THE AICPA REVISED ITS STANDARDS for
performing and reporting on peer reviews for firms that do not
audit SEC registrants. The revised standards, effective for
reviews commencing on or after January 1, 2005, will enhance
the quality of peer reviews and increase the usefulness of
peer review reports to the public and regulators as well as to
reviewed firms. |
THE REVISED STANDARDS AFFECT ALL 30,000 firms enrolled in the AICPA peer review program. The revisions include elements such as timing, engagement selection and peer review reporting.
THE PUBLIC HAS REASONABLE EXPECTATION that the working methods of every firm performing an audit be validated by a system review. The enhancements have not changed the fact that there are three types of peer reviews: system, engagement and report reviews.
FIRMS UNDERGOING ANY TYPE OF PEER REVIEW are required to assure the peer reviewer in writing that the firm is not aware of any situations where it or its personnel have not complied with the state board(s) of accountancy or other regulatory bodies.
FIRMS THAT WISH TO EXCLUDE AN ENGAGEMENT from peer review must request a scope limitation waiver. The administering entity will review the request, satisfy itself as to the reasonableness of the firm’s explanation and notify the firm in writing whether a scope limitation in the peer review report is required.
FIRMS WILL NOTICE SIGNIFICANT CHANGES in their peer review reports and letters of comments. The revisions will enable users of peer review reports to better understand the peer review process and the matters identified during such reviews.
|DAVID JENTHO, CPA, is a partner at Ratliff and Jentho in Baytown, Texas, and chairman of the AICPA peer review board. DEAN BEDDOW, CPA, is a senior technical manager in the AICPA peer review team. His e-mail address is email@example.com . Official positions are determined through certain specific committee procedures, due process and deliberation.|
he right kind of peer pressure can be a good thing—a fact proven by the profession’s peer review program. Since its inception nearly 20 years ago, participating firms have reaped the benefits of having colleagues assess the quality of their work. Now, after almost two decades, the AICPA has taken a look at the program to strengthen the process.
Peer reviews are carried out in compliance with the AICPA peer review board under the supervision of a state CPA society or group of state societies that the board approves. Over the past year the board evaluated the program and revised its standards for performing and reporting on peer reviews for firms that do not audit SEC registrants. In the process it has affirmed that enhancing the quality of firms’ accounting and auditing practices and protecting the public interest are equally important objectives. The resulting modifications to PR section 100 of AICPA Professional Standards, “Standards for Performing and Reporting on Peer Reviews,” are designed to improve the quality of reviews and increase the usefulness of the resulting reports to the public, to the regulators that rely on them and to the reviewed firms.
The revised standards will affect all 30,000 firms enrolled in the AICPA peer review program and the state societies that administer it (administering entities). Firms will notice changes in the reports and will need to implement additional procedures for their next peer review. The revisions affect timing, engagement selection, peer review reporting and the oversight process. This article describes several—but not all—enhancements that will affect participating firms.
State CPA societies administer the AICPA peer review program for firms headquartered in that state or arrange for another state society to administer them. Currently 41 state societies administer reviews for the 54 licensing jurisdictions (including the District of Columbia, Guam, Puerto Rico and the Virgin Islands).
THE TYPES REMAIN THE SAME
There are still three types of peer reviews: system, engagement and report reviews.
System reviews. Firms that perform engagements under AICPA and government auditing standards or those that examine prospective financial information under AICPA attestation standards still will have system reviews.
Engagement reviews. Peer reviews of firms that perform accounting and review services and/or attestation engagements under Statements on Standards for Accounting and Review Services and/or Statement on Standards for Attestation Engagements, respectively, are called engagement reviews.
Report reviews. Peer reviews of firms that perform only compilation engagements under SSARS where the firm has compiled financial statements that omit substantially all disclosures are called report reviews.
TIMING IS EVERYTHING
The public has a reasonable expectation that every firm performing an audit have its working methods validated by a system review. Firms performing audits for the first time, or those that perform such services only occasionally, may have a higher risk of noncompliance with professional standards because of lack of experience. Consequently, the standards now require firms that have participated in an engagement or report review and subsequently performed an engagement requiring a system review (such as a first audit) to (a) immediately notify the administering entity and (b) undergo a system review. The system review will be due 18 months from the year end of the engagement requiring a system review (or 18 months from the date of the report for financial forecasts and projections) or the firm’s next scheduled due date, whichever is earlier.
Reviewed firms also will provide written representations concerning the information they give to peer reviewers and administering entities. The representations will assure the peer reviewer that the firm
Is not aware of any situations where it or its personnel have not complied with the rules and regulations of state board(s) of accountancy or other regulatory bodies (including applicable firm and individual licensing requirements for each state in which the firm practices for the year under review).
Has made available to the reviewer any communications related to allegations or investigations.
