Assignment of Responsibility for the Appointment of Engagement Quality Reviewers (Ref: Para. 17)

Competence and capabilities that are relevant to an individual’s ability to fulfill responsibility for the appointment of the engagement quality reviewer may include appropriate knowledge about:

• The responsibilities of an engagement quality reviewer;
• The criteria in paragraphs 18 and 19 regarding the eligibility of engagement quality reviewers; and
• The nature and circumstances of the engagement or the entity subject to an engagement quality review, including the composition of the engagement team.

The firm’s policies or procedures may specify that the individual responsible for the appointment of engagement quality reviewers not be a member of the engagement team for which an engagement quality review is to be performed. However, in certain circumstances (e.g., in the case of a smaller firm or a sole practitioner), it may not be practicable for an individual other than a member of the engagement team to appoint the engagement quality reviewer.

The firm may assign more than one individual to be responsible for appointing engagement quality reviewers. For example, the firm’s policies or procedures may specify a different process for appointing engagement quality reviewers for audits of listed entities than for audits of non-listed entities or other engagements, with different individuals responsible for each process.

Eligibility of the Engagement Quality Reviewer (Ref: Para. 18)

In some circumstances, for example, in the case of a smaller firm or a sole practitioner, there may not be a partner or other individual in the firm who is eligible to perform the engagement quality review. In these circumstances, the firm may contract with, or obtain the services of, individuals external to the firm to perform the engagement quality review. An individual external to the firm may be a partner or an employee of a network firm, a structure or an organisation within the firm’s network, or a service provider. When using such an individual, the provisions in ASQM 1 addressing network requirements or network services or service providers apply.

Eligibility Criteria for the Engagement Quality Reviewer

Competence and Capabilities, Including Sufficient Time (Ref: Para. 18(a))

ASQM 1 describes characteristics related to competence, including the integration and application of technical competence, professional skills, and professional ethics, values and attitudes.^[7] Matters that the firm may consider in determining that an individual has the necessary competence to perform an engagement quality review include, for example:

• An understanding of AUASB standards and applicable legal and regulatory requirements and of the firm’s policies or procedures relevant to the engagement;
• Knowledge of the entity’s industry;
• An understanding of, and experience relevant to, engagements of a similar nature and complexity; and
• An understanding of the responsibilities of the engagement quality reviewer in performing and documenting the engagement quality review, which may be attained or enhanced by receiving relevant training from the firm.

The conditions, events, circumstances, actions or inactions considered by the firm in determining that an engagement quality review is an appropriate response to address one or more quality risk(s)^[8] may be an important consideration in the firm’s determination of the competence and capabilities required to perform the engagement quality review for that engagement. Other considerations that the firm may take into account in determining whether the engagement quality reviewer has the competence and capabilities, including sufficient time, needed to evaluate the significant judgements made by the engagement team and the conclusions reached thereon include, for example:

• The nature of the entity.
• The specialisation and complexity of the industry or regulatory environment in which the entity operates.
• The extent to which the engagement relates to matters requiring specialised expertise (e.g., with respect to information technology (IT) or specialised areas of accounting or auditing), or scientific and engineering expertise, such as may be needed for certain assurance engagements. Also see paragraph A19.

In evaluating the competence and capabilities of an individual who may be appointed as an engagement quality reviewer, the findings arising from the firm’s monitoring activities (e.g., findings from the inspection of engagements for which the individual was an engagement team member or engagement quality reviewer) or the results of external inspections may also be relevant considerations.

A lack of appropriate competence or capabilities affects the ability of the engagement quality reviewer to exercise appropriate professional judgement in performing the review. For example, an engagement quality reviewer who lacks relevant industry experience may not possess the ability or confidence necessary to evaluate and, where appropriate, challenge significant judgements made, and the exercise of professional scepticism, by the engagement team on a complex, industry-specific accounting or auditing matter.

Appropriate Authority (Ref: Para. 18(a))

Actions at the firm level help to establish the authority of the engagement quality reviewer. For example, by creating a culture of respect for the role of the engagement quality reviewer, the engagement quality reviewer is less likely to experience pressure from the engagement partner or other personnel to inappropriately influence the outcome of the engagement quality review. In some cases, the engagement quality reviewer’s authority may be enhanced by the firm’s policies or procedures to address differences of opinion, which may include actions the engagement quality reviewer may take when a disagreement occurs between the engagement quality reviewer and the engagement team.

