PCAOB Issues Standard to Clarify Engagement Quality Review Requirements

In a move expected to clarify the Engagement Quality Review process, the Public Accounting Oversight Board (PCAOB) has adopted a new auditing standard that establishes qualifications for engagement reviewers and provides guidance on evaluating judgment calls made by engagement teams during audits of client financials.  The Board also issued for public comment a Concept Release on requiring the engagement partner’s signature on the audit report.

Auditing Standard No. 7, Engagement Quality Review (EQR), provides a framework for the engagement quality reviewer to objectively evaluate the significant judgments made and related conclusions reached by the engagement team in forming an overall conclusion about the engagement.

“The EQR standard focuses the engagement quality reviewer’s attention on the areas that are most likely to contain a significant engagement deficiency and increases the likelihood of identifying and correcting those deficiencies before the audit report is issued,” said PCAOB Chairman Mark W. Olson.  “The new standard goes a long way in clarifying the process."

Required by Sarbanes-Oxley, the EQR standard addresses issues arising from findings by PCAOB inspectors that, in some cases, reviews were ineffective due to the reviewer’s lack of experience or expertise.  As a result, AS7 now specifies that the engagement quality reviewer must possess “the level of knowledge and competence related to accounting, auditing, and financial reporting required to serve as the engagement partner on the engagement under review.”

The standard goes on to state that the engagement quality reviewer must be independent of the company and may not have served as the engagement partner during either of the two audits preceding the audit undergoing quality review.  Further, in recognition of the fact that many smaller firms may not be able to meet the new reviewer qualification requirements internally, AS7 allows for the use of partners from other firms for the evaluations.

The standard applies to all audit engagements and engagements to review interim financial information.  If approved by the Securities and Exchange Commission (SEC), AS7 will become effective for fiscal years beginning on or after Dec. 15, 2009.

Separately, the Board also is seeking comment on a Concept Release to consider the effects of a potential requirement for the engagement partner to sign the audit report.  Any such requirement would be in addition to the existing requirement for the audit firm to sign its name on the audit report.

“The PCAOB has discussed the engagement partner signature with its Standing Advisory Group three times, and taken a close look at the Treasury's Advisory Committee recommendations as well as the new signature requirements for Member States in the European Union,” said Olson.  “We want to take a hard look at this issue and its potential benefits for investors, and look forward to a robust and informative comment period.”
 

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