Peer Review Is Stronger and Better Now
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.
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.
FIRM REPRESENTATIONS
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.
ENGAGEMENT SELECTION
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.
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 .
OVERSIGHT
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>
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