The authority of the engagement quality reviewer may be diminished when:

• The culture within the firm promotes respect for authority only of personnel at a higher level of hierarchy within the firm.
• The engagement quality reviewer has a reporting line to the engagement partner, for example, when the engagement partner holds a leadership position in the firm or is responsible for determining the compensation of the engagement quality reviewer.

Public Sector Considerations

In the public sector, an auditor (e.g., an Auditor General, or other suitably qualified individual appointed on behalf of the Auditor General) may act in a role equivalent to that of the engagement partner with overall responsibility for public sector audits. In such circumstances, the selection of the engagement quality reviewer may include consideration of the need for independence and the ability of the engagement quality reviewer to provide an objective evaluation.

Relevant Ethical Requirements (Ref: Para. 13(c), 18(b))

The relevant ethical requirements that are applicable when undertaking an engagement quality review may vary, depending on the nature and circumstances of the engagement or the entity. Various provisions of relevant ethical requirements may apply only to individual members, such as an engagement quality reviewer, and not the firm itself.

Relevant ethical requirements may include specific independence requirements that would apply to individual members, such as an engagement quality reviewer. Relevant ethical requirements may also include provisions that address threats to independence created by long association with an audit or assurance client. The application of any such provisions dealing with long association is distinct from, but may need to be taken into consideration in applying, the required cooling-off period in accordance with paragraph 19.

Threats to the objectivity of the engagement quality reviewer

Threats to the engagement quality reviewer’s objectivity may be created by a broad range of facts and circumstances. For example:

• A self-review threat may be created when the engagement quality reviewer previously was involved with significant judgements made by the engagement team, in particular as the engagement partner or other engagement team member.
• A familiarity or self-interest threat may arise when the engagement quality reviewer is a close or immediate family member of the engagement partner or another member of the engagement team, or through close personal relationships with members of the engagement team.
• An intimidation threat may be created when actual or perceived pressure is exerted on the engagement quality reviewer (e.g., when the engagement partner is an aggressive or dominant individual, or the engagement quality reviewer has a reporting line to the engagement partner).

Relevant ethical requirements may include requirements and guidance to identify, evaluate and address threats to objectivity. For example, the APESB Code provides specific guidance, including examples of:

• Circumstances where threats to objectivity may be created when a member is appointed as an engagement quality reviewer;
• Factors that are relevant in evaluating the level of such threats; and
• Actions, including safeguards, that might address such threats.

Law or Regulation Relevant to the Eligibility of the Engagement Quality Reviewer (Ref: Para. 18(c))

Law or regulation may prescribe additional requirements regarding the eligibility of the engagement quality reviewer. For example, in some jurisdictions, the engagement quality reviewer may need to possess certain qualifications or be licensed to be able to perform the engagement quality review.

Cooling-Off Period for an Individual After Previously Serving as the Engagement Partner (Ref: Para. 19)

In recurring engagements, the matters on which significant judgements are made often do not vary. Therefore, significant judgements made in prior periods may continue to affect judgements of the engagement team in subsequent periods. The ability of an engagement quality reviewer to perform an objective evaluation of significant judgements is therefore affected when the individual was previously involved with those judgements as the engagement partner. In such circumstances, it is important that appropriate safeguards are put in place to reduce threats to objectivity, in particular the self-review threat, to an acceptable level. Accordingly, this ASQM requires the firm to establish policies or procedures that specify a cooling-off period during which the engagement partner is precluded from being appointed as the engagement quality reviewer.

The firm’s policies or procedures also may address whether a cooling-off period is appropriate for an individual other than the engagement partner before becoming eligible to be appointed as the engagement quality reviewer on that engagement. In this regard, the firm may consider the nature of that individual’s role and previous involvement with the significant judgements made on the engagement. For example, the firm may determine that an engagement partner responsible for the performance of audit procedures on the financial information of a component in a group audit engagement may not be eligible to be appointed as the group engagement quality reviewer because of that audit partner’s involvement in the significant judgements affecting the group audit engagement.

Circumstances When the Engagement Quality Reviewer Uses Assistants (Ref: Para. 20–21)

In certain circumstances, it may be appropriate for the engagement quality reviewer to be assisted by an individual or team of individuals with the relevant expertise. For example, highly specialised knowledge, skills or expertise may be useful for understanding certain transactions undertaken by the entity to help the engagement quality reviewer evaluate the significant judgements made by the engagement team related to those transactions.

The guidance in paragraph A14 may be helpful to the firm when establishing policies or procedures that address threats to objectivity of individuals who assist the engagement quality reviewer.

