Engagement Quality Review Problems Pepper Inspection Reports

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By Laura Tieger Salisbury

PCAOB inspections staff continue to find audit firms that fall short of the engagement quality review standard.

Maillie LLP’s expanded inspection report was one of three expanded Public Company Accounting Oversight Board inspections report that the U.S. audit watchdog posted Dec. 27, along with 34 new inspection reports.

Engagement Quality Review Problems

The PCAOB found that Maillie LLP’s system of quality control had problems and issued an expanded inspection report because the firm failed to correct issues or “deficiencies"—identified in the initial Oct. 1, 2015 report— required by AS 7.

Maillie LLP fell short of the standard because “in the audit reviewed, the individual who performed the engagement quality review was a Firm employee who was not a partner or an individual in an equivalent position,” the report noted.

The PCAOB did not agree with the position Maillie LLP took in its letter of explanation June 17, 2015 that Maillie’s senior quality control manager had enough audit experience, specifically employee benefit plan audit expertise to meet the definition of “an individual in an equivalent position to a partner.”

PCAOB Standards for Reviewer

Audit firms must ensure that their engagement quality reviewer has qualifications or technical expertise to be in compliance with the PCAOB’s auditing standards to prevent their quality control systems being deemed deficient by the board’s inspections staff.

Auditing Standard no. 7 ( AS 7) establishes that the Engagement Quality Reviewer evaluates the significant judgments and conclusions made by the engagement team to decide whether to provide concurring approval.

An engagement quality reviewer from the firm that issues the engagement report must be a partner or another individual in an equivalent position. The engagement quality reviewer may also be from outside the firm.

AS 7 states that the firm’s quality control policies and procedures should include provisions to ensure that the engagement quality reviewer has sufficient competence, independence, integrity, and objectivity to perform the engagement quality review in accordance with the standards of the PCAOB.

Loss of Confidentiality

The PCAOB identifies audit deficiencies in the initial inspection reports. Then CPA firms have a year to fix the audit deficiencies. After a year the PCAOB can issue expanded inspection reports—making public additional portions of the report that reveal the firm’s failures in more detail—when the firms haven’t remedied quality control issues to the board’s satisfaction.

PCAOB inspectors review a firm’s quality control systems to check how the firm “addressed practices, policies, and procedures concerning audit performance, training, compliance with independence standards, client acceptance and retention, and the establishment of policies and procedures,” according to PCAOB inspection reports.

Engagement quality review problems were among the quality control flaws found in Paula S. Morelli, CPA, P.C.'s expanded inspection report. The PCAOB found “in two of the audits reviewed, the audit work papers did not contain sufficient information to enable an experienced auditor, having no previous connection with the engagement, to understand the procedures performed.”

The PCAOB inspections staff also identified a lack of professional skepticism and due care in Morelli’s failure to perform any procedures to test a related party transaction.

Attempt to Explain Quality Control Failures

The PCAOB Dec. 27 made public additional portions of ZBS Group LLP’s initial inspection report from July 2, 2015.

The expanded inspection report included the previously non-public letter of May 7, 2015 from ZBS to the board, explaining what had caused the audit deficiencies and how ZBS had corrected the problems that the inspections staff had identified.

ZBS wrote that when the PCAOB inspections staff were there in Oct. 2014 performing the inspection, the audit firm was using a new automated software system with which it wasn’t entirely familiar.

ZBS wrote in its May 2015 letter that software unfamiliarity issues were no longer a problem and ZBS was using the software during the audit process to document every stage of the audit process. “The system alerts us and does not allow us to finalize the audit until all required procedures are performed,” ZBS wrote in its explanatory letter.

“A new engagement quality reviewer has joined our audit team and that has significantly improved our quality control process,” ZBS said in the letter.

The PCAOB could not have been satisfied with ZBS’s remediation efforts if it issued an expanded inspection report.

To contact the reporter on this story: Laura Tieger Salisbury in Washington at LSalisbury@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

For More Information

The inspections reports are available on the PCAOB website at: https://pcaobus.org/inspections/Pages/default.aspx.The Engagement Quality review standard is on the PCAOB website at https://pcaobus.org/Standards/Auditing/Pages/Auditing_Standard_7.aspx

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