SQM1 & EQCM FAQs: Transition, Requirements & Documentation [2026]

Published: April 3, 2026 | Category: FAQ | Read Time: 10 minutes | Author: CORAA Team

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SQM1 Fundamentals

Q1: What is SQM1?

A: SQM1 (Service Quality Management 1) is ICAI's quality management standard for all services (audits, reviews, compilations, agreed-upon procedures).

Key Changes from ISA 220:

• Scope: Audit-only → All services
• Responsibility: Partner-centric → Firm + Partner
• EQCM: Optional → Mandatory
• Monitoring: Post-engagement → Continuous
• Quality Objectives: Implicit → Explicit 5 objectives

Effective Date: July 1, 2026 (mandatory; no extensions)

Per ICAI SQM1 Guidance, SQM1 aligns with international standards while reflecting Indian audit environment.

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Q2: What are the Five SQM1 Quality Objectives?

A:

1. Competence

   • Team members have necessary skills and experience
   • Continuing education maintained
   • New standards training provided

2. Independence & Integrity

   • No independence impairments
   • Conflicts of interest identified
   • Professional skepticism maintained

3. Engagement Performance

   • Audit procedures performed per ISAs
   • Audit evidence sufficient and appropriate
   • ISA standards complied with

4. Acceptance & Continuance

   • Client acceptable (no fraud risk)
   • No major red flags (money laundering, sanctions)
   • Annual continuance assessment

5. Monitoring

   • Quality issues identified throughout year
   • Corrective actions implemented
   • Real-time escalation (not post-engagement)

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Q3: When does the ISA 220 to SQM1 transition happen?

A:

• Through June 30, 2026: ISA 220 applies (old standard)
• July 1, 2026 onwards: SQM1 applies (new standard; mandatory)

Engagement Cutoff:

• If audit concludes before June 30: Use ISA 220
• If audit concludes after June 30: Use SQM1

Recommendation: Complete all ISA 220 engagements by mid-June to avoid confusion.

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EQCM (Engagement Quality Control Review)

Q4: What is EQCM and when is it required?

A: EQCM = Independent partner review of audit file before engagement conclusion.

Requirements per SQM1:

• Mandatory for: Most audits (listed companies, audits >₹10 crore materiality)
• Optional for: Some low-risk audits (<₹5 crore materiality; strong controls)
• Timing: Pre-completion (before audit report signed)

Purpose:

• Significant judgments review (revenue, leases, RP)
• RP independence confirmation (no conflicts)
• Disclosure completeness check

Per ISA 220 (pre-SQM1):

• EQCM was optional, post-engagement only

Per SQM1:

• EQCM is mandatory (with exceptions), pre-completion required

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Q5: What does EQCM involve?

A: EQCM procedure checklist:

EQCM REVIEW MEMO

1. SIGNIFICANT JUDGMENTS
   ☐ Revenue recognition complexity
   ☐ Lease classification (Ind AS 116)
   ☐ Provisions & contingencies (Ind AS 37)
   ☐ Related party transactions
   ☐ Impairments
   ☐ Any other significant judgments

   Review: Auditor assessment adequate? Procedures sufficient?

2. INDEPENDENCE & RP SCREENING
   ☐ Confirm no audit team member is related party
   ☐ Confirm no financial interest in client
   ☐ Confirm no long association (>7 years without rotation)
   ☐ Confirm no management threat
   ☐ Confirm no business relationship

   Conclusion: Independence confirmed / Not confirmed

3. FRAUD RISK & GOING CONCERN
   ☐ Assessed fraud risk adequately
   ☐ Tested going concern (if applicable)
   ☐ Management override procedures performed

   Conclusion: Appropriate procedures performed

4. DISCLOSURE COMPLETENESS
   ☐ RP disclosures complete (Ind AS 24)
   ☐ Contingencies disclosed (Ind AS 37)
   ☐ Segment reporting (if listed)
   ☐ Related party transactions disclosed

   Conclusion: Disclosures complete

5. OVERALL ASSESSMENT
   Reviewed by: [Independent Partner Name]
   Date: [Date]
   Conclusion: ☐ Audit ready for report
              ☐ Issues identified (see below)

   Issues Identified (if any):
   [Describe any issues requiring remediation]

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Q6: Who performs EQCM?

