SQM 2 Engagement Quality explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
SQM 2 sets out how a firm appoints an independent senior person to test the significant judgments on an engagement before the report is issued. It covers who may be the reviewer, what the reviewer must do, how the review is closed and what is recorded.
SQM 2, as effective for audits and reviews of financial statements for periods beginning on or after 1 April 2025 on a recommendatory basis (and, as printed, 1 April 2026 on a mandatory basis that has been deferred), is not yet mandatory. ICAI may revise standards, so check icai.org for the current text.
An engagement quality review is an objective evaluation of the engagement team's significant judgments, completed on or before the date of the report. The reviewer is not part of the team, must be competent, have time and authority, and be independent, and a former engagement partner must wait a cooling-off period of two years or longer. The partner cannot date the report until the reviewer says the review is complete. ICAI deferred the mandatory date of SQM 1 and SQM 2 on 31 March 2026, so SQC 1 still applies.
Status and scope
SQM 2 prints both a recommendatory date (audits and reviews for periods beginning on or after 1 April 2025; other engagements beginning on or after that date) and a mandatory date one year later (paragraph 11). ICAI's Council deferred the mandatory date on 31 March 2026 until further announcement and said the existing SQC 1 continues to apply. A firm may follow SQM 2 on a recommendatory basis.
SQM 2 is premised on the firm being subject to SQM 1 (paragraph 2). It deals with the appointment and eligibility of the reviewer and the performance and documentation of the review, while SQM 1 decides which engagements need a review. Paragraph 3 calls the review a specified response of the firm's system of quality management, carried out at engagement level by the reviewer on the firm's behalf. How much the reviewer does depends on the engagement; the procedures are likely to be less extensive where there are fewer significant judgments (paragraph 4).
What a review is, and is not
Paragraph 8 says the review is an objective evaluation of significant judgments and conclusions. It is not an evaluation of whether the whole engagement complies with standards or with the firm's policies. Paragraph 9 adds three limits: the reviewer is not a member of the engagement team; the review does not change the engagement partner's responsibilities for quality, direction, supervision and review; and the reviewer does not have to obtain evidence to support the opinion, though the team may gather more evidence to answer the reviewer's points.
Objective
The firm's objective, through appointing an eligible reviewer, is to perform an objective evaluation of the significant judgments made by the engagement team and the conclusions reached (paragraph 12).
Appointment and eligibility (paragraphs 17-23)
| Requirement | What the firm does | Paragraph |
|---|---|---|
| Who appoints | Assign the appointment to a person with competence, capabilities and authority | 17 |
| Eligibility criteria | Reviewer is not on the team; has competence, capabilities, time and authority; complies with ethics including objectivity and independence; meets any legal requirements | 18 |
| Cooling-off | Policy must set at least two years before a former engagement partner can be the reviewer | 19 |
| Assistants | Same kind of criteria for people who help the reviewer | 20 |
| Responsibility | Reviewer takes overall responsibility and directs and reviews assistants | 21 |
| Impairment | Firm has a process to replace a reviewer whose eligibility is impaired; reviewer who becomes aware must notify and decline or discontinue | 22-23 |
The reviewer may be a partner, another individual in the firm or an external individual appointed by the firm; footnotes to the definition say an "other" or external individual must be an ICAI member. The cooling-off of two years in paragraph 19 is a minimum; the footnote points to longer periods in the Code of Ethics, for example three consecutive years after acting as the reviewer for seven cumulative years, and longer periods in some combinations of engagement partner and review roles. Check the Code for the exact cases.
Performing the review (paragraphs 24-26)
The firm's policies address three things: the reviewer's procedures at suitable points in the engagement; the engagement partner's duties, including that the partner is precluded from dating the report until the reviewer notifies that the review is complete; and what to do when discussions between the team and the reviewer about a significant judgment threaten the reviewer's objectivity (paragraph 24).
In the review itself the reviewer (paragraph 25):
- reads the team's information on the engagement and entity, and the firm's information about monitoring and remediation, especially deficiencies that could affect areas of significant judgment;
- discusses significant matters and judgments with the partner and, if applicable, other team members;
- reviews selected documentation on significant judgments and evaluates the basis, including professional skepticism, whether the documentation supports the conclusions, and whether the conclusions are appropriate;
- for audits, evaluates the basis for the partner's conclusion on independence;
- checks that consultation took place on difficult or contentious matters, or differences of opinion;
- for audits, evaluates the basis for the partner's view that his or her involvement was sufficient and appropriate throughout; and
- reviews the financial statements and auditor's report, including any key audit matters, or the report and subject matter for other engagements.
If the reviewer has concerns that are not resolved, the reviewer notifies the engagement partner and then an appropriate person in the firm that the review cannot be completed (paragraph 26).
Completing and documenting the review (paragraphs 27-30)
The reviewer decides whether the requirements have been met and whether the review is complete, and if so notifies the engagement partner (paragraph 27). The reviewer takes responsibility for the documentation (paragraph 28), which is kept with the engagement documentation (paragraph 29). Paragraph 30 says it must be enough for an experienced practitioner with no previous connection to understand what the reviewer and assistants did and concluded. It includes:
- the names of the reviewer and assistants;
- the engagement documentation reviewed;
- the basis for deciding that the review is complete;
- the notifications made under paragraphs 26 and 27; and
- the date the review was completed.
SQM 2 compared with the SQC 1 review
| Point | SQC 1 (applies today) | SQM 2 |
|---|---|---|
| Name | Engagement quality control review | Engagement quality review |
| Mandatory for | All listed entity audits and engagements meeting firm criteria | Firms follow SQM 1's specified response; listed entity audits, law-required and risk-based engagements |
| Reviewer cooling-off | Not specified in the text | At least two years for a former engagement partner |
| Timing | Completed before the report is issued | Completed on or before the report date; partner cannot date the report until notified |
| Reviewer's scope | Review of selected papers, discussion, report | Adds explicit steps on independence, partner involvement and key audit matters |
See SQC 1 part 2 for the review that applies now.
Illustrative example
Khanna & Co., an invented firm, audits Orbit Components Ltd, a listed company. Partner Rekha Khanna signed the previous year's audit as engagement partner. This year the firm appoints Anil Soni, a partner who has never worked on the client, as reviewer; it would not appoint Rekha because her cooling-off period has not run. Anil reads the planning summary, discusses a goodwill impairment judgment with Rekha, reviews the working papers behind it, and checks the draft report and key audit matter wording. He notifies Rekha that the review is complete on 18 May; the report is dated after that notification.
Need help with review processes?
If your firm is setting up reviewer eligibility rules, completion notices or review files, TaxClue's compliance advisory team can help you shape them. Companies that expect a quality review of their audit can use our compliance advisory service to prepare for the questions it raises.
Key takeaways
- The reviewer is outside the engagement team and evaluates significant judgments, not the whole engagement.
- A former engagement partner needs a cooling-off period of at least two years before reviewing the same engagement.
- The engagement partner cannot date the report until the reviewer notifies completion.
- Review documentation is kept with the engagement file.
- SQM 2 is recommendatory; SQC 1 applies because the mandatory date was deferred.
Read next
- SQC 1, part 2: the review that applies today
- SQM 1, part 1: components of quality management
- SA 220: the engagement partner's responsibilities
Disclaimer: Based on the Standards on Auditing and quality standards issued by the Institute of Chartered Accountants of India, in the versions named in the article, and ICAI's announcement of 31 March 2026 on SQM 1 and SQM 2, as consulted on 3 October 2026. ICAI revises standards from time to time; check the current text and effective dates on icai.org. This article is general information, not legal advice; check the official text before acting.