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A23. Factors that may be relevant to the firm in considering whether the eligibility of the engagement quality reviewer to perform the engagement quality review is impaired include: • Whether changes in the circumstances of the engagement result in the engagement quality reviewer no longer having the appropriate competence and capabilities to perform the review; • Whether changes in the other responsibilities of the engagement quality reviewer indicate that the individual no longer has sufficient time to perform the review; or • Notification from the engagement quality reviewer in accordance with paragraph 23.
A24. In circumstances in which the engagement quality reviewer’s eligibility to perform the engagement quality review becomes impaired, the firm’s policies or procedures may set out a process by which alternative eligible individuals are identified. The firm’s policies or procedures may also address the responsibility of the individual appointed to replace the engagement quality reviewer to perform procedures sufficient to fulfill the requirements of this SQM with respect to the performance of the engagement quality review. Such policies or procedures may further address the need for consultation in such circumstances.
Performance of the Engagement Quality Review (Ref: Para. 24–27)
Engagement Partner Responsibilities in Relation to the Engagement Quality
Review (Ref: Para. 24(b))
A25. SA 220(Revised)12 establishes the requirements for the engagement partner in audit engagements for which an engagement quality review is required, including: • Determining that an engagement quality reviewer has been appointed; • Cooperating with the engagement quality reviewer and informing other members of the engagement team of their responsibility to do so; • Discussing significant matters and significant judgments arising during the audit engagement, including those identified during the engagement quality review, with the engagement quality reviewer; and • Not dating the auditor’s report until the completion of the engagement quality review.
Discussions Between the Engagement Quality Reviewer and the Engagement
Team (Ref: Para. 24(c))
A26. Frequent communication between the engagement team and engagement quality reviewer throughout the engagement may assist in facilitating an effective and timely engagement quality review. However, a threat to the objectivity of the engagement quality reviewer may be created depending on the timing and extent of the discussions with the engagement team about a significant judgment. The firm’s policies or procedures may set out the actions to be taken by the engagement quality reviewer or the engagement team to avoid situations in which the engagement quality reviewer is, or may be perceived to be, making decisions on behalf of the engagement team. For example, in these circumstances the firm may require consultation about such significant judgments with other relevant personnel in accordance with the firm’s consultation policies or procedures. Procedures Performed by the Engagement Quality Reviewer (Ref: Para. 25–27)
A27. The firm’s policies or procedures may specify the nature, timing and extent of the procedures performed by the engagement quality reviewer and also may emphasize the importance of the engagement quality reviewer exercising professional judgment in performing the review.
A28. The timing of the procedures performed by the engagement quality reviewer may depend on the nature and circumstances of the engagement or the entity, including the nature of the matters subject to the review. Timely review of the engagement documentation by the engagement quality reviewer throughout all stages of the engagement (e.g., planning, performing and reporting) allows matters to be promptly resolved to the engagement quality reviewer’s satisfaction, on or before the date of the engagement report. For example, the engagement quality reviewer may perform procedures in relation to the overall strategy and plan for the engagement at the completion 12 Standard on Auditing (SA) 220(Revised), “Quality Management for an Audit of Financial Statements”, paragraph 36. of the planning phase. Timely performance of the engagement quality review also may reinforce the exercise of professional judgment and, when applicable to the type of engagement, professional skepticism, by the engagement team in planning and performing the engagement.
A29. The nature and extent of the engagement quality reviewer’s procedures for a specific engagement may depend on, among other factors: • The reasons for the assessments given to quality risks,13 for example, engagements performed for entities in emerging industries or with complex transactions. • Identified deficiencies, and the remedial actions to address the identified deficiencies, related to the firm’s monitoring and remediation process, and any related guidance issued by the firm, which may indicate areas where more extensive procedures need to be performed by the engagement quality reviewer. • The complexity of the engagement. • The nature and size of the entity, including whether the entity is a listed entity. • Findings relevant to the engagement, such as the results of inspections undertaken by an external oversight authority in a prior period, or other concerns raised about the quality of the work of the engagement team. • Information obtained from the firm’s acceptance and continuance of client relationships and specific engagements. • For assurance engagements, the engagement team’s identification and assessment of, and responses to, risks of material misstatement in the engagement. • Whether members of the engagement team have cooperated with the engagement quality reviewer. The firm’s policies or procedures may address the actions the engagement quality reviewer takes in circumstances when the engagement team has not cooperated with the engagement quality reviewer, for example, informing an appropriate individual in the firm so appropriate action can be taken to resolve the issue.