A: Per SQM1:

EQCM Must Be Performed By:

• An independent partner (not the engagement partner)
• Someone without involvement in the audit
• Someone with necessary expertise

Experience Required:

• Typically: Partner or senior manager
• Minimum: 5+ years audit experience (firm's policy)
• Preferably: Familiar with client's industry

Documentation:

• EQCM memo signed by EQCM partner
• File shows EQCM performed pre-completion

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Q7: What's different between ISA 220 EQCM and SQM1 EQCM?

A:

Aspect	ISA 220 EQCM	SQM1 EQCM
Timing	Post-engagement (optional)	Pre-completion (mandatory)
Scope	General quality review	Specific: significant judgments, RP, fraud, going concern
RP Screening	Not emphasized	Mandatory (independence confirmation)
Significant Judgments	General review	Explicit focus on revenue, leases, RP, provisions
Documentation	Minimal	Detailed EQCM memo required

Key Change: ISA 220 EQCM was "nice to have"; SQM1 EQCM is "must-have" and more rigorous.

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Quality Objectives Implementation

Q8: How do firms document the five SQM1 quality objectives?

A: Firms must create a Quality Management File documenting:

QUALITY MANAGEMENT FILE (Firm Level)

1. COMPETENCE POLICY
   - Team member qualification requirements
   - Training requirements (annual hours)
   - Continuing education monitoring
   - New standards training plan

   Example: "All audit staff complete 20 hours annual CPE,
   including 4 hours on new standards annually."

2. INDEPENDENCE & INTEGRITY POLICY
   - Independence procedures
   - Conflict-of-interest screening
   - Related party questionnaire
   - Rotation policy

   Example: "All partners rotate after 7 years.
   Team members screen for RP status before engagement."

3. ENGAGEMENT PERFORMANCE POLICY
   - Audit manual (ISA standards)
   - Procedure documentation requirements
   - Workpaper standards
   - File completeness checklist

   Example: "All audits documented per ISA standards.
   Working papers must show procedure, results, conclusion."

4. ACCEPTANCE & CONTINUANCE POLICY
   - Client acceptance criteria
   - Red flags (fraud risk, money laundering)
   - Annual continuance assessment
   - Termination criteria

   Example: "New clients screened for KYC compliance.
   Annual continuance assessed for all clients."

5. MONITORING POLICY
   - Real-time quality monitoring
   - Monthly exception tracking
   - Corrective action process
   - NFRA compliance monitoring

   Example: "Real-time monitoring of EQCM completion.
   Monthly review of quality issues. Corrective action
   within 30 days."

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Q9: Is the Quality Management File per firm or per engagement?

A: Both:

Firm Level (Entity-Wide):

• Quality Management File (framework)
• Five quality objectives (policies)
• Training requirements
• Monitoring procedures

Engagement Level (Per Engagement):

• Acceptance & continuance assessment (per engagement)
• EQCM memo (per audit)
• Quality issues log (per engagement)
• Independence confirmation (per engagement)

Structure:

Firm Quality Management File
├── Competence Policy
├── Independence Policy
├── Engagement Performance Standards
├── Acceptance & Continuance Criteria
└── Monitoring Procedures

Per-Engagement Documentation
├── Acceptance & Continuance Assessment
├── EQCM Memo (pre-completion)
├── Quality Issues Log (if any)
└── Independence Confirmations (RP screening)

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Q10: How often should the Quality Management File be updated?

A: Minimum annually, or when:

• New ISA standards are issued
• NFRA inspection identifies gaps
• Firm undergoes significant change (merger, new sector)
• Quality issues identified and corrective action needed

Best Practice: Review annually during firm audit or quality review process.

