# Audit Quality: SQC 1 vs SA 220 and the Components of SQC 1
## SQC 1 vs SA 220 — Key Distinction
| Particulars | SQC 1 | SA 220 |
|---|---|---|
| Scope | All engagements — audit, reviews, other assurance and related services | Specific to audit engagements only |
| Applicability | The entire firm | A particular audit engagement |
> Mental model: SQC 1 = firm-level quality system; SA 220 = engagement-level quality application.
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## SQC 1: The Six Elements of Quality Control
### 1. Leadership (Tone at the Top)
- Firms must establish policies promoting an internal culture recognising quality as essential
- Ultimate responsibility: CEO or Managing Partners of the firm
- Leadership sets the example — quality culture flows from the top down
- Persons assigned operational QC responsibility must have:
- Sufficient and appropriate experience
- Ability
- Necessary authority
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### 2. Ethical Requirements
- Policies to ensure compliance with the Code of Ethics issued by ICAI
- Fundamental principles: Integrity, Objectivity, Professional Competence and Due Care, Confidentiality, Professional Behaviour
- Independence is the basic requirement for all engagements
Firm's obligations under this element:
- Communicate independence requirements to all personnel
- Identify and evaluate threats → eliminate, reduce to acceptable level (via safeguards), or withdraw
- All independence breaches → promptly notified to the firm
- At least annually: Obtain written confirmation of independence compliance from all relevant personnel
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### 3. Acceptance and Continuance of Client Relationships
Before accepting an engagement, assess three factors:
- Integrity of the client
- Competence of the firm (capabilities, time, resources)
- Compliance with ethical requirements
Integrity assessment factors — Mnemonic: B²A MAAL
| Letter | Factor |
|---|---|
| B | Business reputation of principal owners, key management, related parties, TCWG |
| B | Nature of client's operations, including business practices |
| A | Attitude of client's principal owners, key management, TCWG |
| M | Involvement in money laundering or other criminal activities |
| A | Whether client is aggressive about keeping audit fees as low as possible |
| A | Reasons for appointment and non-reappointment of the previous auditor |
| L | Indications of an inappropriate limitation in scope of work |
If conflict of interest is discovered:
- Resolve before accepting the engagement
- If discovered after acceptance:
(a) Consider professional and legal reporting obligations (to appointing authority or regulators)
(b) Consider withdrawing from the engagement or the entire client relationship
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### 4. Human Resources
Policies must ensure the firm has personnel with:
- Sufficient capabilities and competence
- Commitment to ethical principles
HR policies must address:
- Recruitment | Training | Performance evaluation
- Compensation | Career development | Professional development
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### 5. Engagement Performance — Mnemonic: PAR²C² (partial)
| Code | Requirement |
|---|---|
| P | Property — engagement documentation belongs to the firm; extracts may be shared with clients only if it doesn't undermine the validity of the work |
| A | Assembly — final engagement files must be assembled within 60 days of the date of the auditor's report |
| R¹ | Review — significant judgments must be reviewed by an Engagement Quality Control Reviewer (EQCR) before the report is issued, to ensure an objective view |
> The 60-day deadline for file assembly is a high-frequency exam fact.
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### 6. Monitoring
(Addressed in further study material)