ISA 220 vs. SQM1: Transition Guide for Indian Auditors [2026]

Published: March 27, 2026 | Category: Audit Procedures | Read Time: 15 minutes | Author: CORAA Team

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Introduction

Important Deadline: June 30, 2026

All Indian audit firms must transition from ISA 220 to SQM1 (Service Quality Management 1).

ISA 220 is no longer permitted for any engagements after June 30, 2026.

This isn't a minor update. SQM1 restructures how firms define, implement, and document quality procedures.

This guide explains what changed, why, and how to transition.

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ISA 220: The Old Standard (Until June 30, 2026)

What Is ISA 220?

ISA 220 (Quality Management in Audits of Financial Statements) established quality control procedures for audit engagements.

Scope: Quality control for audits only

Key Elements:

1. Leadership responsibilities for quality (partner commitment)
2. Ethical requirements (independence, integrity)
3. Acceptance and continuance (should we accept this client?)
4. Engagement performance (are procedures being done correctly?)
5. Monitoring (are quality procedures working?)

ISA 220 Structure

Partner Responsibility:

• Partners responsible for quality
• Firm establishes quality control procedures

Engagement-Level Quality Control:

• Engagement partner sets audit strategy
• Team performs procedures per ISA standards
• Engagement partner reviews findings

Monitoring:

• Periodic review of completed audits (post-engagement)
• Assessment of quality control effectiveness
• Corrective action if needed

Example ISA 220 Quality Control Memo

Date: March 31, 2026
Engagement: ABC Company Ltd (FY 2025-26)
Partner: Senior Partner A

ISA 220 QUALITY CONTROL PROCEDURES:

1. PARTNER RESPONSIBILITIES
   - Senior Partner assigned and responsible for quality
   ✓ Confirmed

2. ETHICAL REQUIREMENTS
   - Independence confirmed (no audit impairments)
   - Integrity of engagement team verified
   ✓ Confirmed

3. ACCEPTANCE & CONTINUANCE
   - Client assessed as acceptable (no major red flags)
   - No significant risks identified
   ✓ Confirmed

4. ENGAGEMENT PERFORMANCE
   - Procedures per ISAs performed
   - Audit evidence sufficient
   - Conclusions supported
   ✓ Confirmed

5. MONITORING (Post-Engagement)
   - File reviewed by quality partner
   - Quality procedures assessed for effectiveness
   ✓ Confirmed

CONCLUSION: Quality control procedures followed per ISA 220. No quality issues identified.

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SQM1: The New Standard (From July 1, 2026)

What Is SQM1?

SQM1 (Service Quality Management 1) is ICAI's adapted quality management standard for India.

Per ICAI SQM1 guidance, SQM1 applies to all services (not just audits), and places quality management responsibility at both entity level (firm) and engagement level (per engagement).

Scope: Quality management for all services (audits, reviews, agreed-upon procedures, compilations)

Key Components:

1. Firm-level quality management (entity-wide quality objectives)
2. Engagement-level quality management (per-engagement EQCM)
3. Continuous monitoring (throughout year, not just year-end)
4. SQM1 quality objectives (five key objectives)

SQM1 Structure

Firm Responsibility:

• Firm establishes quality management system (not just engagement level)
• Five quality objectives defined at firm level
• Monitoring procedures implemented across firm

Engagement-Level Quality Management:

• EQCM (Engagement Quality Control Review) required
• Independent partner reviews all audits (with exceptions)
• Focus on significant judgments and complex areas

Continuous Monitoring:

• Monitoring happens throughout year
• Not just post-engagement review
• Real-time identification of quality issues

Five SQM1 Quality Objectives

1. Competence

• Team members have necessary competence and experience
• Continuing education requirements met
• Training provided on new standards

2. Independence & Integrity

• No independence impairments exist
• Audit team screened for conflicts
• Related party relationships assessed

3. Engagement Performance

• Audit procedures performed correctly
• Audit evidence sufficient and appropriate
• Team follows ISAs

4. Acceptance & Continuance

• Client is acceptable (low fraud risk, no red flags)
• Continuance assessed annually (should we continue?)
• Decisions documented

5. Monitoring

• Procedures tracked throughout year
• Quality issues identified and escalated
• Corrective action implemented

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Comparison Table: ISA 220 vs. SQM1

