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The four-eyes principle involves validation by a second person and is implemented in crucial areas such as payment mechanisms, credit approval systems, specific data management systems, and across most business processes. Therefore, it’s imperative that a vital process like auditing does not overlook it. The Engagement Quality Review serves as a significant step in this direction, safeguarding the interests of investors, and is an essential component of the audit process.

Auditing Standard 1220: Engagement Quality Review issued by the PCAOB clearly states the applicability of the standard, the objective, the qualification of the reviewer, and the engagement quality review process for various engagements.

Engagement Quality Review (EQR) is a process by which an independent reviewer maintains integrity and objectivity in performing the review of the significant judgments made by the engagement team and the basis of all the conclusions reached in forming an audit opinion. An EQR is required for the following engagements conducted in accordance with the Public Company Accounting Oversight Board (PCAOB) standards.

1. an audit engagement.
2. a review of interim financial information.
3. attestation engagement performed in accordance with attestation standards.

A new report from the staff of the PCAOB reveals a rather alarming increase in quality control criticism related to EQR. The report shows that 42% of accounting firms have reported deficiencies in 2022 as compared to 37% in 2020. The report highlights the deficiencies, applauds the good practices, and provides several EQR reminders. Most notably, the U.S. Global Network Firms (GNF) had a 33-percentage point increase in the number of firms with an EQR deficiency from 2021 to 2022, while the Non-Affiliate Firms showed a 21-percentage point increase for the same period. The discovery of deficiencies in EQR are worrisome, as the EQR is the first line of safeguard enforced by PCAOB and assures investors that significant aspects of the audit process have been performed in accordance with the applicable PCAOB standards prior to the issuance of the audit report.

The following is the summary of the deficiencies identified in 2021 and 2022 comment forms issued to audit firms related to the EQR process:

Deficiency	Percentage (EQR Comment Forms)	Applicable Standards
Failing to identify certain engagement level performance deficiencies such as: To provide reasonable assurance that the review by the audit firms EQR reviewers for audit and attestation engagements meet the requirements of AS 1220. EQR reviewers not identifying deficiencies in audit response in areas of significant risks, including fraud risk, that were subsequently identified by PCAOB staff.	82%	QC 20 AS 1220
Failing to provide a competent, knowledgeable EQR reviewer. The Quality Control system did not provide reasonable assurance that the EQR reviewer had sufficient competence, integrity, independence, and objectivity to perform the EQR.	6%	QC 20 AS 1220
Failing to properly document the EQR and insufficiency of information to the extent that an experienced auditor with no prior connection with the engagement could not comprehend the procedures performed by the EQR reviewer.	6%	AS 1220.11 AS 1220.10 AS 1220.19 AS 1220.20
Failing to provide concurring approval.	6%	AS 1220.17
Failing to provide an EQR.	5%	AS 1220.01

The PCAOB report also highlighted important reminders that auditors must consider:

• The EQR reviewers’ experience in specific industries, experience with PCAOB auditing, and related professional standards prior to being engaged.
• Verify the independence, integrity, and objectivity of the EQR reviewer and assistants.
• The EQR reviewer must be someone other than the person who served as the engagement partner during the two audits preceding the audit subject to EQR.
• If the EQR reviewer is from outside the firm, the exact requirements will apply and must be adhered to.
• The audit firm must ensure that the EQR reviewer gets sufficient time to fulfil all the responsibilities.
• EQR reviewer must document their review.
• Audit firms may grant a public company or broker-dealer permission to use the audit report only after the EQR reviewer provides concurring approval.
• Audit firms must implement a robust quality control process to avoid the likelihood of all the above deficiencies.

KNAV’s Opinion

In simple terms, a process is a logical sequence of steps. A process is enhanced when various checks and balances are integrated into it. Similarly, every audit engagement is a process, and quality control acts as the checks and balances to fortify it. Initially, these measures are outlined as policies and procedures. Subsequently, they are implemented by skilled personnel who are crucial in determining its success. The implementation is continuously monitored, which is essential to ensure adherence and effectiveness. Like an additional fertilizer a gardener uses to ensure better produce, quality control ensures more robust processes, lower deficiencies, increased reputation, and higher trust for the audit firm. The incorporation of an experienced and competent Engagement Quality Review (EQR) signifies the presence of a strong quality assurance process.