Has provided the reviewer with a list of all client engagements that concluded during the year under review.
Has provided all the other information that the reviewer has requested.
The new requirements call for firms to notify the peer reviewer of any communications about allegations or investigations (including litigation) relating to the conduct of an accounting, audit or attestation engagement performed and reported on by the firm. The objective of such communications is to enhance peer review, and minimize risk for both reviewer and firm, by allowing the peer reviewer to better plan and perform the review, including identifying offices, owners and engagements that should get greater scrutiny during the process.
The board always has required the peer reviewer, during planning, to notify the subject firm which engagements have been selected for review. The changes say that, for system reviews, peer reviewers must notify the firm no earlier than two weeks before commencement of the review which engagements will be reviewed. However, the review team will hold back notification of at least one engagement from the initial review list until fieldwork begins at the subject firm’s offices. That engagement should be the firm’s highest level of service that does not increase the scope of the review. It is hoped this change to the peer review program will add credibility to the program and strengthen reliance on it by regulators and other third parties.
Another revision ensures that the engagement selected at commencement of the review is available to the peer reviewer during the fieldwork phase. If the engagement cannot be provided at this time, the peer reviewer will inform the firm that a limitation in the scope of the review exists. In addition, the peer review report will be modified to include the fact that the firm did not make available an engagement selected for review.
Firms undergoing a system review may have reasons to exclude an engagement from being selected for review (for example, if that engagement is the subject of litigation). Firms that wish to exclude an engagement must request a waiver from the scope limitation report modification.
Firms should send the written request to the administering entity identifying:
The engagement(s) the firm plans to exclude from peer review selection.
The reasons for the exclusion.
A request for a waiver from a scope limitation in the peer review report.
The administering entity is responsible for determining whether modifying the peer review report to reflect the limitation in scope is required. Administering entities will consider several factors including, but not limited to, whether the review team will be able to obtain a reasonable cross-section of engagements to review. The administering entity will review the reasonableness of the firm’s explanation and notify the firm in writing whether a scope limitation in the peer review report is required.
REPORTS AND LETTERS OF COMMENTS
Firms will notice significant changes in their peer review reports and letters of comments designed to enable users to better understand the peer review process and any matters identified during reviews. Here is a summary of the significant revisions:
System review reports will include a brief description of the system review process.
When a subject firm performs audits of employee benefit plans, engagements adhering to government auditing standards or audits of certain depository institutions with assets of $500 million or more, system review reports will state that such engagements were selected as a part of the peer review.
All deficiencies and recommendations resulting in a modified or adverse opinion will be included in the system or engagement review report. Adverse reports no longer will have a letter of comments, since all matters will be included in the report.
If a system (or engagement) review report is modified or adverse, any resulting substandard engagements will be identified and will include industry and level of service. The standards define a substandard engagement as one in which the deficiencies identified, individually or in aggregate, are material to understanding the report or the financial statements accompanying the report, or represent omission of a critical accounting, auditing or attestation procedure(s) required by professional standards.
Peer review reports will refer to the letter of comments (especially because users of the reports should be aware when a letter of comments is issued).
For system review reports, the elements of quality control headings no longer will be included in the letter of comments.
For report reviews, significant deficiencies identified during the review will be clearly expressed in the report.
A firm’s letter of response will address its plans to correct not only the findings in the letter of comments but also any deficiencies identified in modified and adverse reports.
peer review program is dedicated to enhancing the quality of
accounting, auditing and attestation services performed by
AICPA members in public practice. For more peer review
information and resources go to www.aicpa.org and type in
“peer review program,” or call the AICPA at 888-777-7077.
For peer reviews commencing on or after January 1, 2005, peer reviewers should consult guidance materials available at www.aicpa.org/members/div/practmon/index.htm .
All peer reviews are subject to oversight by the AICPA and the administering entities. To improve the overall process and provide more credibility to the program, the board has strengthened the oversight policies and procedures. Those include but are not limited to
Selecting for oversight a minimum number of audits of employee benefit plans, engagements adhering to government auditing standards and audits of certain depository institutions with assets of $500 million or more.
Selecting at least 2% of all peer reviews for oversight.
Having team members participate in the exit conference in some circumstances.
Verifying reviewer qualifications to perform peer reviews.
Timing in the performance and acceptance of peer reviews.
Those are some of the enhancements to the standards that went into effect for all peer reviews commencing on or after January 1, 2005. The standards, interpretations and additional guidance related to the revisions are on the AICPA Web site, www.aicpa.org . A white paper, also available on the Web site, explains the reasoning behind some of the revisions to the standards.
After much thoughtful discussion, the peer review board believes the adopted enhancements help ensure that the program continues to support the highest quality of accounting and auditing practices of public accounting firms and that its objectives are relevant, efficient, modern and valid. width=9>