The PCAOB on Oct. 12, 2023, issued a staff report to urge engagement quality reviewers to do a better job when they look at the work done by audit engagement teams. The PCAOB staff found that 42 percent of inspected firms in 2022 had a quality control criticism related to engagement quality reviews (EQRs), which is up from 37 percent in 2020, and called the trend “troubling.”
Most concerning, U.S. firms that are part of a global network had a 33-percentage point increase in the number of audit firms with an EQR deficiency from 2021 to 2022. Then there was a 21-percentage point increase among accounting firms that are not part of an affiliated-network but are inspected every year, according to Spotlight: Inspection Observations Related to Engagement Quality Reviews.
In an EQR, a reviewer who is not part of the audit engagement team evaluates significant judgments made by the team and the related conclusions reached in forming the audit opinions. The report notes that Audit Standards (AS) 1220, Engagement Quality Review, is intended to better help identify significant audit deficiencies before audit or attestation reports are issued.
A “well-performed EQR serves as an important safeguard against erroneous or insufficiently supported audit opinions and as a meaningful check on the work performed by engagement teams,” the staff report states. “Auditors who fail to follow AS 1220 deprive investors of that PCAOB-mandated safeguard. In addition, we consider the EQR reviewers’ evaluations to be an important part of an audit firm’s quality control (QC) system.”
The report provides recent trends in deficiencies related to EQRs, and it also describes good practices that inspectors observed.
The report also includes several helpful reminders for auditors to better avoid the deficiencies. For example, the staff noted that it is important for audit firms to evaluate the reviewer’s experience, including specific industries and the accounting principles used in the industry. The reviewer definitely must not be the person who served as the audit engagement partner during either of the two audits preceding the audit subject to the EQR.
Further, the staff report highlights some key questions on EQRs that audit committees could ask when they have discussions with external auditors.
“Engagement quality reviews are an important investor safeguard during the audit process. Unfortunately, audit firms are increasingly falling short when performing this function,” said PCAOB Chair Erica Williams in a statement. “We urge audit firms and audit committees to read our EQR report so they can fully live up to their responsibility to protect investors against insufficiently supported audits.”
Summary of Analysis
The PCAOB staff’s analysis showed that the deficiencies are not limited to a single type or size of the firm. Also, the deficiencies are not limited to a specific inspection program or a particular industry sector.
The report has a section that summarizes deficiencies identified in the PCAOB’s 2021 and 2022 comment forms issued to audit firms on EQRs.
The report notes that 82 percent of EQR comment forms said that firms failed to identify certain engagement-level performance deficiencies in the audit.
“We have identified deficiencies where the audit firms’ QC system did not provide reasonable assurance that the reviews performed by the audit firms’ EQR reviewers for audit and attestation engagements would meet the requirements of AS 1220,” the staff report stated. “This contributed to EQR reviewers not identifying deficiencies in audit responses to areas of significant risks, including fraud risks, that were subsequently identified by PCAOB staff.”
While the deficiency rate is much lower, the analysis also found that 6 percent of EQR comment forms pointed out that firms failed to have competent and knowledgeable EQR reviewer.
In 6 percent of EQR comment forms, the PCAOB faulted the firm for failing to properly document the EQR. Also in 6 percent of the comment forms, firms failed to provide concurring approval.
Most egregiously, some firms failed to do an EQR even though it was required—this is 5 percent of the comment forms.
This article originally appeared in the October 13, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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