Audit firms must improve preventive quality safeguard when performing audits of financial statements
The engagement quality control review (EQCR) that audit firms perform as a preventive safeguard for the quality of high-risk statutory audits must be improved. The depth of review in particular is currently insufficient. These are the conclusions of an assessment by the Dutch Authority for the Financial Markets (AFM) at 21 audit firms, in which 52 EQCRs were assessed. The report ‘Into the Depth’ sets out the main improvements that need to be made and gives several examples of good practices.
In short
• The EQCR is an important preventive quality safeguard when performing high-risk audits
• The EQCR does not currently provide a sufficient safeguard, depth in particular needs to be improved
• No proper policy in place for EQCR in non-PIE audit firms
• The AFM expects parties to apply findings and will continue actively monitoring quality improvement
The EQCR is an important preventive quality safeguard when performing high-risk audits
In an EQCR, an independent auditor performs an objective review of the work performed by the external auditor. This preventive quality safeguard is mainly used for high-risk audits and is mandatory for audits of public-interest entities (PIEs), such as banks and insurers. It is performed approximately 3,000 times a year across an average of 15% of all statutory audits.The EQCR does not currently provide a sufficient safeguard, depth in particular needs to be improved
The EQCR does not currently provide a sufficient quality safeguard. In the case of non-PIE audit firms, the depth of the review was found to be insufficient in 26 of the 30 assessed EQCRs. In the case of PIE audit firms, similar findings were established for 9 of the 22 assessed EQCRs. This means, for example, that there are inadequate safeguards that the audit evidence obtained was sufficient to substantiate the external auditor’s opinion.No proper policy in place for EQCR in non-PIE audit firms
In the case of non-PIE audit firms, the policy for the EQCR needs to be improved, as the existing policy lacks adequacy in 13 of the 15 assessed firms. The AFM also requests these firms to pay attention to the competence and involvement of the EQC reviewer. Most PIE audit firms have a proper policy for the EQCR in place, however. This also applies in respect of the competence and involvement of the EQC reviewer.The AFM expects parties to apply findings and will continue actively monitoring the quality improvement for the EQCR
The results of the assessment were discussed with parties across the sector. The AFM will continue actively monitoring the quality improvement for the EQCR and adapt its supervisory activities where necessary. Hanzo van Beusekom: “This important quality safeguard is currently lacking throughout non-PIE audit firms, the report offers insights to guide the required actions in this regard. In the case of PIE audit firms, improvements are needed in particular regarding the depth with which the EQCR is performed.”Tags
Audit firmsContact for this article
Would you like to receive the latest news from AFM?
Subscribe to our newsletter, we will keep you up-to-date.