Over the past year, adopting the AICPA’s Statements on Quality Management Standards has been a challenge for firms performing engagements under Statements on Auditing Standards, Statements on Standards for Accounting and Review Services, and Statements on Standards for Attestation Engagements.
Firms of all sizes worked to develop, document, and carry out solid quality management (QM) plans to achieve the foundational objectives of the standards, including issuing accounting and auditing engagements that meet relevant professional standards and ensuring that related reports were appropriate.
Even firms whose day-to-day processes didn’t significantly change had to document and respond to quality risks, ensure existing policies and procedures sufficiently mitigate identified risks, and design responses to address new or expanded QM components (e.g., resources, information and communication, etc.).
Now, with the first year nearly behind us, firms face one final push to the QM standards implementation goal line—the required annual evaluation.
The required annual evaluation represents a distinct new requirement under the QM standards, with the first evaluation required by Dec. 15, 2026.
While previous quality control standards expected firms to monitor their systems, the new QM standards take this a step further. Individuals assigned ultimate responsibility and accountability for the firm’s QM system (i.e., managing partners or their equivalents) are now required to assess and conclude whether their QM system is achieving its objectives and to document this conclusion and the basis for it.
Notably, the standard requires firms to frame this conclusion around whether their QM system provides “reasonable assurance” that its objectives are being met. Essentially, there must be evidence that the firm’s QM system doesn’t exhibit any issues so significant that a deficiency in its design or operation exists at the time of the evaluation.
This can sound overwhelming, but at its core, the process is about identifying the evidence firm leadership needs to have confidence regarding the effectiveness of the firm’s QM system. Obtaining such evidence and documenting the basis for this conclusion will mean developing ways to stress test whether a firm’s policies and procedures effectively guard against quality risks and produce engagements that conform with relevant professional standards.
While evidence about the operation of a firm’s QM system can take many forms, the results of a firm’s monitoring activities represent a significant piece of this puzzle (if designed effectively).
Under the new standards, a firm’s monitoring activities now serve double duty: flagging problems so the firm can adjust where necessary and providing critical evidence about the operation of the firm’s QM system.
Of course, monitoring a firm’s QM system isn’t a new concept, as firms were already required to document annual monitoring and inspection procedures under the previous standards. However, the QM standards have evolved this requirement into a monitoring and remediation component, where firms are expected to identify the root cause of problems and correct them.
Specifically, firms are now required to possess documented monitoring and remediation policies and procedures that provide a timely feedback loop with relevant, reliable information about the health of the firm’s QM system (i.e., design, implementation, and operation) and respond to issues when they’re identified.
Naturally, developing a comprehensive monitoring plan will look different for all firms. The complexity and timing of a firm’s monitoring will depend on numerous factors, such as engagement volume, industry, number of personnel or offices, professional experience, updates to professional standard requirements, and any changes the firm encounters during a given year.
That said, at a minimum, monitoring policies should include:
So, how does a firm develop monitoring activities to support the required annual evaluation and conclusion on the firm’s QM system? The answer lies in designing a monitoring plan that tests the effectiveness of key risk responses while considering whether the system produced and reported on engagements that live up to professional standards.
To put this into practice, consider the following firm profile:
ABC CPAs LLC has two experienced partners supervising engagements performed by four staff (two individuals with five years of experience and two individuals with less than a year of experience). The firm has a strong peer review history, passing its last three peer reviews with minimal findings. The firm primarily performs audits in the not-for-profit (NFP) and school district industries (including three single audits). The firm also began performing agreed-upon procedure (AUP) engagements, picking up six new clients in the past year.
With this profile in mind, the partners need to design and carry out a set of monitoring activities that’ll help determine whether the firm’s QM system is effective. For this firm, those activities should include an inspection of the completed engagement and a stress test of other QM components. Also, the firm should emphasize testing processes that address potential risk areas unique to its current circumstances, including inexperienced staff, high-risk single audit engagements, and a new line of service.
To put this into practice, here’s what the firm’s monitoring plan could look like:
The firm’s annual inspection of engagements will include two new AUP engagements, one single audit, and two other audits to provide a representative sample of the firm’s engagements. Because both partners are well-versed in all engagement types the firm performs, they’ll inspect each other’s engagements to help ensure objectivity. During the inspections, each partner will consider whether engagement documentation and reports meet relevant professional standards. Additionally, each will assess whether the firm’s QM policies occurring at the engagement level were adequately carried out and documented, such as engagement time budgets, non-attest services documentation, and acceptance and continuance forms. The partners will also review continuing professional education (CPE) taken by all personnel, including themselves, for sufficiency and appropriateness.
Finally, to address the firm’s unique risks over the past
year, several key QM policies will be tested as outlined
in the chart below:
| QM Component | QM Policy or Procedure | Monitoring Activity |
| Acceptance and Continuance | Before accepting a new client, both partners must discuss and sign off on the client acceptance documentation prior to the firm issuing an engagement letter. | The partners will review whether appropriate discussion and signoff occurred on each of the six new clients. |
| Resources | Staff working on the firm’s single audits meet CPE requirements under Government Auditing Standards. | The partners will test whether all staff working on single audits met these CPE requirements. |
Governance and Leadership and Engagement Performance | The firm ensures sufficient and appropriate supervision occurs on engagements through robust engagement budgets and timely supervisory review. | As part of the inspection, the partners will select an NFP audit where a less experienced staff member performed most of the work. The inspection of this engagement included a review of the partner hours budgeted and timeliness of supervisory review. |
The firm must now execute the above procedures, consider whether any issues identified represent a deficiency requiring root cause analysis and remediation, and document and communicate relevant information across the firm. Overall, these results will provide firm leadership with strong evidence to conclude whether the firm’s QM system is achieving its objectives.
As firms approach the QM implementation goal line, having a well-thought-out and effectively executed monitoring plan to support the annual evaluation process is critical. By confirming what’s working and addressing what isn’t, firms can build an even stronger strategy moving forward.
