AS 1220 Engagement Quality Review for Public Company Audits: Requirements and How It Differs from SQMS 2

Under PCAOB AS 1220, an engagement quality review and concurring approval of issuance are required for every audit conducted under PCAOB standards, every review of interim financial information, and the broker-dealer attestation engagements named in paragraph .01. There is no risk-based option. Under SQMS 2 and AU-C 220 for nonissuer audits, the firm decides which engagements get one unless law or regulation requires it.

This post sets out AS 1220 requirement by requirement and contrasts it with the AICPA approach. For the nonissuer process, see the engagement quality review guide.

What is the reviewer trying to determine?

Paragraph .02 states the objective: to evaluate the significant judgments made by the engagement team and the related conclusions reached in forming the overall conclusion and preparing the report, in order to determine whether to provide concurring approval of issuance. The reviewer does not take over the engagement. Paragraph .07 says the reviewer and assistants should not make decisions for the engagement team or assume any of its responsibilities, and the engagement partner remains responsible for the engagement and its performance.

Who can be the reviewer?

Paragraph .03 sets the status. The reviewer must be an associated person of a registered public accounting firm. A reviewer from the firm issuing the report must be a partner or an individual in an equivalent position. The reviewer may also be from outside the firm.

Paragraph .04 requires competence, independence, integrity and objectivity, and the note requires the firm's quality control policies to provide reasonable assurance that the reviewer has them. The specific tests:

• Competence (.05): the level of knowledge and competence in accounting, auditing and financial reporting required to serve as the engagement partner on the engagement under review.
• Independence, integrity and objectivity (.06): independent of the company, performs the review with integrity, maintains objectivity. Assistants must meet the same tests.
• Cooling-off (.08): the person who served as engagement partner in either of the two audits preceding the audit under review may not be the reviewer. Firms qualifying for the exemption under Rule 2-01(c)(6)(ii) of Regulation S-X are exempt from this paragraph.

What procedures are required in an audit?

Paragraph .09 requires the reviewer to evaluate the significant judgments and conclusions, to the extent necessary to satisfy paragraphs .10 and .11, by holding discussions with the engagement partner and other team members and reviewing documentation. Paragraph .10 lists the work:

• a. Planning judgments: recent firm experience with the company and client acceptance risks; the company's business, significant activities and reporting risks; materiality judgments and their effect on strategy; and, in audits involving other auditors, the partner's determination that the firm's participation is sufficient to act as lead auditor.
• b. Significant risks: the team's assessment of, and responses to, significant risks including fraud risks, and other significant risks the reviewer identifies.
• c. Misstatements and deficiencies: significant judgments on the materiality and disposition of corrected and uncorrected misstatements, and the severity and disposition of control deficiencies.
• d. Independence: review the team's evaluation of the firm's independence.
• e. Engagement completion document: review it and confirm with the engagement partner that there are no significant unresolved matters.
• f. Financial statements: review the financial statements, management's report on internal control and the report.
• g. Other information: read other information in documents containing the financial statements to be filed with the SEC and evaluate whether the team took appropriate action on material inconsistencies or misstatements of fact the reviewer is aware of.
• h. Consultations: evaluate whether appropriate consultation took place on difficult or contentious matters, and review the documentation of those consultations.
• i. Communications: evaluate whether appropriate matters have been communicated, or identified for communication, to the audit committee, management and others such as regulators.
• j. Critical audit matters: evaluate the team's determination, communication and documentation of CAMs under AS 3101.

Paragraph .11 then asks whether the documentation reviewed indicates the team responded appropriately to significant risks and supports the conclusions reached on the matters reviewed. The engagement completion document in item e is the one AS 1215.13 requires; see AS 1215 documentation rules.

When can the reviewer approve?

Paragraph .12: the reviewer may provide concurring approval of issuance only if, after performing the review with due professional care, he or she is not aware of a significant engagement deficiency. The note defines a significant engagement deficiency in an audit as existing when:

1. The team failed to obtain sufficient appropriate evidence under PCAOB standards.
2. The team reached an inappropriate overall conclusion on the subject matter.
3. The report is not appropriate in the circumstances.
4. The firm is not independent of its client.

Paragraph .13 ties it to release: the firm may grant the client permission to use the report only after the reviewer provides concurring approval.

For reviews of interim financial information, paragraphs .14 to .18 mirror the structure with a shorter procedure list and a different deficiency definition (failure to perform necessary review procedures replaces the evidence test).

What must be documented?

Paragraph .19 requires documentation sufficient for an experienced auditor with no previous connection to understand the reviewer's procedures, including:

• Identification of the reviewer and anyone who assisted.
• The documents reviewed.
• The date concurring approval was provided or, if it was not, the reasons.

Paragraph .20 puts the EQR documentation in the engagement documentation, and paragraph .21 applies AS 1215 retention and post-completion change rules to it. So the EQR file follows the seven-year and 45-day rules of the audit file.

How does this compare with SQMS 2 and AU-C 220?

SQMS 2 paragraph 8 also states what an EQR is not: it is not an evaluation of whether the entire engagement complies with professional standards or the firm's policies, and paragraph 9 says the reviewer is not required to obtain evidence to support the opinion. AS 1220 has the same practical stance on responsibility (paragraph .07) but frames approval around the four-part significant engagement deficiency test and a list of required procedures.

What does a firm that does both have to do?

Run two EQR policies. For issuer audits, apply AS 1220 reviewer eligibility, the procedure list in .10 and concurring approval. For nonissuer audits, apply the SQMS 2 criteria set in firm policy.

Frequently asked questions

Can an outside CPA serve as reviewer on an issuer audit?

Yes. Paragraph .03 says the reviewer may be an individual from outside the firm, provided the person is an associated person of a registered public accounting firm and meets the competence, independence, integrity and objectivity tests.

Does the reviewer need to reperform audit procedures?

No. The procedures in paragraph .10 are evaluations, discussions and document reviews directed at significant judgments.

What if the reviewer refuses approval?

The firm cannot grant permission to use the report (paragraph .13), and the reasons for not providing approval are documented (paragraph .19c).

Sources

• PCAOB, AS 1220, Engagement Quality Review (paragraphs .01 to .21): https://pcaobus.org/oversight/standards/auditing-standards/details/AS1220
• AICPA, Statement on Quality Management Standards No. 2, Engagement Quality Reviews (QM Section 20, paragraphs 8, 9, 12, 13, 18, 19, 24, 27) and SQMS No. 1 paragraph 35f: https://www.aicpa-cima.com/resources/landing/aicpa-professional-standards
• PCAOB, AS 1215, Audit Documentation (paragraphs .13 to .16): https://pcaobus.org/oversight/standards/auditing-standards/details/AS1215

CORAA prepares ready-to-review audit files for US CPA firms from client books; you review and sign. See /us.

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error