Engagement Quality Reviews (EQR) are a firm-level response to quality risks. The engagement quality review is undertaken at the engagement level by the engagement quality reviewer on behalf of the firm. Engagement quality review is a crucial step in the audit process, as it guarantees that the work performed by the audit team meets the standards set by The International Auditing and Assurance Standards Board (IAASB).
In managing quality reviews, there are two key IAASB standards that are involved i.e. ISQM1 and ISQM2. These guidelines provide a framework for conducting an effective review, helping to ensure that the audit is performed to the highest possible standards.
ISQM1 provides a comprehensive guide to the overall review process. It includes information on how to manage the firm’s overall audit quality, select engagements to be reviewed, how to assemble a review team, and the procedures to be followed during the review. ISQM2 provides a more detailed guidance on the engagement review process. This includes assessing the quality of the audit work, evaluating the effectiveness of the audit team, and identifying areas for improvement and documenting review findings.
Objectives of ISQM1 & 2 in relation to EQR
The firm is expected to establish policies or procedures that address:
- Which engagements need to be subject to an engagement quality The policies or procedures need to include the scope of engagements specified by ISQM 1.
- The eligibility criteria for an individual to perform an engagement quality review, and the appointment of the engagement quality reviewer. The policies or procedures need to also comply with the eligibility requirements in ISQM 2 and the requirements addressing the appointment of the reviewer.
The performance and documentation of the engagement quality review.
Paragraph A136 of ISQM 1 notes that in some cases, the firm may determine that there are no audits or other engagements for which an engagement quality review is needed. It should be noted that the requirement in ISQM 1 to establish policies or procedures addressing engagement quality reviews would still apply to the firm. However, the nature and circumstances of engagements the firm performs may be such that they do not require an engagement quality review in accordance with the firm’s policies or procedures.
The firm may design and implement other types of engagement reviews as a response to quality risks, that are not engagement quality reviews. For example, for qualifying audit engagements, the firm may require a review of the engagement team’s further audit procedures to address significant risks or reviews of certain matters by individuals within the firm who have specialized technical expertise. In some cases, these reviews may be undertaken in addition to an engagement quality review.
One of the most important aspects of engagement quality review is assessing the independence and objectivity of the audit team. The ISQM guidelines place a strong emphasis on independence and objectivity in the audit process, and the review team should be vigilant in ensuring that the audit team has not been influenced by any conflicts of interest.
Stages of an EQR
The monitoring and remediation process can be broken down into four aspects:
- Design and perform monitoring activities
- Evaluate findings and identify deficiencies and evaluate identified deficiencies
- Respond to identified deficiencies
The EQR Monitoring and remediation process should be dynamic and iterative allowing for real-time adjustments to be made to the audit engagement. These processes involve continuously monitoring the audit engagement throughout its lifecycle, identifying and addressing any issues that arise, and making adjustments as necessary to ensure the engagement meets professional standards.
Dynamic monitoring involves continuously monitoring the audit engagement as it progresses. This includes monitoring the work performed by the audit team, evaluating the effectiveness of the audit procedures, and identifying any issues that may arise. Dynamic monitoring helps to ensure that the audit engagement stays on track and that any issues are identified and addressed in a timely manner.
Iterative remediation, on the other hand, involves making adjustments to the audit engagement as necessary based on the results of the dynamic monitoring. This may include modifying the audit procedures, providing additional training to the audit team, or making other changes to ensure that the audit engagement meets professional standards.
Appointment and Eligibility of Engagement Quality Reviewers
ISQM 2 includes new requirements and application material addressing:
- The eligibility of the individual(s) within the firm responsible for the appointment of engagement quality reviewers;
- Limitations on the eligibility of an individual to be appointed as engagement quality reviewer for an engagement for which the individual previously served as the engagement partner;
- The eligibility of individual(s) who assist the engagement quality reviewer in performing the engagement quality review; and
- The engagement quality reviewer taking overall responsibility for the performance of the engagement quality review, including that the work of individuals assisting in the review is
Who Performs the Monitoring Activities?
ISQM 2 Para. 18-19, A4-A18 defines the desirable qualities of an EQR monitor; these are:
- Have competence, capabilities, including sufficient time, and appropriate authority
- Comply with relevant ethical requirements, including objectivity and independence
- Comply with provisions of law and regulation relevant to the eligibility of engagement quality reviewers
Documentation of the Engagement Quality Review
- Paragraphs 28-29 of ISQM 2 include new specific requirements for the engagement quality reviewer to take responsibility for documentation of the engagement quality review, and that the documentation be filed with the engagement
- Paragraph 30 of ISQM 2 also includes a new overarching requirement for the documentation to be sufficient to enable an experienced practitioner, having no previous connection to the engagement, to understand the nature, timing and extent of the engagement quality review procedures performed.
Engagement quality review is a vital component of the audit process, and the ISQM1 and ISQM2 guidelines provide a valuable framework for conducting an effective review. These guidelines help to ensure that the audit team’s work meets professional standards and that any areas for improvement are identified and addressed. The standards are rigorous and audit firms are encouraged to automate their audit procedures to aid achievement of audit quality assurance. Auditproo helps you achieve audit quality assurance.