What’s News?

Engagement Quality Reviews (EQRs) are a crucial aspect of audit quality, and compliance with the International Standards on Quality Management (ISQM) and the International Standards on Auditing (ISA). By carefully selecting engagements for EQR, audit firms can ensure that the engagement partner receives the assistance and objective evaluation needed to address challenging issues, make informed judgments, and ultimately enhance the reliability and credibility of the audit report.

The role of the engagement partner in EQR

The engagement partner is responsible for the overall quality of the audit engagement. This includes ensuring that the EQR is performed in accordance with relevant standards, and that any issues identified during the review are appropriately addressed. The EQR acts as an additional safeguard to enhance the quality and reliability of the audit. It involves an objective evaluation of the significant judgments made by the engagement team and the conclusions reached in forming the audit report.

ISQM 2 requires firms to establish policies and procedures that ensure that EQRs are performed at appropriate times during the engagement and completed before the report is dated, and that significant matters and judgments are reviewed, and addressed thoroughly and on time.

ISA 220 requires the engagement partner to take responsibility for the overall quality of each audit engagement, ensuring that EQRs are conducted and completed on time, with significant judgments and conclusions reviewed before issuing the audit report.

Importance of adhering to timelines

• Ensuring audit quality and compliance

Any significant issues or concerns are identified and resolved before issuance of the audit report.

• Risk mitigation

Delays in the EQR process may lead to critical issues being overlooked or inadequately addressed. This increases the risk of material misstatements going undetected, which may have severe consequences for the audited entity and its stakeholders.

• Maintaining professionalism and credibility

The audit profession relies heavily on public trust. Prompt and thorough EQRs demonstrate a commitment to high standards of quality and professionalism, thereby enhancing the credibility of the audit process.

Consequences and risks of non-adherence

Failing to adhere to timelines for EQRs and signing the audit report before resolving EQR issues may have severe consequences, including:

• Regulatory and legal repercussions

Regulatory bodies expect audits to be conducted in line with professional standards, and any deviations may lead to sanctions or penalties.

• Compromised audit quality

Significant issues may be overlooked, undermining the thoroughness and reliability of the audit.

• Material misstatements

If left unaddressed, risks of material misstatement may lead to inaccurate financial statements being issued.

• Breach of professional standards

ISQM and ISA standards are violated, potentially leading to disciplinary action by professional bodies.

• Reputational damage and loss of stakeholder trust

Firms risk damaging their credibility and trust with stakeholders, including clients and regulatory bodies. If stakeholders discover that issues were unresolved before the audit report was signed, it may lead to a loss of confidence in the audit process and the firm’s reliability.

• Regulatory sanctions

Fines, restrictions on practice, or other penalties imposed by regulatory authorities may result.

• Litigation risks

Firms are exposed to increased litigation risks from stakeholders who may have suffered losses, due to undisclosed audit deficiencies.

• Possible withdrawal of audit report

In severe cases, the audit report must be withdrawn or retracted, leading to significant reputational and financial repercussions for the audit firm.

• Possible prior-year adjustments

Future adjustments to prior-year financial statements may be required, complicating the audit process, and potentially leading to additional scrutiny and loss of stakeholder confidence.

These consequences underscore the critical importance of adherence to EQR timelines and the resolution of all identified issues before the audit report is issued, ensuring the integrity, quality, and compliance of the audit process.