Aspect	ISA 220	SQM1
Effective Until	June 30, 2026	July 1, 2026 onwards
Scope	Audit engagements only	All services
Responsibility	Partner-centric	Firm + Partner
Quality System	Engagement-level control	Entity-level management + Engagement-level review
EQCM	Optional (post-engagement)	Mandatory (includes independence review)
Monitoring	Post-engagement review (periodic)	Continuous throughout year
Documentation	ISA 220 memo	SQM1 quality management file + EQCM memo
Focus	Audit quality	Quality across all services
Quality Objectives	Implicit in ISAs	Explicit (Five objectives)

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Key Differences Explained

Difference 1: Scope (Audits Only → All Services)

ISA 220: Quality control for audit engagements

SQM1: Quality management for:

• Audits
• Reviews (Limited Assurance)
• Agreed-upon procedures
• Compilations
• Other services

Implication: If you perform reviews or compilation services, SQM1 applies to those engagements too (not just audits).

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Difference 2: Responsibility (Partner → Firm + Partner)

ISA 220:

• Partner responsible for quality
• Firm supports with overall framework

SQM1:

• Firm responsible for designing quality management system
• Partner responsible for executing system on engagement

Implication: Firms must document entity-level quality objectives, not just engagement-level procedures.

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Difference 3: EQCM (Optional → Mandatory)

ISA 220:

• EQCM optional (varies by firm policy)
• If required, post-engagement review

SQM1:

• EQCM mandatory for most audits
• Independent partner review before engagement completion
• Includes assessment of significant judgments

Implication: Every material audit must have independent partner review (with limited exceptions).

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Difference 4: Monitoring (Post-Engagement → Continuous)

ISA 220:

• Monitoring happens post-engagement
• Annual review of completed files
• Identify patterns of quality issues

SQM1:

• Monitoring happens throughout year
• Real-time identification of issues
• Immediate corrective action

Implication: Quality issues must be identified during engagement, not after.

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Difference 5: Quality Objectives (Implicit → Explicit)

ISA 220:

• Quality goals implicit in ISA requirements

SQM1:

• Five explicit quality objectives:
  1. Competence
  2. Independence & Integrity
  3. Engagement Performance
  4. Acceptance & Continuance
  5. Monitoring

Implication: Firms must define policies for each objective and document how they're achieved.

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SQM1 Transition: What Needs to Change

Change 1: Document Quality Management System

ISA 220 Documentation:

• Quality control procedures (general)
• EQCM requirements (if any)
• Monitoring procedures (annual)

SQM1 Documentation:

• Quality management file:
  • Five quality objectives (documented)
  • Policies for each objective
  • Responsibility assignments
  • Monitoring procedures
  • Corrective action framework

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Change 2: Expand EQCM Process

ISA 220 EQCM:

• Post-engagement review
• File completeness check
• No specific RP screening

SQM1 EQCM:

• Pre-completion review (before engagement conclusion)
• RP screening (confirm no independence impairments)
• Significant judgments review (complex areas)
• Documentation of all EQCM findings

New Documentation Required:

• EQCM memo (per SQM1 format)
• RP independence confirmation
• Significant judgments assessment

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Change 3: Implement Continuous Monitoring

ISA 220 Monitoring:

• Annual review of files (post-engagement)
• Assessment of quality trends
• Corrective action plan (if needed)

SQM1 Monitoring:

• Real-time monitoring (throughout year)
• Exception tracking (quality issues flagged as they arise)
• Monthly/quarterly review of monitoring results
• Immediate corrective action (don't wait for year-end)

New Procedures:

• Quality metrics dashboard
• Exception reporting system
• Corrective action log

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ISA 220 → SQM1 Transition Roadmap

Phase 1: Assess Current State (January 2026)

Action Items:

• Audit current ISA 220 quality control procedures
• Document gaps vs. SQM1 requirements
• Prioritize implementation areas

Questions to Ask:

• Do we have documented quality management system (not just engagement-level)?
• Do we have five explicit quality objectives?
• Is EQCM performed pre-completion or post-engagement?
• Do we have continuous monitoring procedures (throughout year)?

