Standard on Engagement Quality Review

By Brian Rush, CPA

I beg forgiveness from my colleagues in taxation, but I think it timely to address a new standard that is applicable to certain attest engagements.

As many of you know, the Public Company Accounting Oversight Board has adopted Auditing Standard No. 7, Engagement Quality Review, which applies to all audit and interim financial review engagements that are conducted pursuant to the PCAOB’s standards. This standard, if adopted by the SEC, will become effective for audits and interim reviews for fiscal years beginning on or after Dec. 15, 2009.

According to AS 7, the objective of the engagement quality reviewer is to evaluate the significant judgments made by the engagement team and the related conclusions reached in forming the overall conclusion on the engagement and in preparing the engagement report (if a report is to be issued), to determine whether to provide concurring approval of issuance. In an engagement quality review, a qualified reviewer takes a fresh, objective look at the engagement and evaluates whether it is appropriate for the firm to issue its report. The engagement quality reviewer must be independent of the company, perform the engagement quality review with integrity and maintain objectivity in performing the review.

Some other requirements of AS 7 include:

• The person who served as the engagement partner during either of the two audits preceding the audit subject to the engagement quality review may not be the engagement quality reviewer.
• In an audit and a review of interim financial information, the engagement quality reviewer should evaluate the significant judgments that relate to engagement planning.
• In an audit, the engagement quality reviewer should evaluate the engagement team’s assessment of, and audit responses to, significant risks identified by the engagement team, including fraud risks, and other significant risks identified by the engagement quality reviewer through performance of the procedures required by AS 7.
• Whether in an audit or an interim review, the engagement quality reviewer also should review the engagement team’s evaluation of the firm’s independence in relation to the engagement.
• The engagement quality reviewer should evaluate judgments made about the materiality and disposition of corrected and uncorrected identified misstatements and the severity and disposition of identified control deficiencies.
• The engagement quality reviewer is required to evaluate whether appropriate consultations have taken place on difficult or contentious matters. The engagement quality reviewer must review the documentation, including conclusions, of such consultations.
• Based on procedures required by AS 7, the engagement quality reviewer also must evaluate whether appropriate matters have been communicated, or identified for communication, to the audit committee, management and other parties, such as regulatory bodies.

The engagement quality reviewer may provide concurring approval of issuance only if, after performing the required review with due professional care, he or she is not aware of a significant engagement deficiency. The firm may grant permission to the client to use the engagement report (or communicate an engagement conclusion to its client, if no report is issued) only after the engagement quality reviewer provides concurring approval of issuance.

This information is based on an article authored by McGladrey & Pullen.

My best to all of you.

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