A new Public Company Accounting Oversight Board (PCAOB) staff report discloses that 42 percent of the firms that the PCAOB inspected in 2022 had a quality control criticism related to engagement quality reviews (EQRs), up from 37 percent in 2020. The report, Inspection Observations Related to Engagement Quality Reviews, "focuses on the PCAOB-mandated EQR process, in which a reviewer who is not part of the engagement team evaluates significant judgments made by the audit engagement team."

The report's overview notes, "When an engagement quality review (EQR) is required, a well-performed EQR serves as an important safeguard against erroneous or insufficiently supported audit opinions and as a meaningful check on the work performed by engagement teams. The objective of the EQR reviewer is to perform an evaluation of the significant judgments made by the engagement team and the related conclusions reached in forming the overall conclusion on the engagement."

The report goes on to reveal that "the PCAOB staff has observed high and increasing rates of audit deficiencies related to EQRs, the trend of which is troubling considering the important role that the EQR reviewer plays in evaluating whether significant aspects of the audit have been performed in accordance with PCAOB standards before an audit firm issues its audit report."

“Engagement quality reviews are an important investor safeguard during the audit process. Unfortunately, audit firms are increasingly falling short when performing this function,” said PCAOB Chair Erica Y. Williams. “We urge audit firms and audit committees to read our EQR report so they can fully live up to their responsibility to protect investors against insufficiently supported audits.”

The report lays out the situations that call for an EQR. "Under PCAOB standards, an EQR and the EQR reviewer’s concurring approval of issuance of the engagement report are required for the following: an audit engagement; a review of interim financial information; and an attestation engagement performed pursuant to Attestation Standard No. 1, Examination Engagements Regarding Compliance Reports of Brokers and Dealers (AT 1), or Attestation Standard No. 2, Review Engagements Regarding Exemption Reports of Brokers and Dealers (AT 2)."

It also lists four situations in which a significant engagement deficiency in an audit exists. They are when the engagement team failed to obtain sufficient appropriate evidence in accordance with the standards of the PCAOB; when the engagement team reached an inappropriate overall conclusion on the subject matter of the engagement; when the engagement report is not appropriate in the circumstances; or when the audit firm is not independent of its client.

The report further summarizes the kinds of deficiencies that the staff found in 2021 and 2022: failing to identify certain engagement level performance deficiencies in the audit; failing to provide competent, knowledgeable EQR reviewer; failing to properly document the EQR; failing to provide concurring approval; and failing to provide an EQR.

The report additionally reminds auditors that in order to to serve as an EQR reviewer, "an individual must be an associated person of a registered public accounting firm. An EQR reviewer from the audit firm that issues the engagement report (or communicates an engagement conclusion, if no report is issued) must be a partner or another individual in an equivalent position. The EQR reviewer may also be a qualified individual from outside the audit firm. In addition, the audit firm’s QC policies and procedures should include provisions to provide the audit firm with reasonable assurance that the EQR reviewer has sufficient competence, independence, integrity, and objectivity to perform the EQR in accordance with the standards of the PCAOB."

The report includes a list of recommended good practices, "which may positively influence audit quality. They involve the following areas:

• Workload and expertise monitoring

• Timely and increased involvement of EQR reviewers for key audit milestones

• Increased accountability

• New and revised audit tools and guidance

• Root cause task forces

The report concludes with some questions that audit committees might consider among themselves or in talks with independent auditors:

• What policies and procedures does the audit firm have in place to provide reasonable assurance that the EQR reviewer has sufficient competence, independence, integrity, and objectivity to perform the EQR in accordance with the standards of the PCAOB?

• Does the audit firm have individuals with experience in their specific industry that have not served as the engagement partner during either of the two audits preceding the current audit, who can serve as the EQR reviewer? If not, will the auditor go outside of the audit firm to fill this role?

• Were there any significant judgments discussed or challenged by the EQR reviewer? What was the outcome of those discussions?

• Has the auditor obtained concurring approval of issuance from the EQR reviewer prior to the issuance of the engagement report (or communicating its conclusion if no report is issued)?