Proposed ISQM 2, Engagement Quality Reviews Imran Vanker, IAASB Member and Task Force Chair IAASB Meeting December 12, 2019 Agenda Item 8 Page 1 Introduction Objectives of this session are to obtain the Boards views on: (a) Task Forces revised proposals to address the key issues presented on the scope of engagements subject to an engagement quality (EQ) review, and objectivity and cooling-off period (b) Other matters (i.e., professional skepticism and group audit considerations) identified by the Task Force in responding to comments received on the Exposure Draft (ED) of ISQM 2 (c) The draft of proposed ISQM 2, if time permits
Scope Objectivity and cooling-off Professional skepticism Group audit considerations Para. 10 Objective Para. 22
Performance Walkthrough Para. 1-11 Para. 12-20 Para. 21-27 Page 2 Scope of Engagements Subject to EQ Review Task Forces Revised Proposals: (see Section II-A of Agenda Item 8) Retain a separate category for engagements for which the firm determines an EQ review is an appropriate response to assessed quality risks
Change nature of the entity to nature and circumstances of the engagement or the entity in para. paragraph 41A(c)(iii)(b) (previously para. 37(e)(iii)(b)) Revise the related application material such that it corresponds to the requirements for each category Page 3 Scope of Engagements Subject to EQ Review (Cont.) 41A.In designing and implementing responses, the firm shall, at a minimum, include the following specific responses: (c) [Moved from 37(e)] The firm establishes policies or procedures addressing engagement quality reviews in accordance with proposed ISQM 2, and requiring an engagement quality review for:
(i) Audits of financial statements of listed entities; (ii) Audits or other engagements for which an engagement quality review is required by law or regulation; and (Ref: Para. A103) (iii) Audits or other engagements for which the firm determines that an engagement quality review is appropriate: (a) As a response to assessed quality risks, based on the reasons for the assessments given to those risks, or (Ref: Para. A104-A105x) (b) Due to the nature and circumstances of the engagement or the entity. (Ref: Para. A105A-A106) Page 4 Scope of Engagements Subject to EQ Review (Cont.) Matter for IAASB Consideration 1. Does the IAASB support the proposed changes to the requirements in paragraph 41A(c) of proposed ISQM 1 and related application material, relating to the scope of engagements subject to an EQ review? (see Section II-A of Agenda Item 8)
Page 5 Objectivity and Cooling-off Period Task Forces Revised Proposals: (see Section II-B of Agenda Item 8) Specify a cooling-off period of two years, or a longer period if required by relevant ethical requirements, before an engagement partner can assume the role of EQ reviewer Apply such requirement to all engagements for which an EQ review is performed Revise application material supporting the requirement in paragraph
16A Coordinate with and obtain feedback from IESBA Staff and Board representatives Page 6 IESBA Coordination Update on EQ Reviewer Objectivity Refer to handout. New ED approved on EQ reviewer objectivity: o Unanimously approved the project proposal and ED to change Section 120 of the IESBA Code to address the EQ reviewer objectivity o Aims to release the ED by end of January 2020 for a 45-day accelerated consultation period o Intent is for the IESBA to be in a position to adopt a final pronouncement in September 2020
Page 7 IESBA Coordination Update on EQ Reviewer Objectivity (Cont.) Proposed adding application material at the end of Section 120 of the IESBA Code to describe: Section 120 The Conceptual Framework Engagement Quality Reviews o 120.14 A2 The self-review threat that may be created when an individual is appointed EQ reviewer immediately after having served on the audit engagement team; o 120.14 A3 The factors that are relevant in evaluating the level of such threats; and o 120.14 A4 The actions that might be safeguards to address the threats. Page 8 Objectivity and Cooling-off Period (Cont.)
Matters for IAASB Consideration 2. With respect to the proposed requirement in paragraph 16A for firm policies or procedures to specify a mandatory cooling-off period, and the related application material: (see Section II-B of Agenda Item 8) (a) Is the proposed requirement in the public interest, and appropriate to drive consistency in practice? (b) Does the IAASB agree that the requirement in paragraph 16A could be amended or deleted, depending on the outcome of the IESBAs planned activities? Page 9 Professional Skepticism - Engagement Team Question 6(a) in the EM to ED-ISQM 2 asked respondents: Do you agree that the engagement quality reviewers evaluation of the engagement teams significant judgments includes evaluating the engagement teams
exercise of professional skepticism? 17 2 42 31 Generally agreed that the EQ reviewers evaluation of the engagement teams significant judgments includes evaluating the engagement teams exercise of professional skepticism. Agree Agree but with further comments Disagree Unclear or no specific response
Page 10 Professional Skepticism EQ Reviewer Question 6(b) in the EM to ED-ISQM 2 asked respondents: Do you believe that ED-ISQM 2 should further address the exercise of professional skepticism by the engagement quality reviewer? If so, what suggestions do you have in that regard? 19 2 42 29 Mixed views about whether proposed ISQM 2 should
further address the exercise of professional skepticism by the EQ reviewer. Agree Agree but with further comments Disagree Unclear or no specific response Page 11 Professional Skepticism (Cont.) Task Forces Initial Proposals: (see Section II-C of Agenda Item 8) Focus on the EQ reviewers evaluation of the appropriateness of the engagement teams exercise of professional skepticism in proposed ISQM 2 Add application material clarifying how to demonstrate compliance
with the requirement, or how to document the EQ reviewers evaluation of the exercise of professional skepticism by the engagement team Page 12 Professional Skepticism (Cont.) Matters for IAASB Consideration 3. With respect to professional skepticism: (see Section II-C of Agenda Item 8) (a) Does the IAASB agree that proposed ISQM 2 should focus on the EQ reviewers evaluation of the appropriateness of the engagement teams exercise of professional skepticism, when applicable, based on the review of selected engagement documentation as required by paragraph 22(c)(i) of proposed ISQM 2? (b) Is additional application material needed to describe how the EQ reviewer evaluates the exercise of professional skepticism by the engagement team? If so, what suggestions or examples does the IAASB have in this regard?