A30. The nature, timing and extent of the engagement quality reviewer’s procedures may need to change based on circumstances encountered in performing the engagement quality review.
Group Audit Considerations
A31. The performance of an engagement quality review for an audit of group financial statements may involve additional considerations for the individual appointed as the engagement quality reviewer for the group audit, depending on the size and complexity of the group. Paragraph 21(a) requires the firm’s policies or procedures to require the engagement quality reviewer to take overall responsibility for the performance of the engagement quality review. In this context, it is imperative to draw guidance from SA 13 SQM 1, paragraph A49. 600, “Using the Work of Another Auditor” which details the responsibility of the principal auditor in group audit scenario. In this regard, SA 600 deals with situations where an auditor (referred to herein as the ‘principal auditor’), reporting on the financial information of an entity, uses the work of another auditor (referred to herein as the ‘component auditor’) with respect to the financial information of one or more components included in the financial information of the entity. SA 600, adapted as necessary in the circumstances, may also be useful in an audit of financial statements when the engagement team includes individuals from another firm. In doing so, for larger and more complex group audits, the group engagement quality reviewer may need to discuss significant matters and significant judgments with key members of the engagement team other than the group engagement team (e.g., those responsible for performing audit procedures on the financial information of a component). In these circumstances, the engagement quality reviewer may be assisted by individuals in accordance with paragraph 20. The guidance in paragraph A22 may be helpful when the engagement quality reviewer for the group audit is using assistants.
A32. In some cases, an engagement quality reviewer may be appointed for an audit of an entity or business unit that is part of a group, for example, when such an audit is required by law, regulation or other reasons. In these circumstances, communication between the engagement quality reviewer for the group audit and the engagement quality reviewer for the audit of that entity or business unit may help the group engagement quality reviewer in fulfilling the responsibilities in accordance with paragraph 21(a). For example, this may be the case when the entity or business unit has been identified as a component for purposes of the group audit and significant judgments related to the group audit have been made at the component level. Information Communicated by the Engagement Team and the Firm (Ref: Para. 25(a))
A33. Obtaining an understanding of information communicated by the engagement team and the firm in accordance with paragraph 25(a) may assist the engagement quality reviewer in understanding the significant judgments that may be expected for the engagement. Such an understanding may also provide the engagement quality reviewer with a basis for discussions with the engagement team about the significant matters and significant judgments made in planning, performing and reporting on the engagement. For example, a deficiency identified by the firm may relate to significant judgments made by other engagement teams for certain accounting estimates for a particular industry. When this is the case, such information may be relevant to the significant judgments made on the engagement with respect to those accounting estimates, and therefore may provide the engagement quality reviewer with a basis for discussions with the engagement team in accordance with paragraph 25(b).
Significant Matters and Significant Judgments (Ref: Para. 25(b)–25(c))
A34. For audits of financial statements, SA 220(Revised)14 requires the engagement partner to review audit documentation relating to significant matters15 and significant 14 SA 220(Revised), paragraph 31. 15 SA 230, “Audit Documentation”, paragraph 8(c). judgments, including those relating to difficult or contentious matters identified during the engagement, and the conclusions reached.
A35. For audits of financial statements, SA 220(Revised)16 provides examples of significant judgments that may be identified by the engagement partner related to the overall audit strategy and audit plan for undertaking the engagement, the execution of the engagement and the overall conclusions reached by the engagement team.
A36. For engagements other than audits of financial statements, the significant judgments made by the engagement team may depend on the nature and circumstances of the engagement or the entity. For example, in an assurance engagement performed in accordance with “Guidance Note on Reports or Certificates for Special Purposes (Revised 2016)”, the engagement team’s determination of whether the criteria to be applied in the preparation of the subject matter information are suitable for the engagement may involve or require significant judgment.
A37. In performing the engagement quality review, the engagement quality reviewer may become aware of other areas where significant judgments would have been expected to be made by the engagement team for which further information may be needed about the engagement team’s procedures performed or the basis for conclusions reached. In those circumstances, discussions with the engagement quality reviewer may result in the engagement team concluding that additional procedures need to be performed.
A38. The information obtained in accordance with paragraphs 25(a) and 25(b), and the review of selected engagement documentation, assists the engagement quality reviewer in evaluating the engagement team’s basis for making the significant judgments. Other considerations that may be relevant to the engagement quality reviewer’s evaluation include, for example: • Remaining alert to changes in the nature and circumstances of the engagement or the entity that may result in changes in the significant judgments made by the engagement team; • Applying an unbiased view in evaluating responses from the engagement team; and • Following up on inconsistencies identified in reviewing engagement documentation, or inconsistent responses by the engagement team to questions relating to the significant judgments made.
