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Greetings Tutor, I hope you are doing well.
Firstly I’d like to appreciate the fact that in your video you have explained how a specific threat could potentially arise under relevant circumstancesHowever, I have some doubt over certain points, can you please help me in them
1) The guidance on High Fee Dependency in case of a Public Interest Entity states that
“A Firms independence is threatened if the total fees from a listed audit client exceeds 15% of Firm’s total fees for two consecutive years.
And if fees remain at this level for 5 consecutive years the firm must resign”.Question –
i) Does this means no safeguard should be applied if in case 15% limit is exceeded in the first year?
ii) Does this also means that after 2 consecutive years, the audit firm by implementing appropriate safeguards could continue the engagement for 3 more years?2) One of the safeguard is that “an Engagement Quality Control Review shall be performed which could be pre or post issuance review”.
However, if we look at the definition of EQR, it clearly states that EQR is completed on or before the date of the engagement report. So how a post issuance EQR could be performed? Isn’t the above safeguard contradictory to the definition.
“An engagement quality review (EQR) is an objective evaluation of the significant judgements made by the engagement team and the conclusions reached thereon, performed by the engagement quality reviewer and completed on or before the date of the engagement report.”
[ISQM 2 Engagement Quality Reviews, 13a]Q1 i) any audit firm that has resources to handle PiE clients would be alert to the potential threat of fee dependency before hitting 15% for the first time and would have the sense to put some safeguard(s) in place even at 10%.
ii) yes, but if safeguards are not sufficient to reduce a threat to an acceptable level, an engagement cannot be continued.You are right, EQR must now be pre-issuance. Can you tell me where in the video (which is not me incidentally) it mentions post-issuance?
Thankyou Tutor. It’s not mentioned anywhere in the video. I guess I just mixed up two different concepts.
a) In case of High few dependency we have this choice to undertake hot or cold revie as a safeguard to reduce the threat within an acceptable level.b) Whereas in case of Engagement Quality Control Review performed under Quality Management (ISA 220) it can only be a pre issuance (hot) review.
Can you confirm whether what I mentioned above is correct?
Where there is a significant threat to objectivity/independence, a review must be PRE-issuance of the audit report – (post-would be too late to that the audit engagement partner’s objectivity was compromised).
For a PiE the requirement is specifically for an EQ review, which is a “thing” – it has specified objectives, requirements, etc.
For a non-PiE client, an audit firm might carry out some other pre-issuance review that is not as rigorous as an EQ review – this is typically called “hot”, but that is not a “thing”.
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