PCAOB 7: Engagement Quality Review1

EFFECTIVE DATE AND APPLICABILITY

DEFINITIONS OF TERMS

Significant engagement deficiency. An audit condition that exists when an engagement team does not obtain sufficient evidence, it reached an inappropriate conclusion on the subject matter, the engagement report is not appropriate, or the firm is not independent of its client.

Significant risk. A risk of material misstatement that is important enough to require special audit consideration.

OBJECTIVES OF PCAOB STANDARD 7

PCAOB Auditing Standard 7 addresses the judgments made by an engagement team in forming an overall conclusion on an engagement quality review and in preparing the resulting report.

FUNDAMENTAL REQUIREMENTS

Qualifications of an Engagement Quality Reviewer

An auditor engaged in an engagement quality review must possess the following characteristics:

• Be associated with a registered public accounting firm

• Have competence, which is considered to be a sufficient level of knowledge to be the engagement partner on the engagement being reviewed.
• Have independence from the company being reviewed.
• Perform the engagement quality review with integrity.
• Have objectivity. To maintain objectivity, the engagement quality reviewer and those assisting the reviewer should not make decisions for the engagement team or assume any of its responsibilities. This means that the engagement partner is responsible for the engagement.
• Any assistants involved in the engagement should also be independent and conduct their work with integrity and objectivity.

Engagement Quality Review for an Audit

The engagement quality review process requires an evaluation of the engagement team in the following areas:

• Audit committee communications. Evaluate whether appropriate matters were communicated, or are to be communicated, to the audit committee, management, and other parties.
• Contentious matters. Evaluate whether appropriate consultations have taken place on contentious or otherwise difficult matters.
• Control deficiencies. Evaluate significant judgments regarding the severity and disposition of identified control deficiencies.
• Document inconsistencies. Compare the financial statements to be filed with the Securities and Exchange Commission (SEC) with other information accompanying the financial statements, and evaluate whether appropriate actions were taken regarding any material inconsistencies with the financial statements, or material misstatements of fact.
• Documentation. Evaluate whether the engagement documentation indicates that the team responded appropriately to significant risks, and that it supports the engagement team’s conclusions regarding the matters reviewed.
• General reviews. Review the financial statements, management’s report on internal controls, and the related engagement report.
• Independence. Evaluation of the firm’s independence in relation to the engagement.
• Misstatements. Evaluate significant judgments regarding the materiality and disposition of both corrected and uncorrected identified misstatements.
• Risks. Evaluate the engagement team’s assessments of and responses to significant risks, including fraud risks.
• Unresolved matters. Review the engagement completion document and confirm that there are no significant unresolved matters.

The engagement quality reviewer should also evaluate the engagement team’s assessment of and responses to other significant risks identified by the engagement quality reviewer through the procedures itemized in this standard.

In an audit, the audit firm can only grant permission to the client to use the engagement report after the engagement quality reviewer approves issuance of the report. The engagement quality reviewer should only approve the issuance if he or she is not aware of a significant engagement deficiency, following completion of the review steps required by this Standard.

Engagement Quality Review for a Review of Interim Financial Information

If a report concerning interim financial information is to be issued, the engagement quality reviewer should evaluate the engagement team in the following areas:

• Audit committee communications. Evaluate whether appropriate matters were communicated, or are to be communicated, to the audit committee, management, and other parties.
• Business. Evaluate the company’s business, significant recent activities, and related financial reporting issues and risks.
• Contentious matters. Evaluate whether appropriate consultations have taken place on contentious or otherwise difficult matters.
• Document inconsistencies. Compare the interim financial information to be filed with the SEC with other information accompanying the financial information, and evaluate whether appropriate actions were taken regarding any material inconsistencies with the financial information, or material misstatements of fact.
• Documentation. Evaluate whether the engagement documentation indicates that the team responded appropriately to significant risks, and that it supports the engagement team’s conclusions regarding the matters reviewed.
• Fraud. Evaluate the nature of identified risks of material misstatement caused by fraud.
• Independence. Evaluate the firm’s independence in relation to the engagement.
• Internal control changes. Review interim financial information for all periods presented, and the engagement report, regarding changes in internal control over financial reporting.
• Misstatements. Evaluate the engagement team’s judgments concerning the materiality and disposition of identified misstatements, as well as any material modifications that should be made to the disclosures concerning changes in internal controls over financial reporting.
• Recent experience. Review the firm’s recent experience with the company and those risks connected to the firm’s client acceptance and retention process.
• Unresolved matters. Review the engagement completion document and confirm that there are no significant unresolved matters.

In a review of interim financial information, the audit firm can only grant permission to the client to use the engagement report after the engagement quality reviewer approves issuance of the report. The engagement quality reviewer should only approve the issuance if he or she is not aware of a significant engagement deficiency, following completion of the review steps required by this Standard.

Documentation Engagement Quality Review

The engagement quality reviewer should create documentation of a quality review that contains sufficient information to allow an experienced auditor who has no prior connection with the engagement to understand the reviewer’s procedures to comply with the provisions of this Standard. Specifically, the documentation should identify the engagement quality reviewer and assistants, the documents reviewed, and the date when the engagement quality reviewer provided concurring approval or the reason(s) for not providing such approval.

1 Practitioners should reference the additional guidance listed in the section “Other PCAOB Guidance” in this volume’s chapter PCAOB 1.