Advanced Auditing, Assurance and Professional Ethics · Quality Control

SQC 1: Overview and Elements of a Firm's Quality Control System

Updated 5 October 2026 · Fact-checked

SQC 1 (Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements) requires a firm to set up a system of quality control. The system has six elements: leadership responsibilities, ethical requirements, acceptance and continuance, human resources, engagement performance, and monitoring. In answers, name the element and apply it to the facts.

Understand SQC 1 Overview and Elements of Quality Control System

A system of quality control is the set of policies and procedures a firm designs so that it has reasonable assurance that it and its people comply with professional standards and legal requirements, and that the reports it issues are appropriate in the circumstances. SQC 1 applies to the firm as a whole, not to one engagement.

The objective of SQC 1 is to make the firm establish and maintain such a system. It applies to firms of professional accountants for audits and reviews of historical financial information, and for other assurance and related services engagements. The firm is responsible for the system. A firm of any size must apply it, but how it is done can be scaled to the size and nature of the firm.

The standard has six elements. Learn them as: (1) leadership responsibilities for quality within the firm, (2) relevant ethical requirements, (3) acceptance and continuance of client relationships and specific engagements, (4) human resources, (5) engagement performance, and (6) monitoring. Engagement quality control review sits inside engagement performance. Documentation and consultation also sit inside engagement performance, so do not count them as separate elements.

The firm must document its policies and procedures and communicate them to its personnel. The firm must also make clear that each person has a personal responsibility for quality and is expected to comply with them. Key terms in SQC 1 include firm, engagement partner, engagement team, personnel, network firm, engagement quality control reviewer, monitoring and inspection. The engagement quality control reviewer is a partner, other person in the firm, or suitably qualified external person, who is not part of the engagement team and who objectively evaluates the significant judgments made by the engagement team and the conclusions reached in formulating the report.

Monitoring is an ongoing consideration and evaluation of the firm's system of quality control. It includes a periodic inspection of a selection of completed engagements. Its purpose is to give the firm reasonable assurance that the system is relevant, adequate and operating effectively.

SQC 1 and SA 220 work together. SQC 1 puts duties on the firm. SA 220 puts duties on the engagement partner for quality control of an audit of financial statements. SA 220 relies on the firm's system being in place. The partner may rely on that system unless the firm or others give information that suggests otherwise.

Key rules to remember

Six elements of the system: Leadership + Ethics + Acceptance/Continuance + Human resources + Engagement performance + Monitoring; Learn them in this order. Remember the count is six.
Objective of SQC 1: Firm's reasonable assurance of (a) compliance with professional standards and legal requirements, and (b) appropriateness of reports issued; The word is reasonable assurance, not absolute assurance.
SQC 1 vs SA 220: SQC 1 = firm-level responsibility; SA 220 = engagement-level responsibility of the engagement partner (audits of financial statements); This is the most common comparison question.
Engagement quality control reviewer: Not part of the engagement team + sufficient and appropriate experience and authority + objective; SQC 1 requires EQC review for all audits of financial statements of listed entities, and for other engagements that meet the firm's criteria.
Documentation and communication: Policies and procedures = documented + communicated to personnel; The firm should also keep records that show compliance with its own system.

How to solve SQC 1 Overview and Elements of Quality Control System questions

Use this method for any question on SQC 1, whether it asks for a definition, a list of elements, or a case where something has gone wrong in a firm.

1Read the question and decide whether it is about the firm (SQC 1) or one audit engagement (SA 220).
2State the objective in one line: reasonable assurance of compliance with standards and appropriateness of reports.
3Name the element of the system that the facts point to. Use the six elements as the checklist.
4Quote the requirement of that element in plain words. For example, the firm must have policies on independence, or on assigning suitable people.
5Apply it to the facts in the case. Say what the firm did or failed to do.
6Conclude clearly: the firm has or has not complied, and what it should now do.
7If asked for a list, give the six elements with one line on each.

Quickest way: Six-element sweep

When to use it: Use when the question gives a short case and asks which element is breached or what the firm should do, and time is short.

Underline the facts: who did what, and at which stage.
Match the stage to the element. Taking a client points to acceptance. Staffing points to human resources. Partner tone points to leadership. Review of files after issue points to monitoring.
Write the element, the rule, the fact and the conclusion in four short lines.
Add one corrective action to earn the last mark.

Common mistakes in SQC 1 Overview and Elements of Quality Control System

Stating that SQC 1 has more or fewer than six elements.
Students list important topics such as EQC review or documentation as elements of their own, or add other headings from memory.
Fix: Remember the six elements in order: leadership, ethics, acceptance, human resources, engagement performance, monitoring.
Treating engagement quality control review or documentation as a separate element.
They are important topics, so students give them a heading of their own.
Fix: Place EQC review, consultation and documentation under engagement performance.
Mixing up SQC 1 and SA 220.
Both deal with quality control and appear in the same chapter.
Fix: Write that SQC 1 is for the firm and SA 220 is for the engagement partner on an audit of financial statements.
Saying the system gives absolute assurance.
Students assume that a quality system guarantees good work.
Fix: Use the phrase reasonable assurance in the objective and in conclusions.
Giving a list of elements with no application to the case.
Students recall the list from memory and skip the facts.
Fix: After naming the element, tie it to a fact in the question and give a conclusion.

