18 August 2021
Why there is a need for yet another quality standard? This one specifically addresses the Engagement Quality Reviewer; their appointment, eligibility, responsibilities, and documentation.
This standard aims to strengthen the requirements for engagements that should be subject to an engagement quality review by extending the requirement for an Engagement Quality Review (EQR) to engagements other than audits of listed entities. The concept of scalability has been included within the standard, allowing the firm to adjust certain requirements for their size and nature, especially the significant judgements made.
ISQM 1 explains the firm’s responsibility for establishing quality management, including the new quality management approach. An engagement quality review is a response, among others, designed and implemented by a firm to address its assessed quality risks. The performance of an EQR is undertaken at the engagement level. However, the reviewer response is implemented on behalf of the firm.
ISQM 2 is applicable only through requirements in ISQM 1 and ISA 220 for a firm’s quality management system. Therefore, ISQM 2 is interrelated to all quality management standards.
There are some requirements related to EQR within ISQM 1 and the new ISA 220 but are mainly to do with the engagement team supporting the reviewer and a process to trigger and EQR within a firm’s quality management system.
Appointment and Eligibility of Engagement Quality Reviewers
When the firm’s quality management system assesses the need for an engagement quality review, ISQM 2 states the minimum requirements for eligibility and appointment of reviewers around competencies, capabilities, and ethics required, and other relevant considerations. A firm may choose to select further requirements for selecting reviewers.
The standard also lays out the selection of the reviewer, including the qualifications, experience, and objectivity of the individual selected to perform the EQR. It also addresses the reviewer’s requirements of independence, integrity, and objectivity and their ability to challenge the engagement team’s judgements and authority.
ISQM 2 appointment and eligibility requirements for engagement quality reviewers are more selective (whether internal to the firm or external) than those in extant ISQC 1:
• The eligibility of the individual(s) within the firm responsible for the appointment of engagement quality reviewers.
• The eligibility of individuals to assist the engagement quality reviewer in performing the engagement quality review.
• The engagement quality reviewer is responsible for the performance of the engagement quality review, including that the work of individuals assisting in the review is appropriate.
• Limitations on an individual’s eligibility to be appointed as engagement quality reviewer for an engagement for which the individual previously served as the engagement partner.
Competence and Capabilities, Including Sufficient Time
ISQC 1 includes requirements regarding the criteria for eligibility of engagement quality reviewers and has been transferred to ISQM 2 and improved through expanding the eligibility requirements and describes the competence and capabilities of the engagement quality reviewer like other roles described in ISQM 1.
The IAASB believes that the achievement of an effective engagement quality review requires the involvement of the reviewer at appropriate points in the engagement, consistent with when the engagement team is making significant judgements, because doing so facilitates the resolution of issues promptly. Accordingly, ISQM 2 includes a new requirement addressing the reviewer’s responsibility to perform the procedures at the appropriate time during the engagement.
The timing of the performance of the EQR is essential. Not only concerning when the reviewer becomes involved but the time allocated for the performance of the review. ISQM 2 clearly states that the firm’s policies or procedures must give the reviewer sufficient time to perform the review.
Relevant Ethical Requirements, specifically objectivity
To improve the reviewer’s objectivity, ISQM 2 requires a reviewer to comply with relevant ethical requirements and explicitly highlights the threats to objectivity in its application material about the engagement or engagement team. ISQM 2 includes a new requirement for the firm to establish policies or procedures that limit an individual’s eligibility to be appointed as a reviewer for an engagement on which the individual previously served as the engagement partner.
Furthermore, the application material in ISQM 2 suggests objectivity may be accomplished by establishing a two-year cooling-off period and notes that determining a suitable cooling-off period depends on the facts and circumstances of the engagement and applicable law or regulation provisions or regulation and relevant ethical requirements. The standard implies that if the individual is appointed as the reviewer immediately after serving as the engagement partner, there are no safeguards or other actions that would eliminate the threats to the individual’s objectivity or reduce them to an acceptable level.
Outside firm Engagement Quality Reviewers
The standard considers that small to medium firms may not have sufficient experience within and might require external reviewers. The standard has been expressly set up not to be onerous that the availability of suitable engagement quality reviewers is limited or non-existent for small to medium firms.
ISQM 2 clarifies that the exact eligibility requirements apply to any individual appointed as a reviewer, whether within the firm or external (as may be the case when there is no partner or other individual within the firm who is eligible to perform the engagement quality review).
Significant Judgements and Significant Matters
EQR discussions with the engagement partner (or other engagement team members, if applicable), along with the information obtained from the engagement team about the nature and circumstances of the entity, will enable the reviewer to be aware of significant judgements made within the engagement.
Based on that information, the reviewer looks at selected engagement documentation in support of those significant judgements. The standard clarifies that the engagement quality reviewer discusses with the engagement partner and, if applicable, other engagement team members significant matters and significant judgements made in planning, performing, and reporting on the engagement.
The engagement quality reviewer evaluates the basis for the engagement team’s significant judgements, including, when applicable to the type of engagement. The reviewer evaluates the professional scepticism of the engagement team based on the review of selected engagement documentation. By doing this, the reviewer acknowledges their role in evaluating the engagement team’s exercise of professional scepticism in making significant judgements and reaching conclusions, and, where appropriate, challenging them.
ISQM 2 includes a specific requirement for the reviewer to take responsibility for documentation of the EQR. The documentation is to be filed with the engagement documentation. The documentation is sufficient to enable an experienced practitioner, having no previous connection to the engagement, to understand the nature, timing, and extent of the engagement quality review procedures performed.
In summary, the implementation of ISQM 2 will make it easier for firms and for reviewers to understand their responsibilities when an EQR is required. The standard clearly places the requirements in one place, in contrast to the current system where EQR requirements are placed in ISQC 1 and ISA 220.