Microlesson · 5-min read

Quality Control — SQC 1 and SA 220 Compared

## Audit Quality: SQC 1 and SA 220

### Why Quality Control Matters

The purpose of an independent audit is to provide confidence to users of financial statements. High audit quality is essential to maintain that confidence. It is the auditor's responsibility to maintain high quality.

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### Scope: SQC 1 vs SA 220 at a Glance

	SQC 1	SA 220
Full Name	Quality Control for Firms Performing Audits, Reviews, Other Assurance and Related Service Engagements	Quality Control for an Audit of Financial Statements
Level	Firm level	Engagement level
Scope	All engagements — audits, reviews, assurance, related services	Audit engagements only

> Key linkage: SA 220 is premised on the basis that the firm is already subject to SQC 1. They work together, not in isolation.

### Objective under SA 220

Implement quality control procedures at the engagement level to provide reasonable assurance that:

(a) The audit complies with professional standards and regulatory/legal requirements
(b) The auditor's report issued is appropriate in the circumstances

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### The Six Elements of Quality Control

#### 1. Leadership Responsibilities for Quality

SQC 1 (Firm)	SA 220 (Engagement)
Firm establishes policies to promote an internal culture of quality	Engagement Partner (EP) takes overall leadership responsibility for quality of each engagement
CEO or managing partner assumes ultimate responsibility	EP's actions emphasise: (i) audit quality — compliance with standards, firm policies, appropriate report, team's ability to raise concerns without fear; (ii) quality is essential to the engagement
Persons assigned operational responsibility must have Sufficient and Appropriate (S&A) experience, ability and authority

#### 2. Relevant Ethical Requirements

SQC 1	SA 220
Policies to give Reasonable Assurance (RA) that the firm and personnel comply with ICAI Code of Ethics	EP must: (i) identify threats to independence; (ii) report to relevant persons in the firm to determine appropriate action
Policies: communicate independence requirements; identify and evaluate threats to independence

#### 3. Acceptance and Continuance of Client Relationships

Both SQC 1 and SA 220 require the firm to assess:

Integrity of the client
Competence to perform the engagement
Compliance with ethical requirements

(Requirements are the same at both levels.)

#### 4. Human Resources / Assignment of Engagement Teams

SQC 1	SA 220
Policies to provide RA that the firm has sufficient personnel with capabilities, competence and commitment per professional standards	EP ensures the engagement team (ET) plus experts collectively have appropriate competence and capabilities to perform the engagement per professional standards

#### 5. Engagement Performance

SQC 1	SA 220
Engagement Quality Control Reviewer (EQCR) partner reviews significant judgements before report issuance	EP has responsibility for direction, supervision and performance of the audit engagement
EQCR is mandatory for all listed entities; firm sets own criteria for others	If EQCR is required: (i) EP determines EQCR is appointed; (ii) EP discusses significant matters with EQCR; (iii) EP must NOT date the audit report until EQCR review is complete
Differences between ET and EQCR must be resolved before report issuance — by consulting another practitioner, professional body, or regulatory body

#### 6. Monitoring

SQC 1	SA 220
Firm ensures policies are relevant, adequate and operating effectively	EP documents: issues re compliance with ethical requirements and resolution; conclusions on compliance; conclusions on acceptance and continuance; nature, scope and conclusions of the engagement
Includes periodic inspection of completed engagements

Worked example

### Example 1

EQCR Dispute on a Listed Company Audit: CA Firm ABC is auditing a listed entity. The engagement team values goodwill at ₹15 crores using a going-concern basis; the EQCR partner believes ₹9 crores is more appropriate. The audit report cannot be signed and dated until this disagreement is resolved. The firm consults an independent valuation expert (another practitioner) to adjudicate. Only after resolution does the EP date and issue the report — illustrating EQCR's mandatory role for listed entities under SQC 1.

### Example 2

Independence Threat Mid-Engagement (SA 220): The EP notices that a senior audit team member recently inherited shares in the client company. This is a self-interest threat to independence. Under SA 220, the EP must identify the threat and report it to the relevant persons within the firm. The firm's response: remove that team member from the engagement and document the resolution.

### Example 3

Client Acceptance Decision: A new potential client's management has a history of earnings manipulation at a prior company. Before accepting, the firm assesses integrity (doubtful), competence to perform (adequate), and ethical compliance (possible issues). Because management integrity is questionable, the firm declines the engagement — this is the acceptance and continuance assessment under both SQC 1 and SA 220.

### Example 4

Raising Concerns Without Fear (Leadership under SA 220): A junior auditor on an engagement suspects the client is hiding a contingent liability. The EP has established a culture where team members can raise concerns freely. The junior flags it; the EP investigates and discloses the liability in the audit report. This reflects the SA 220 requirement that the EP's actions must enable the team to raise concerns without fear.

⚠️ Common exam mistakes

Confusing SQC 1 (firm-level, all engagement types) with SA 220 (engagement-level, audits only) — SQC 1 is broader in both level and scope.
Stating EQCR is mandatory for all engagements — it is mandatory only for listed entities under SQC 1; for other engagements, the firm determines its own criteria.
Dating the audit report before EQCR review is complete — SA 220 explicitly prohibits the EP from dating the report until the EQCR review is finished.
Treating SA 220 as standalone — SA 220 is premised on the firm already being subject to SQC 1; both standards work in tandem.
Attributing ultimate leadership responsibility to the Engagement Partner at the firm level — at firm level (SQC 1) it is the CEO/managing partner; at engagement level (SA 220) it is the Engagement Partner.
Forgetting that differences of opinion between the engagement team and EQCR must be resolved before the report is issued, not after.

Bare-Act text SQC 1 (Firm-level — all elements); SA 220, Paragraph 8 (Objective) and Paragraphs 10–22 (Six elements at engagement level) · SQC 1 — Quality Control for Firms Performing Audits and Reviews; SA 220 — Quality Control for an Audit of Financial Statements · click to expand

SA 220: The objective of the auditor is to implement quality control procedures at the engagement level that provide the auditor with reasonable assurance that: (a) the audit complies with professional standards and regulatory and legal requirements; and (b) the auditor's report issued is appropriate in the circumstances. SQC 1: Applies to all firms performing audits, reviews, and other assurance and related service engagements, requiring firm-level policies across six elements: leadership, ethics, acceptance and continuance, human resources, engagement performance, and monitoring.

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