Before you accept the engagement
Preconditions for an audit require the auditor to (a) determine the financial reporting framework is acceptable, and (b) obtain management's agreement that it acknowledges its responsibilities — for the financial statements, for internal control, and for providing the auditor with access to information and people.
IMPORTANT: Communication with the predecessor auditor is required before accepting the engagement, and the successor auditor must initiate it — but only with the prospective client's permission. Ask about management integrity, disagreements over accounting or auditing matters, communications about fraud or noncompliance, and the predecessor's reasons for the change.
The engagement letter
The engagement letter documents the terms and reduces misunderstanding. It should cover the objective and scope, auditor responsibilities, management responsibilities, the applicable framework, and the expected form of the report. It's required for every audit and should be updated (or at least reconsidered) annually.
Quality management: SQMS No. 1
The AICPA's Statements on Quality Management Standards replaced the older quality control standards, effective for firms from December 15, 2025. SQMS No. 1 requires a risk-based system: the firm establishes quality objectives, identifies and assesses quality risks, and designs responses — then evaluates the system at least annually.
| Component | What it covers |
|---|---|
| Governance and leadership | Tone at the top, accountability, resources |
| Relevant ethical requirements | Independence, ethics compliance |
| Acceptance and continuance | Taking on the right clients and engagements |
| Engagement performance | Direction, supervision, review, consultation |
| Resources | People, technology, intellectual resources |
| Information and communication | Internal and external information flow |
| Monitoring and remediation | Finding and fixing deficiencies |
| Risk assessment process | The engine that drives the whole system |
EXAM TIP: Quality management operates at the firm level; the engagement partner is responsible for quality at the engagement level. Both layers get tested — read the question carefully to see which level it's asking about.