Although the Statement on Quality Control Standards No. 7, A Firm’s System of Quality Control, (SQCS No. 7) was issued in October 2007, the effective date is Jan. 1, 2009. All earlier issued SQCSs are superseded. Prior to SQCS No. 7, there was a requirement to communicate the firm’s quality control system, but not necessarily to document it. Now documentation is a requirement. This is the major change in SQCS No. 7.

Each element of quality control should be documented. The extent of documentation will vary depending on the firm, its size and its practice. The extended effective date should allow firms to review, revise and
document their system of quality control.

The American Institute of CPAs has provided an Audit and Accounting Practice Aid Series titled, “Establishing and Maintaining a System of Quality Control for a CPA Firm’s Accounting and Auditing Practice.”

This practice aid provides three examples of a documented quality control system based on the size of the firm.

Quality Control Standards Overview
The objectives of a quality-control system in a CPA firm include providing a CPA firm with reasonable assurance the firm and personnel comply with professional standards; applicable regulatory and legal requirements; and issue reports that are appropriate in the circumstances.

The design of a quality control system and policies is to achieve the objectives of the systems and procedures necessary to implement and monitor compliance.

This system will depend on several factors, including the firm’s size; number of offices; degree of authority allowed; knowledge and experience of firm personnel; nature and complexity of firm’s practice.

A major unconditional requirement of SQCS 7 is that a firm must establish a system of quality control.

There are three major changes in SQCS 7 from previously issued standards: documentation, documentation, documentation.

The new standard also indicates six elements of quality control, which should be interrelated, that should be addressed:

1. Leader responsibilities for quality within the firm (the “tone at the top”)
2. Relevant ethical requirements
3. Acceptance and Continuance of client relationships and specific engagements
4. Human resources
5. Engagement performance
6. Monitoring

Leader Responsibilities for Quality within the Firm
(the “tone at the top”)
Several issues should be addressed in the system to promote an internal culture with the theme that quality is essential in performing engagements.

• The firm’s leadership should assume ultimate responsibility for the firm’s system of quality control.
• Commercial considerations should not override the quality of the work performed.
• Personnel who have sufficient experience, ability and authority to implement the system should be assigned operational responsibility for the system.
• Performance evaluations should be designed to show the firm’s commitment to the objectives of the system.
• Resources should be supplied for all aspects of the system.

Relevant Ethical Requirements
The purpose of the “relevant ethical requirements” of a system of quality control is to provide reasonable assurance the firm and its personnel comply with ethical requirements of the profession. The primary ethical requirements include the areas: independence, integrity and objectivity.

Several policies would meet the requirements for compliance with ethical standards, such as require adherence to regulations; interpretations; AICPA rules; rules of state CPA societies; laws and rules of state Boards of Accountancy; state statutes; U.S. Government Accountability Office (GAO); and other regulators as needed (such as U.S. Department of Labor).

A firm also should establish policies or procedures for:

• communication of independence requirements;
• treating possible threats to independence and objectivity;
• withdrawing when threats to independence cannot be applied;
• written confirmation of independence of firm personnel and others required to be independent;
• written confirmation of independence of another firm;
• rotation of personnel for audit or attest engagements when required.

Acceptance and Continuance of Client Relationships and Specific Engagements
This element of quality control establishes policies and procedures for accepting or continuing with a client. This includes specific engagements for clients and implies that quality control will provide the firm with reasonable for taking on an engagement or continuing with a client. These policies and procedures will include:

• consideration for the integrity of the client, its owners, key management, related parties and those charged with governance;
• competence to perform an engagement;
• ability to comply with legal and ethical requirements;
• client understanding is established with regard to services performed;
• required documentation is present.

Human Resources
An objective of human resources is to provide reasonable assurance the firm has enough personnel: that are competent to perform the engagements; to issue reports in compliance with professional standards; and assign, evaluate and promote in accordance with professional qualifications, educational needs, knowledge and skills.

Engagement Performance
The element of engagement performance should be designed to put in place policies and procedures to provide the firm with reasonable assurances that engagements are consistently performed in compliance with standards, regulatory and legal requirements; reports are appropriate when issued; documentation is done as required.

Monitoring
Monitoring should provide reasonable assurance the firm’s policy and procedures of quality control are relevant, adequate, operating effectively and complied with. Monitoring also involves inspections and other issues for reasonable assurance.

January 2009 is around the corner – if you haven’t already implemented these changes. Now is the time.