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Phase 2: Design SQM1 System (February 2026)

Action Items:

• Define five quality objectives (per firm)
• Write policies for each objective
• Design EQCM procedure (per SQM1)
• Design monitoring procedures (continuous)

Deliverables:

• Quality Management File (framework)
• EQCM Procedure (updated)
• Monitoring Procedures (continuous)
• Staff Training Materials

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Phase 3: Implement SQM1 (March–May 2026)

Action Items:

• Train all partners and managers
• Rollout new EQCM process
• Deploy monitoring procedures
• Update engagement files

Deliverables:

• SQM1 Audit Manual (updated)
• EQCM Templates (SQM1 format)
• Monitoring Dashboard (if applicable)
• Staff Training Completed

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Phase 4: Pilot with New Engagements (April–May 2026)

Action Items:

• Apply SQM1 to new engagements starting April/May
• Refine procedures based on feedback
• Identify training gaps
• Update documentation based on lessons learned

Outcomes:

• SQM1 procedures tested and refined
• Staff trained and competent
• Procedures documented

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Phase 5: Transition Existing Engagements (June 2026)

Action Items:

• Communicate transition to clients (if needed)
• Apply SQM1 procedures to June 30 transitions
• Complete all ISA 220 engagements before July 1
• Document transition in engagement files

Deadline: June 30, 2026

• All ISA 220 engagements must be completed
• All July 1+ engagements must use SQM1

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NFRA Perspective: ISA 220 vs. SQM1

NFRA View of ISA 220 (Currently)

NFRA Inspector:

"Audit performed per ISA 220. Partner responsible for quality. File demonstrates EQCM procedures performed. Quality control procedures followed."

NFRA Assessment: Compliant with current standards.

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NFRA View of SQM1 (After July 1, 2026)

NFRA Inspector:

"Audit performed per SQM1. Firm quality management system documented. Five quality objectives addressed. EQCM performed by independent partner. Continuous monitoring procedures implemented. Quality management file demonstrates ongoing monitoring throughout engagement."

NFRA Assessment: Comprehensive quality management system in place.

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Common Transition Questions

Q1: Do we need to re-do our ISA 220 manual?

A: Yes. You'll need to:

• Add SQM1 framework section
• Update EQCM procedure
• Add continuous monitoring procedures
• Add five quality objectives

You can incorporate ISA 220 sections but emphasize SQM1 requirements.

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Q2: What happens to engagements in progress on June 30?

A:

• If engagement ends before June 30: Use ISA 220
• If engagement ends after June 30: Use SQM1

Recommend wrapping up ISA 220 engagements by mid-June to avoid transition complications.

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Q3: Do we need separate EQCM templates for ISA 220 vs. SQM1?

A: Recommended. ISA 220 and SQM1 EQCM are different:

• ISA 220 EQCM: Post-engagement; general quality review
• SQM1 EQCM: Pre-completion; RP screening; significant judgments focus

Using separate templates prevents confusion.

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Q4: How does SQM1 affect our audit fees?

A: SQM1 shouldn't increase fees materially, but:

• EQCM complexity increases (pre-completion, more thorough)
• Monitoring procedures add overhead
• Training and system setup is one-time cost

Long-term: Quality improvements may reduce rework/adjustments.

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Key Takeaways

1. SQM1 replaces ISA 220 on June 30, 2026. No extensions; mandatory transition.

2. SQM1 expands scope. From audit-only to all services.

3. SQM1 expands responsibility. From partner-centric to firm + partner.

4. EQCM becomes mandatory and more rigorous. Pre-completion review required for all audits (with exceptions).

5. Monitoring becomes continuous. Quality issues identified throughout year, not at year-end.

6. Five quality objectives guide everything. Competence, Independence, Engagement Performance, Acceptance/Continuance, Monitoring.

7. Transition is achievable. With planning and preparation, firms can be compliant by June 30, 2026.

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Related Blog Posts

• SQM1 Implementation Roadmap: ISA 220 to Compliance [2026]
• EQCM: Engagement Quality Control Review Procedures
• Audit Quality Management: SQM1, EQCM & Compliance Framework

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About CORAA

CORAA helps Indian audit firms transition from ISA 220 to SQM1. From quality management system design to EQCM implementation, ensure June 30, 2026 compliance and strengthen audit quality across your firm.

Learn more: Visit our website

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Sources

• ISA 220: Quality Management in Audits of Financial Statements
• SQM1: Service Quality Management (ICAI)
• ICAI Quality Standards Implementation Guidance