Engagement Quality Reviews

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| Colm Owens

As we know ISQM 1 came into effect on 15 December 2022. Associated with ISQM 1 is ISQM 2 which is effective for audits and reviews of financial statements for periods beginning on or after 15 December 2022 (and other assurance and related services engagements beginning on or after 15 December 2022).

ISQM 2 relates to what used to be called ‘engagement quality control reviews’ (or ‘hot file reviews’). These are now called ‘engagement quality reviews’ also known as Engagement Quality Review (EQR or EQ review) - these are also still referred to as Hot File Reviews.

The main changes that ISQM 2 has brought in are as follows:

  1. The standard require the reviewer to challenge the engagement partners’ judgments much more than in the previous requirements. In the past, reviews have sometimes focused on process more than on assessing the quality of judgments.
  2. The scope of the standard (at least for small and medium firms with non-PIE or listed audits) states that reviews should be required:
  • for ‘other engagements’ that are required by law or regulation; and
  • audits and other engagements that the firm itself determines should be reviewed in response to a specific ‘quality risk’.

Scope / criteria

The criteria for these types of engagements will be set out in your ISQM 1 & ISQM 2 policies and would typically include those where there are:

  • high levels of risk (i.e. regulated clients or charities) complexity or judgment;
  • un-remediated deficiencies in internal control at the audit firm;
  • there are recurring inspection findings on the audit; and
  • engagements for new clients where there were disagreements with the previous auditor (or even on first-year audit engagements);
  • Independence issues (such as long association, fee dependency issues & provision of non-audit services). 

Some firms that didn’t need an EQ review / hot file review in the past may need one in the future as the scope for avoiding one will probably be narrower.It will ultimately depend on individual firms’ assessment of their quality risks and the types of appropriate responses to such risks which may include an EQ review / hot file review.

Who can carry out the EQR?

Reviewers will need sufficient seniority/experience, with sufficient time and resources allowed to do the job properly. Therefore, it will ultimately fall to senior management / Audit Engagement Partners / Senior Audit Directors or Managers to carry them out. The point to remember is ‘can the chosen reviewer sufficiently challenge the engagement partners’ judgments’?

In circumstances where this is not practicable or possible the other avenue is an External EQ review / hot file review.

With ever-increasing emphasis on quality generally within firms and the adverse consequences associated with quality failings, it seems likely that the role of EQ reviewer / hot file reviewer will be an even more challenging one in future.

For further information on how the OmniPro Practice Support team can assist you with your EQ review / hot file review please contact us on 053 91 000 00 or email [email protected].

The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.

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About the Author

As a member of our Practice Support team, Colm’s focus is on helping practices achieve ongoing best practice compliance, prepare for monitoring visits and assist with post-monitoring visits follow-ups. Having spent the 6 years prior to joining OmniPro as a quality reviewer with Chartered Accountants Ireland Colm has a unique insight into how firms operate, the challenges facing firms and how firms are responding to current issues facing them and the profession.

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