A39. The firm’s policies or procedures may specify engagement documentation to be reviewed by the engagement quality reviewer. In addition, such policies or procedures may indicate that the engagement quality reviewer exercises professional judgment in selecting additional engagement documentation to be reviewed relating to significant judgments made by the engagement team.
A40. Discussions about significant judgments with the engagement partner, and if applicable, other members of the engagement team, together with the engagement team’s documentation, may assist the engagement quality reviewer in evaluating the 16 SA 220(Revised), paragraph A90. exercise of professional skepticism, when applicable to the engagement, by the engagement team in relation to those significant judgments.
A41. For audits of financial statements, SA 220 (Revised)17 provides examples of the impediments to the exercise of professional skepticism at the engagement level, unconscious auditor biases that may impede the exercise of professional skepticism, and possible actions that the engagement team may take to mitigate impediments to the exercise of professional skepticism at the engagement level.
A42. For audits of financial statements, the requirements and relevant application material in SA 315(Revised),18 SA 540(Revised)19 and other SAs also provide examples of areas in an audit where the auditor exercises professional skepticism, or examples of where appropriate documentation may help provide evidence about how the auditor exercised professional skepticism. Such guidance may also assist the engagement quality reviewer in evaluating the exercise of professional skepticism by the engagement team. Whether Relevant Ethical Requirements Relating to Independence Have Been Fulfilled (Ref: Para. 25(d))
A43. SA 220 (Revised)20 requires the engagement partner, prior to dating the auditor’s report, to take responsibility for determining whether relevant ethical requirements, including those related to independence, have been fulfilled. Whether Consultation Has Taken Place on Difficult or Contentious Matters or Matters
Involving Differences of Opinion (Ref: Para. 25(e))
A44. SQM 121 addresses consultation on difficult or contentious matters and differences of opinion within the engagement team, or between the engagement team and the engagement quality reviewer or individuals performing activities within the firm’s system of quality management. Sufficient and Appropriate Involvement of the Engagement Partner on the Engagement (Ref: Para. 25(f))
A45. SA 220 (Revised)22 requires the engagement partner to determine, prior to dating the auditor’s report, that the engagement partner’s involvement has been sufficient and appropriate throughout the audit engagement such that the engagement partner has the basis for determining that the significant judgments made and the conclusions reached are appropriate given the nature and circumstances of the engagement. SA 220 (Revised)23 also indicates that the documentation of the involvement of the engagement partner may be accomplished in different ways. Discussions with the engagement team, and review of such engagement documentation, may assist the engagement quality reviewer’s evaluation of the basis for the engagement partner’s determination that the 17 SA 220(Revised), paragraphs A34-A36. 18 SA 315(Revised), “Identifying and Assessing the Risks of Material Misstatement”, paragraph A238. 19 SA 540(Revised), “Auditing Accounting Estimates and Related Disclosures”, paragraph A11. 20 SA 220(Revised), paragraph 21. 21 SQM 1, paragraphs 31(d), 31(e) and A79-A82. 22 SA 220(Revised), paragraph 40(a). 23 SA 220(Revised), paragraph A116. engagement partner’s involvement has been sufficient and appropriate. Review of Financial Statements and Engagement Reports (Ref: Para. 25(g))
A46. For audits of financial statements, the engagement quality reviewer’s review of the financial statements and auditor’s report thereon may include consideration of whether the presentation and disclosure of matters relating to the significant judgments made by the engagement team are consistent with the engagement quality reviewer’s understanding of those matters based on the review of selected engagement documentation, and discussions with the engagement team. In reviewing the financial statements, the engagement quality reviewer may also become aware of other areas where significant judgments would have been expected to be made by the engagement team for which further information may be needed about the engagement team’s procedures or conclusions. The guidance in this paragraph also applies to review engagements, and the related engagement report.
A47. For other assurance and related services engagements, the engagement quality reviewer’s review of the engagement report and, when applicable, the subject matter information may include considerations similar to those described in paragraph A46 (e.g., whether the presentation or description of matters relating to the significant judgments made by the engagement team are consistent with the engagement quality reviewer’s understanding based on the procedures performed in connection with the review).
