Engagement Acceptance & Quality Management

Statement on Quality Management Standards (SQMS) No. 1 — 8 components

Risk assessment process · Governance and leadership · Ethical requirements · Acceptance and continuance · Engagement performance · Resources · Information and communication · Monitoring and remediation. Evaluate annually. Peer review is not a component.

SQMS No. 2 — engagement quality review

• Reviewer not on the team; former engagement partner: 2-year cooling-off.
• No report release until the review is complete.

Public Company Accounting Oversight Board (PCAOB) quality control (QC) standard QC 1000 — public company audits (testable from January 1, 2027)

• Effective December 15, 2026; same eight components as SQMS No. 1.
• Principal executive officer has ultimate responsibility; named individuals for operations, independence, and monitoring.
• Evaluate as of September 30; report on Form QC by November 30.
• More than 100 issuer audit clients → external quality control function.

Acceptance

• Consider management integrity, competence and resources, independence.
• Successor contacts predecessor before acceptance with client permission: integrity, disagreements, fraud/internal control communications, reason for change.
• Client refuses permission → usually decline.

Preconditions

1. Acceptable framework.
2. Management accepts responsibility for statements, internal control, and giving access.

Engagement letter must include

Objective and scope · auditor and management responsibilities · inherent limitations · framework · expected report form.

Change to review

OK for changed circumstances or misunderstanding; not OK to avoid a scope limitation or bad report.

Exam traps

• The successor may review the predecessor's working papers with permission, but can't refer to the predecessor's work as the basis for its own opinion on opening balances.
• An audit needs a written engagement letter (or other written agreement) — an oral understanding isn't enough.
• Recurring audits don't need a new letter every year unless circumstances change, but the auditor considers whether to remind management of the terms.
• Firms had to have their SQMS No. 1 systems designed and implemented by December 15, 2025.
• Don't mix up the two quality standards: SQMS No. 1 (AICPA) covers audits of private companies; QC 1000 (PCAOB) covers public company audits and is the one with the September 30 evaluation and Form QC.