As we discussed in this post, the International Auditing and Assurance Board (IAASB) and the Auditing Standards Board (ASB) recently released quality management standards intended to improve audit quality. But who is ultimately responsible for ensuring that an audit of the financial statements, one of the bedrocks of our financial system, is high quality? Well, according to SAS 146, it’s the engagement partner (EP) – the VIP of quality management! This post provides an overview of SAS 146, which says the engagement partner has the overall responsibility for managing and achieving audit quality.
Background on quality management standards
The ASB released the following quality management standards in June 2022:
- Statement on Quality Management Standards No. 1, A Firm’s System of Quality Management (SQMS 1)
- Statement of Quality Management Standards No. 2, Engagement Quality Reviews (SQMS 2)
- Statement on Auditing Standards No. 146, Quality Management for an Engagement Conducted in Accordance with Generally Accepted Auditing Standards (SAS 146)
Statement on Standards of Accounting and Review Services No. 26, Quality Management for an Engagement Conducted in Accordance with Statements on Standards for Accounting and Review Services (SSARS 26)
The biggest change reflected in the new quality management standards is the introduction of a risk-based approach to achieving quality objectives, which helps firms identify and address risks specific to their practice and creates a more scalable approach to quality for all firms.
We’ve previously discussed SQMS 1 regarding having a system of quality management (SOQM), as well as engagement quality (EQ) reviews as required by SQMS 2. In this post, we’ll dive into the requirements of SAS 146, which focuses on the critically important role of the engagement partner in managing and achieving quality on the auditing engagement and reinforcing the importance of quality to all members of the engagement team.
Introducing the engagement partner
According to SAS 146, the engagement partner is:
The partner or other individual appointed by the firm who is responsible for the audit engagement and its performance, and for the auditor’s report that is issued on behalf of the firm, and who, when required, has the appropriate authority from a professional, legal, or regulatory body.
The engagement partner remains ultimately responsible and, therefore, accountable for compliance with the requirements of SAS 146, but may seek assistance from others to fulfill these responsibilities. For any requirements within SAS 146 labeled “take responsibility for…” such delegation is permitted. However, there are certain requirements for which SAS 146 expressly intends that the requirement or responsibility be fulfilled by the engagement partner. In such circumstances, the engagement partner may need to obtain information from the firm or other members of the engagement team to fulfill their responsibilities.
SAS 146 sets out the following requirements:
Leadership responsibilities for managing and achieving quality on audits
The engagement partner should take overall responsibility for managing and achieving quality on the audit engagement, including taking responsibility for creating an environment for the engagement that emphasizes the firm’s culture and expected behavior of engagement team members. How can one do this in absentia? You can’t, which is why the engagement partner must be sufficiently and appropriately involved throughout the audit engagement, not just at the beginning during planning and at the end during sign-off.
Relevant ethical requirements, including those related to independence
The engagement partner should understand the relevant ethical requirements, including those related to independence, that are applicable given the nature and circumstances of the audit engagement. And they should share this knowledge with the engagement team, making sure they also understand the requirements, monitoring possible breaches during the audit and taking appropriate action if necessary.
Acceptance and continuance of client relationships and audit engagements
Many audit failures could have been prevented if the firm would have just followed their client acceptance and continuance procedures. Therefore, the engagement partner should determine that the firm’s policies and procedures for the acceptance and continuance of client relationships and audit engagements have been followed and that conclusions reached in this regard are appropriate.
Does the engagement team have the proper competence and capabilities to perform the audit? If it is a specialized industry, do they have the appropriate knowledge of that industry? Do they need additional training? Do they need to bring in a specialist for certain critical audit areas? These are all the responsibilities of the engagement partner, including ensuring that the team has sufficient time to perform the audit engagement. It goes without saying that overworked and underskilled auditors that are under severe time pressure with little to no involvement of the engagement partner do not tend to perform the highest quality audits!
The requirements related to engagement performance are broken down into the following categories:
- Direction, supervision, and review
- Engagement quality review
- Difference of opinion
The engagement partner should take responsibility for the direction and supervision of the members of the engagement team and the review of their work. As such, the engagement partner should review audit documentation at appropriate points in time during the audit engagement, including documentation related to:
- Significant matters;
- Significant judgments, including those related to difficult or contentious matters; and
- Other matters that, in the engagement partner’s professional judgment, are relevant to the engagement partners’ responsibilities.
At the end of the day, the engagement partner must determine that sufficient appropriate audit evidence has been obtained to support the conclusions reached and for the auditor’s report to be issued. Before the auditor’s report is released, the engagement partner should review the financial statements, auditor’s report (including key audit matters), the related audit documentation, and any formal, written communications to management, those charged with governance, and regulatory authorities.
Sometimes difficult or contentious matters arise during the audit which require consultation. Any consultation, including whether additional consultations are required, is the responsibility of the engagement partner. The engagement partner also ensures that such consultations are performed in accordance with the firm’s policies and procedures, and that the conclusions of such consultations that have been agreed to have been properly implemented.
Regarding engagement quality (EQ) review, the engagement partner should:
- Determine that an EQ reviewer has been appointed
- Cooperate with the EQ reviewer, telling the engagement team to do the same
- Discuss significant matters and significant judgments with the EQ reviewer
- Not release the auditor’s report until the completion of the EQ review
Finally, the engagement partner is responsible for ensuring that any differences of opinion that arise during the audit are resolved in accordance with the firm’s policies and procedures.
Monitoring and remediation
Many firms have firmly established monitoring and remediation processes already in place to ensure quality audits. It is the responsibility of the engagement partner to understand these processes, determine their relevance and effect on the audit engagement, and remain alert for information that may be relevant for such processes to work effectively.
Taking overall responsibility for managing and achieving quality
As previously stated, the engagement partner has the overall responsibility for managing and achieving quality on the audit engagement. In doing so, this means that their involvement has been sufficient and appropriate. It also means that they’ve taken into account the nature and circumstances of the audit engagement and the firm’s policies and procedures to ensure compliance with the requirements of SAS 146.
The auditor should include the following in the audit documentation:
- Significant issues identified, relevant discussions with personnel, and conclusions reached with respect to compliance with ethical requirements, including independence, and continuance of client relationships
- Matters related to consultations undertaken during the audit and how such conclusions were implemented
- Evidence that an engagement quality review, if required, has been completed before the release of the auditor’s report
Like SQMS 1 and SQMS 2, SAS 146 is effective for engagements conducted in accordance with GAAS for periods beginning on or after December 15, 2025.
We hope this post has helped you better understand the requirements of SAS 146. Check out this page on the AICPA’s website for an executive summary of SQMS Nos 1-2 and SAS 146.
If you need help getting your audit and accounting training in compliance with the new audit quality standards, let’s talk. We’re currently helping several accounting firms with their compliance, and we’d be happy to help you too!
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