Unresolved Concerns of the Engagement Quality Reviewer (Ref: Para. 26)
A48. The firm’s policies or procedures may specify the individual(s) in the firm to be notified if the engagement quality reviewer has unresolved concerns that the significant judgments made by the engagement team, or the conclusions reached thereon, are not appropriate. Such individual(s) may include the individual assigned the responsibility for the appointment of engagement quality reviewers. With respect to such unresolved concerns, the firm’s policies or procedures may also require consultation within or outside the firm (e.g., a professional or regulatory body).
Documentation (Ref: Para. 28–30)
A49. Paragraphs 57 to 60 of SQM 1 address the firm’s documentation of its system of quality management. An engagement quality review performed in accordance with this SQM is therefore subject to the documentation requirements in SQM 1.
A50. The form, content and extent of the documentation of the engagement quality review may depend on factors such as: • The nature and complexity of the engagement; • The nature of the entity; • The nature and complexity of the matters subject to the engagement quality review; and • The extent of the engagement documentation reviewed.
A51. The performance and notification of the completion of the engagement quality review may be documented in a number of ways. For example, the engagement quality reviewer may document the review of engagement documentation electronically in the IT application for the performance of the engagement. Alternatively, the engagement quality reviewer may document the review through means of a memorandum. The engagement quality reviewer’s procedures may also be documented in other ways, for example, in the minutes of the engagement team’s discussions where the engagement quality reviewer was present.
A52. Paragraph 24(b) requires that the firm’s policies or procedures preclude the engagement partner from dating the engagement report until the completion of the engagement quality review, which includes resolving matters raised by the engagement quality reviewer. Provided that all requirements with respect to the performance of the engagement quality review have been fulfilled, the documentation of the review may be finalized after the date of the engagement report, but before the assembly of the final engagement file. However, firm policies or procedures may specify that the documentation of the engagement quality review needs to be finalized on or before the date of the engagement report.
Material Modifications vis-à-vis ISQM 2, “Engagement Quality Reviews”
1. Paragraph 13(b) of ISQM 2, dealing with the definition of “engagement quality reviewer” mentions that “other individual in the firm” and “external individual” can also act as engagement quality reviewer. SQM 2 has retained this concept subject to the condition that such “other individual in the firm” and such “external individual” should be a member of the Institute of Chartered Accountants of India.
2. Paragraph 19 of ISQM 2 requires “a cooling-off period of two years, or a longer period if required by relevant ethical requirements” for the engagement quality reviewer after previously serving as the engagement partner. In paragraph 19 of SQM 2, a footnote has been added regarding the relevant ethical requirements given in the ICAI’s Code of Ethics.
3. Paragraph A11 of the Application Section of ISQM 2 (paragraph A11 of SQM 2) deals with the application of the requirements of ISQM 2 to the audits of public sector entities regarding the selection of engagement quality reviewer where the auditor may act in a role equivalent to the engagement partner. Since as mentioned in the “Preface to the Standards on Quality Management, Auditing, Review, Other Assurance and Related Services”, the Engagement and Quality Management Standards apply equally to all entities, irrespective of their form, nature and size, a specific reference to applicability of the Standard to public sector entities has been deleted. Further, it is also possible that even in case of non-public sector entities, there may be cases wherein the independence and ability of engagement quality reviewer is required to be considered while making selection of engagement quality reviewer. Accordingly, the spirit of paragraph A11 in ISQM 2, highlighting the fact that in case of certain entities, there may be cases where the auditor may act in the role of engagement quality reviewer has been retained.
4. Paragraph A26 of the Application Section of ISQM 2 deals with the application of the requirements of ISAE 3000(Revised) wherein ISAE 3000(Revised) establishes requirement for the engagement partner in relation to the engagement quality review. Since, ISAE 3000(Revised) has not been adopted in India, paragraph A26 of ISQM 2 has been deleted.
5. Paragraph A32 of the Application Section of ISQM 2 (paragraph A31 of SQM 2) deals with the application of the requirements of ISQM 2 in case of group audits. In paragraph A31 of SQM 2, additions have been made to draw imperative from SA 600 for Indian context.
6. Paragraph A37 of the Application Section of ISQM 2 (paragraph A36 of SQM 2) contains an example of significant judgment which is based on ISAE 3000(Revised). ISAE 3000(Revised) has not been adopted in India. ICAI has issued the “Guidance Note on Reports or Certificates for Special Purposes (Revised 2016)” which is based on principles of ISAE 3000(Revised). Accordingly, example of ISAE 3000(Revised) has been replaced by example of “Guidance Note on Reports or Certificates for Special Purposes (Revised 2016)” in paragraph A36 of SQM 2.
