The updated Engagement Quality Review (EQR) standards set a higher bar for independent evaluations, improved audit quality
New rules are coming for audit and assurance firms, focusing on how Engagement Quality Reviews ( EQRs ) should be performed. These changes explained in Statement on Quality Management Standards ( SQMS ) No. 2 will take effect on December 15, 2025, and aim to improve the quality of audits and reviews. Firms must prepare to follow these updates to meet professional and regulatory standards.
What Are Engagement Quality Reviews (EQRs)?
An EQR is a process where a qualified reviewer looks at the important decisions made by the audit or assurance team and the conclusions they reached. The goal is to confirm that the work meets professional standards and that the final report is accurate and reliable. Under the new rules, EQRs are seen as a way to address specific risks to quality in engagements.
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What’s Changing?
The term “engagement quality control reviews” has been shortened to “engagement quality reviews” but the basic idea remains the same. The main change is that firms now need to decide when an EQR is necessary based on risks that could affect the quality of the work or the report.
Who Can Serve as an Engagement Quality Reviewer?
Under the updated standards, the EQR reviewer must:
- Be an associated person of a registered public accounting firm.
- Be a partner or hold an equivalent position within the firm.
- Have the necessary competence, independence, integrity, and objectivity to perform the role effectively.
The reviewer may also come from outside the firm, provided they meet these qualifications. Importantly, anyone who served as the engagement partner in the prior two audits cannot act as the EQR reviewer for the current engagement.
When Are EQRs Needed?
Firms must create rules to determine which engagements need an EQR. These decisions depend on the risks involved. Examples of situations where an EQR might be required include:
- Audits with unusual circumstances, like concerns about a company’s ability to continue operating or implementing new accounting rules.
- High-risk jobs, such as audits in specialized or heavily regulated industries (e.g., banks or government organizations).
- Situations where there could be conflicts, like engagements for big clients that make up a large portion of the firm’s revenue.
- Jobs for new clients or ones overseen by a new partner.
Firms need to clearly document these rules in their quality management systems.
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EQR Process for Different Engagements
1. Audit Engagements: The reviewer evaluates important judgments and conclusions, focusing on:
- Risk assessments and engagement planning.
- Materiality judgments and the handling of misstatements or deficiencies.
- Evaluation of the team’s independence.
- Review of audit reports, financial statements, and associated documentation.
- Ensuring appropriate consultations were conducted on complex issues and communicated effectively to stakeholders.
2. Interim Financial Reviews: For reviews of interim financial information:
- The reviewer examines the planning process, focusing on fraud risks and recent developments in the client’s financial environment.
- They assess material corrections, disclosure changes, and internal controls.
- Interim financial reports and related documentation are reviewed for consistency and accuracy.
3. Attestation Engagements: In cases involving brokers and dealers, the reviewer:
- Examines compliance or exemption reports prepared under PCAOB’s attestation standards.
- Evaluates the engagement team’s procedures and conclusions.
- Reviews management’s assertions and relevant documentation to ensure compliance.
Concurring Approval of Issuance
The engagement quality reviewer must provide concurring approval for the final report before it is issued. Approval is granted only if:
- The reviewer identifies no significant deficiencies in the engagement process.
- The engagement team adhered to PCAOB standards and gathered sufficient, appropriate evidence. A huge deficiency arises if:
- The engagement team fails to collect adequate evidence.
- The overall conclusion or report is inappropriate.
- The firm is not independent from the client.
Without the concurring approval, the firm cannot issue the engagement report.
Documentation Requirements
Proper documentation is important for transparency and accountability. The EQR documentation must:
- Identify the reviewer and any assistants involved.
- Specify the documents reviewed and the procedures performed.
- Record the date of approval or the reasons for withholding approval.
This documentation is included in the overall engagement file and must comply with standards on documentation retention and updates.
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Practical Considerations for Firms
- Early Planning: Identify engagements requiring EQRs during the planning phase to ensure a smooth workflow and avoid rushed reviews.
- Training and Competence: Ensure the engagement team and reviewers are trained in the new procedures.
- Resource Management: Budget for EQRs, considering the potential need for external expertise, particularly for small firms.
Clearing Up Common Misunderstandings
Many firms confuse EQRs with other types of reviews or make mistakes in how they’re performed. Here are a few misconceptions:
- EQRs are not the same as second-partner reviews: While both involve reviewing the work, an EQR has specific steps to follow and can be done by a qualified person who is not a partner.
- EQRs aren’t needed for every job: Firms should only perform EQRs when there is a clear risk to quality. Doing them for all engagements can waste time and resources.
- Proper documentation is key: An EQR requires input from multiple people, but sometimes firms mistakenly let one person handle everything, which doesn’t meet the standards.
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