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Transition Roadmap

Q11: What's the implementation roadmap for SQM1?

A: 4-phase transition:

Phase 1: Assess Current State (January 2026)

• Audit existing ISA 220 procedures
• Document gaps vs. SQM1
• Prioritize implementation

Phase 2: Design SQM1 System (February 2026)

• Write Quality Management File
• Define five quality objectives
• Design EQCM procedure (updated)
• Design monitoring procedures

Phase 3: Implement & Test (March-May 2026)

• Train all partners and managers
• Rollout new EQCM process
• Apply to new engagements
• Refine based on feedback

Phase 4: Transition (June 30, 2026)

• Complete all ISA 220 engagements
• All July 1+ engagements use SQM1
• No extensions permitted

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Q12: What training is needed for SQM1?

A: Recommended training program:

For Partners (4 hours):

• SQM1 overview and requirements
• Five quality objectives explained
• EQCM role and expectations
• Monitoring procedures
• Documentation requirements

For Managers (3 hours):

• SQM1 framework
• EQCM checklist and process
• Engagement-level quality monitoring
• Documentation requirements

For Seniors (2 hours):

• SQM1 basics
• Working paper quality standards
• Escalation procedures
• Documentation

Timing: Deliver by May 2026 (before June 30 deadline)

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NFRA Defensibility

Q13: How does SQM1 strengthen NFRA defensibility?

A: Comparison:

NFRA Inspector (ISA 220):

"Auditor performed quality control procedures. EQCM performed post-engagement. File shows general quality review."

NFRA Inspector (SQM1):

"Firm has documented Quality Management File with five explicit quality objectives. EQCM performed pre-completion by independent partner. Significant judgments reviewed. Independence confirmed. Continuous monitoring procedures in place. Comprehensive quality system evident."

Advantage: SQM1 shows more rigorous, systematic quality management.

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Q14: What if we don't transition by June 30, 2026?

A: No extensions possible. After June 30, 2026:

• All audits must use SQM1
• ISA 220 no longer permitted
• NFRA will expect SQM1 compliance
• Non-compliance could result in inspection findings

Key: Transition is non-negotiable and imminent (3 months away).

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Common Implementation Issues

Q15: What are common SQM1 implementation challenges?

A: Anticipated challenges:

Challenge 1: EQCM Resourcing

• Finding independent partners for all audits
• Solution: Train multiple partners; rotate EQCM duties

Challenge 2: Engagement Partner Resistance

• "EQCM adds bureaucracy"
• Solution: Explain defensibility benefits; emphasize quality

Challenge 3: Documentation

• Quality Management File perceived as "extra work"
• Solution: Streamline templates; automate where possible

Challenge 4: Timeline

• Only 3 months to transition (April-June)
• Solution: Start Phase 1 immediately (January/early February)

Challenge 5: Monitoring Procedures

• "How do we monitor continuously?"
• Solution: Spreadsheet-based tracking; escalate issues monthly

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Key Takeaways

1. SQM1 is mandatory from July 1, 2026. ISA 220 no longer permitted after June 30.

2. EQCM becomes mandatory and more rigorous. Pre-completion, independent partner, specific focus areas.

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

4. Quality Management File is required. Firm-level documentation of quality policies and procedures.

5. Transition is a 4-month project. January (assess) → February (design) → March-May (implement) → June 30 (deadline).

6. SQM1 strengthens NFRA defensibility. More systematic, documented quality management system.

7. Start now. Only 3 months until mandatory implementation.

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Related Resources

• ISA 220 vs. SQM1: Transition Guide for Indian Auditors
• SQM1 Implementation Roadmap: ISA 220 to Compliance
• 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. Design your Quality Management File, implement EQCM procedures, and achieve June 30, 2026 compliance with our SQM1 implementation framework.

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
• NFRA: National Financial Reporting Authority - Audit Quality Review Standards