When the engagement quality reviewer is assisted by an individual external to the firm, the assistant’s responsibilities, including those related to compliance with relevant ethical requirements, may be set out in the contract or other agreement between the firm and the assistant.

The firm’s policies or procedures may include responsibilities of the engagement quality reviewer to:

• Consider whether assistants understand their instructions and whether the work is being carried out in accordance with the planned approach to the engagement quality review; and
• Address matters raised by assistants, considering their significance and modifying the planned approach appropriately.

Impairment of the Engagement Quality Reviewer’s Eligibility to Perform the Engagement Quality Review (Ref: Para. 22–23)

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.

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 ASQM with respect to the performance of the engagement quality review. Such policies or procedures may further address the need for consultation in such circumstances.

(Ref: Para. 24–27)

Engagement Partner Responsibilities in Relation to the Engagement Quality Review (Ref: Para. 24(b))

ASA 220^[9] 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 judgements 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.

ASAE 3000^[10] also establishes requirements for the engagement partner in relation to the engagement quality review.

Discussions Between the Engagement Quality Reviewer and the Engagement Team (Ref: Para. 24(c))

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 judgement. 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 judgements 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)

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 emphasise the importance of the engagement quality reviewer exercising professional judgement in performing the review.

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 of the planning phase. Timely performance of the engagement quality review also may reinforce the exercise of professional judgement and, when applicable to the type of engagement, professional scepticism, by the engagement team in planning and performing the engagement.

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,^[11] 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.

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

The performance of an engagement quality review for an audit of a group financial report 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 doing so, for larger and more complex group audits, the group engagement quality reviewer may need to discuss significant matters and significant judgements 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.

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 judgements 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))

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 judgements 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 judgements made in planning, performing and reporting on the engagement. For example, a deficiency identified by the firm may relate to significant judgements 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 judgements 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 Judgements (Ref: Para. 25(b)–25(c))

For audits of a financial report, ASA 220^[12] requires the engagement partner to review audit documentation relating to significant matters^[13] and significant judgements, including those relating to difficult or contentious matters identified during the engagement, and the conclusions reached.

For audits of a financial report, ASA 220^[14] provides examples of significant judgements 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.

For engagements other than audits of a financial report, the significant judgements 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 ASAE 3000, 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 judgement.

In performing the engagement quality review, the engagement quality reviewer may become aware of other areas where significant judgements 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.

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 judgements. 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 judgements 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 judgements made.

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 judgement in selecting additional engagement documentation to be reviewed relating to significant judgements made by the engagement team.

Discussions about significant judgements 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 exercise of professional scepticism, when applicable to the engagement, by the engagement team in relation to those significant judgements.

For audits of a financial report, ASA 220^[15] provides examples of the impediments to the exercise of professional scepticism at the engagement level, unconscious auditor biases that may impede the exercise of professional scepticism, and possible actions that the engagement team may take to mitigate impediments to the exercise of professional scepticism at the engagement level.

For audits of a financial report, the requirements and relevant application material in ASA 315,^[16] ASA 540^[17] and other ASAs also provide examples of areas in an audit where the auditor exercises professional scepticism, or examples of where appropriate documentation may help provide evidence about how the auditor exercised professional scepticism. Such guidance may also assist the engagement quality reviewer in evaluating the exercise of professional scepticism by the engagement team.

Whether Relevant Ethical Requirements Relating to Independence Have Been Fulfilled (Ref: Para. 25(d))

ASA 220^[18] 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))

ASQM 1^[19] 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))

ASA 220^[20] 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 judgements made and the conclusions reached are appropriate given the nature and circumstances of the engagement. ASA 220^[21] 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 engagement partner’s involvement has been sufficient and appropriate.

Review of a Financial Report and Engagement Reports (Ref: Para. 25(g))

For audits of a financial report, the engagement quality reviewer’s review of the financial report and auditor’s report thereon may include consideration of whether the presentation and disclosure of matters relating to the significant judgements 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 report, the engagement quality reviewer may also become aware of other areas where significant judgements 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.

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 A47 (e.g., whether the presentation or description of matters relating to the significant judgements 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)

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 judgements 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).

(Ref: Para. 28–30)

Paragraphs 57 to 60 of ASQM 1 address the firm’s documentation of its system of quality management. An engagement quality review performed in accordance with this ASQM is therefore subject to the documentation requirements in ASQM 1.

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.

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.

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 finalised 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 finalised on or before the date of the engagement report.