Worked examples

Example 1

Case: A mid-sized CA firm has 12 partners. It has no written policy on independence. Partners decide verbally whether to accept new clients. Staff are told to follow the partner on each job. A young partner asks whether SQC 1 applies to the firm and which elements the firm has missed.

Show the solution

SQC 1 applies to the firm as it performs audits and other assurance engagements. The size of the firm only affects how the policies are designed, not whether they are needed.
Ethical requirements: the firm should have documented policies and procedures to give reasonable assurance that it and its personnel comply with relevant ethical requirements, including independence. Having no written policy on independence is a breach of this element.
Acceptance and continuance: the firm should have policies to accept a client only after considering its integrity, the firm's competence and resources, and its ability to comply with ethical requirements. Verbal, ad hoc decisions do not give evidence of this.
Leadership responsibilities: the firm's leadership should promote a culture of quality and communicate that quality is essential. The case does not describe leadership directly, but the lack of written policies suggests it is weak. Treat this as an inference, not a confirmed breach.
Human resources and engagement performance: staff are only told to follow the partner on each job. This suggests the human resources element is deficient, as there appear to be no policies on competence, assignment of personnel and training. Engagement performance (supervision and review) is likely deficient too. Treat this as an inference, because the facts say nothing about review, consultation or documentation.
Monitoring: the facts do not show any monitoring process, so the firm should establish one to check whether its policies are working.
Conclusion: the firm must document and communicate its policies on all six elements, and put in place a process to monitor them.

Answer: SQC 1 applies to the firm. The facts show non-compliance with the ethical requirements element (no written independence policy) and a lack of policies on acceptance and continuance. Human resources appears deficient, and engagement performance is likely deficient, by inference from staff being told only to follow the partner. Leadership also appears weak by inference, as quality policies are not documented or communicated. The facts do not show any monitoring process, so the firm should establish one. It should document and communicate its policies and monitor them.

Example 2

Case: Rao & Co. audits a listed company. The engagement partner says he does not need to follow SA 220 because the firm has already complied with SQC 1. Another partner says SQC 1 and SA 220 are the same. Advise.

Show the solution

SQC 1 puts responsibility on the firm to establish and maintain a system of quality control. It covers all assurance engagements and related services of the firm.
SA 220 puts responsibility on the engagement partner for quality control on a specific audit of financial statements. It covers leadership of the partner on the engagement, ethics and independence in that audit, acceptance of the engagement, assigning the team, performance, consultation, EQC review where required, and documentation.
SA 220 is written on the basis that the firm is subject to SQC 1. The partner may rely on the firm's system unless information suggests otherwise. This reliance does not remove the partner's own duties.
So the first view is wrong: firm-level compliance does not release the partner from SA 220. The second view is also wrong: the two have different scope and responsibility holders.
Conclusion: both apply together. The firm sets the system, and the partner applies it on the engagement.

Answer: Both statements are incorrect. SQC 1 is a firm-level standard and SA 220 is an engagement-level standard for audits of financial statements. The partner must comply with SA 220 even though the firm complies with SQC 1, and may rely on the firm's system unless information suggests otherwise.

Exam tips

Write the count as six elements and list them in the standard order. Examiners check the list first.
For a comparison of SQC 1 and SA 220, use two columns of points in sentences: who is responsible, what level, and what it covers.
In case questions, name the element, quote the rule in a line, apply the fact and conclude. This earns marks on written answers.
For MCQs, check if the question asks about the firm or the engagement partner. The options often swap these two.
Mention that the system is scaled to the size of the firm, if the case involves a small firm.

Practice questions from Quality Control

SQC 1 Overview and Elements of Quality Control System: frequently asked questions

How many elements does SQC 1 have?

SQC 1 has six elements of a system of quality control. They are leadership responsibilities, ethical requirements, acceptance and continuance, human resources, engagement performance, and monitoring.

What is the difference between SQC 1 and SA 220?

SQC 1 applies to the firm and requires it to maintain a system of quality control. SA 220 applies to the engagement partner for an audit of financial statements. The partner may rely on the firm's system unless information suggests otherwise.

Does SQC 1 apply to small firms?

Yes. Every firm that performs audits, reviews and other assurance or related services engagements must apply it. A small firm may design simpler policies, but it must still have the system and document it.

Where does engagement quality control review fit in SQC 1?

It sits under the engagement performance element. The reviewer must be objective and not part of the engagement team. SQC 1 requires EQC review for all audits of financial statements of listed entities, and for other engagements that meet the firm's criteria.