The Securities and Exchange Commission has approved a new auditing standard that aims to toughen the requirements for concurring reviews of the work of audit teams.

Auditing Standard No. 7, “Engagement Quality Review,” was adopted by the Public Company Accounting Oversight Board on July 28, 2009, and was approved last Friday by the SEC.

The Sarbanes-Oxley Act directs the PCAOB, among other things, to set standards for public company audits, including a requirement for each registered public accounting firm to "provide a concurring or second partner review and approval of [each] audit report (and other related information), and concurring approval in its issuance...."

Auditing Standard No. 7 expands the existing requirements for concurring reviews. According to the PCAOB, a well-performed engagement quality review can serve as an important safeguard against erroneous or insufficiently supported audit opinions and contribute to audit quality. The review would serve as a check on the work performed by the engagement team, and the PCAOB believes it would increase the likelihood that a registered public accounting firm would identify any significant engagement deficiencies before it issues its audit report.

AS 7 requires the engagement quality reviewer to evaluate the significant judgments made and related conclusions reached by the engagement team in forming the overall conclusion on the engagement and in preparing the engagement report.

The new standard also requires the engagement quality reviewer to perform certain procedures designed to focus the reviewer on those judgments and conclusions, such as holding discussions with the engagement team, reviewing the documentation, and determining whether to provide a concurring approval of issuance. 

The new standard is effective for engagement quality reviews of audits and interim reviews for fiscal years that began on or after Dec. 15, 2009. Accordingly, for interim reviews of public companies that file financial reports on a calendar-year basis, the standard is applicable beginning with the quarter ending March 31, 2010.

“The new standard is an important milestone in fulfilling the board’s mandate,” said PCAOB Acting Chairman Daniel L. Goelzer in a statement. “This standard should improve the reliability of audited financial statements by increasing the likelihood that reviewers will identify significant engagement deficiencies before audit reports are issued to the investing public."

The SEC, in its order approving the EQR standard, encouraged the PCAOB to issue guidance on the standard’s documentation requirements. The PCAOB plans to publish Staff Questions and Answers on implementation of the standard in the near future.

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