQMS 1 does not have similar requirements.
Monitoring and remediation component
Both standards require firms to establish a monitoring and remediation process to:
- Provide relevant, reliable, and timely information about the design, implementation, and operation of the QC system;
- Provide a reasonable basis for timely detection of deficiencies; and
- Remediate identified deficiencies.
Furthermore, both standards require firms to include the inspection of completed engagements, including at least one for each engagement partner.
However, only QC 1000 require firms that issue audit reports with respect to more than 100 issuers to monitor in-process engagements not just completed engagements. Furthermore, even for firms auditing less than 100 issues, the PCAOB says firms should consider monitoring in-process engagements.
Annual evaluation and reporting
Both standards require firms to perform an annual evaluation of the effectiveness of their QC system based on the results of its monitoring and remediation activities. However, QC 1000:
- Specifies that the annual evaluation be performed on September 30th of each year (“QC evaluation date”); and
- Requires firms to report the results of their annual evaluation to the PCAOB on Form QC no later than November 30th (“Form QC filing date”).
In addition, QC 1000 requires firms to assemble a complete and final set of documentation related to their annual evaluations no later than December 14th (“QC documentation completion date”).
SQMS 1 does not specify the date the annual evaluation needs to be performed, nor does it require the firm to communicate the results of such evaluation (although I am certain your peer reviewers will ask for it).
External QC function (EQCF)
QC 1000 requires firms that audit over 100 issuers annually to establish an external oversight function for the QC system. This external QC function (EQCF) must be composed of one or more persons who can exercise independent judgment related to the firm’s QC system. The EQCF should have the experience, competence, authority, and time necessary to enable them to carry out their responsibilities. The responsibilities of the EQCF include, at a minimum, evaluating the significant judgments made and the related conclusions reached by the firm when evaluating and reporting on the effectiveness of its QC system
There is not a similar requirement within SQMS 1.
Additional requirements for firms auditing over 100 issuers
Firms that issue audit reports for more than 100 issuers per year must undergo annual PCAOB inspections. In addition, the PCAOB believes that such firms should be subject to enhanced requirements as it relates to QC 1000. In addition to the requirement to establish an EQCF, QC 1000 requires such firms to implement:
- A program to collect and address complaints that includes confidentiality protections
- An automated system to track investments that may bear on independence
- Monitoring of in-process engagements
While SQMS 1 requires firms to establish policies and procedures for receiving, investigating, and resolving complaints and allegations, it does not specifically require such processes to be confidential and anonymous.
Regarding an automated system to track investments and monitoring in-process engagements, SQMS 1 does not have similar requirements.
Closing thoughts
There are certainly many other differences between the two standards that we did not highlight in this post. For further discussion of these differences, we recommend that you consult the PCAOB comparison document.
If you haven’t already done so, be sure to check out our CPE-eligible replay, Quality Management Standards (SQMS 1 and QC 1000): What L&D Leaders Need to Know, to learn more about the new quality management standards.
As we mention in the webinar, we’ve released two online courses to help you with implementing the new standards:
- Overview of QC 1000: A Firm’s System of Quality Control
- Overview of SQMS 1: A Firm’s System of Quality Management (SOQM)
Looking to train your entire team? Be sure to reach out to us directly for group discounts!
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Disclaimer
This post is for informational purposes only and should not be relied upon as official accounting guidance. While we’ve ensured accuracy as of the publishing date, standards evolve. Please consult a professional for specific advice.