Page 13 Professional Skepticism (Cont.) Matters for IAASB Consideration 3. With respect to professional skepticism: (see Section II-C of Agenda Item 8) (c) Would application material be helpful in proposed ISQM 2 to address the expected behaviors of the EQ reviewer, as suggested in paragraph 45 of the Issues Paper? (d) Would reference to the application material in proposed ISA 220 (Revised) be helpful, as suggested in paragraph 46 of the Issues Paper? (see paragraphs A27-A29 of proposed ISA 220 (Revised)) Page 14 Group Audit Considerations What We Heard in the Responses to ED-ISQM 2:
Comments or questions about how the requirements and guidance in proposed ISQM 2 would be applied in the context of group audits Task Forces Initial Proposals: Add application material providing guidance for group audit considerations in an EQ review (see Section II-D of Agenda Item 8) Page 15 Group Audit Considerations (Cont.) Matter for IAASB Consideration 4. The IAASB is asked for its views on the proposed application material in paragraph A28A regarding guidance for group audit considerations in an EQ review. (see Section II-D of Agenda Item 8)
Page 16 What We Heard in Responses to ED-ISQM 2 Questions 1 to 3 Question 1 - Separate standard: Support for a separate standard for an EQ review Concerns over the objective of standard being on the firm only, and that it is not sufficiently outcome-based Question 2 - Linkages: Agree that the linkages between ED-ISQM 1 and ED-ISQM 2 are appropriate and clear
Question 3 - Change in terminology: Support the change in terminology because the emphasis is now on quality management, rather than on quality control. Do not anticipate any adverse consequences of changing the terminology. Page 17 What We Heard in Responses to ED-ISQM 2 Question 4 Note: These points relate to considerations other than those discussed on slides 6 and 9 relating to objectivity and a cooling-off period for an engagement partner moving into the EQ reviewer role. Question 4 - Eligibility: Consider whether the limitations on eligibility of an engagement partner
moving into an EQ reviewer role should also apply to other roles on the engagement Clarify if the principle on threats to objectivity and guidance on coolingoff period also apply to assistants of the EQ reviewer Page 18 What We Heard in Responses to ED-ISQM 2 Question 5 Question 5 - Nature, timing and extent of EQ reviewers procedures: Define, or provide guidance on, significant matters and significant judgments
Clarify how to demonstrate, or how to document compliance with the requirements Clarify the replacement EQ reviewers responsibilities and the EQ reviewer assistants responsibilities Consider the EQ reviewers responsibility to consider independence matters (in extant), and to review other specific matters Page 19 What We Heard in Responses to ED-ISQM 2 Questions 7 and 8 Question 7 - Documentation:
Overall, respondents generally supported the enhanced documentation requirements Question 8 - Scalability: Overall, respondents generally agreed that the requirements for EQ reviews are scalable for firms of varying size and complexity Page 20 Additional Discussion and Feedback on Proposed ISQM 2 Matters for IAASB Consideration The IAASB is asked whether: 5. It has any significant questions or concerns about aspects of the draft of the proposed standard in Agenda Item 8-D, in particular about the following (also refer to relevant sections of the discussion of significant
changes and rationale therefor in Agenda Item 8-C): (a) The wording of the objective in paragraph 10. (b) The proposed revisions to the requirements in paragraph 22 relating to the EQ reviewers performance of the EQ review, and related application material. Page 21 Additional Discussion and Feedback on Proposed ISQM 2 (Cont.) Matters for IAASB Consideration The IAASB is asked whether: 6. There are issues raised by respondents, in addition to those summarized in Agenda Item 8-F, that should be further explored by the Task Force and discussed with the Board. The IAASB is also asked whether the significant changes made to the proposed standard, as described in Agenda Item 8-C, appropriately address respondents comments summarized in Agenda Item 8-F. Requirement
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