An Overview of the Peer Review Process, Part II

An Overview of the Peer Review Process, Part II
An Outline of the Engagement Review Process

By Mark Rachleff, Quality Assurance Manager, Peer Review

What Firms Are Eligible for an Engagement Review?

Any member firm of the American Institute of CPAs must have an engagement review if it performs accounting or review services, but does not perform audits (i.e., engagements under the Statements on Auditing Standards (SAS) or Generally Accepted Government Auditing Standards (GAGAS)) and does not perform examinations of prospective financial statements under the Statements on Standards for Attestation Engagements (SSAEs). Accounting and review services include compilations (full disclosure, selected disclosure, those that substantially omit all disclosures and those for management use only) and certain engagements under the SSAEs.

Observation: Firms eligible for engagement reviews, however, may choose to undergo a more extensive system review if they anticipate undertaking audits or examinations in the near future or if they find value in a peer review of their quality-control system.

Observation: Under the revised peer review standards (generally effective Jan. 1, 2005), firms that have an engagement review and subsequently perform an engagement requiring a system review (audit or an examination under the SSAEs of a projection or forecast) must undergo a system review. This review is due 18 months from the year-end of the audited financial statements; or in the case of an examination of a financial forecast or projection, the report is due 18 months from the date of the report on the examination.

What Are the Objectives of an Engagement Review?

An engagement review is designed to furnish a reasonable basis for the reviewer to express limited assurance regarding:

Note that an engagement review focuses on whether the financial statements, reports and any applicable engagement documentation of engagements actually reviewed conform in all material respects with professional standards. System reviews, however, focus on the reviewed firm’s system of quality control and whether it provides reasonable assurance that the firm is conforming with professional standards in all material respects.

What Information and Documents Will the Peer Reviewer Request During an Engagement Review?

As in a system review, a reviewer will ask the reviewed firm to furnish background information on its practice. This includes a list of all clients for whom the firm performs compilations, full- and selected-disclosure compilations, and compilations that substantially omit all disclosures, which encompass those compilations limited to “management use only” (i.e., engagements conducted under Statements on Standards for Accounting and Review Services No. 8), and, finally, financial forecasts or projections. This client engagement breakdown must be furnished for each partner.

The reviewer will compare this list to information previously submitted to the New York State Society of CPAs for any discrepancies. The reviewer must select at least one of any kind of engagement for each partner (or a non partner responsible for issuing reports). The reviewer does not have to select one type of engagement from each partner, as long as one of each type is selected for the firm as a whole.

Under the revised peer review standards, firms will also be requested to furnish their reviewer with a representation letter in connection with peer reviews commenced on or after Jan. 1, 2005. The letter must contain an attestation by the firm to the completeness of the client list; compliance with relevant rules, regulations and licensing requirements; any allegations of professional misconduct against the firm or its members during the year under review; and any investigations of professional misconduct against the firms or its members during the year under review.

The reviewed firm also must furnish a copy of its previous peer review report and any applicable Letter of Comments (LOC) and Letter of Response (LOR). The reviewer will emphasize any deficiencies noted in the prior review’s LOC in the current review.

Finally, the reviewer will inquire whether the partners of the firm have current licenses in the states in which they practice.

How Are Selected Engagements Checked by the Reviewer? What Are the Procedures to Resolve Disagreements?

Once engagements are selected, the reviewer will examine the associated financial statements, financial information, and related accountant’s reports, using the peer review program comprehensive “checklist” appropriate for the type of engagement (e.g., review or full-disclosure compilations, compilations that substantially omit all disclosures, agreed-upon procedures, etc.). The reviewer will also determine from relevant work papers whether matters covered in the accountant’s inquiry, analytical procedures, consideration of unusual matters and SSARS No. 10 expectations have been considered in accordance with provisions in the SSARSs and SSAEs.

Caution: SSARS No. 10 amends SSARS No. 1 for reviews of financial statements for periods ending after Dec. 15, 2004. It requires the reviewing accountant to develop expectations regarding balances based on an understanding of the client and its industry. The accountant should then compare the expected amounts to amounts recorded in the client’s books and records, or to ratios developed from such recorded amounts. Firms, then, must maintain and furnish to the reviewer documentation of those expectations and comparisons to amounts recorded in the client’s books and records for 2004 calendar-year reviews.

As the reviewer completes the checklists, he or she will prepare a “Matter for Further Consideration” (MFC) form documenting all noted deficiencies and matters needing explanation or clarification from the firm. The reviewer will then request the firm to provide answers and explanations to issues noted in the MFC. This can be done via telephone or by a written response.

If the firm and reviewer cannot agree on the findings noted in the MFC, or if there are other unresolved peer review matters, the reviewer will consult with the NYSSCPA and the Peer Review Committee for assistance in resolving the issues.

How Is the Review Concluded?

The reviewer conducts an exit conference by telephone or in person at the end of a review. Matters noted in the MFC may again be discussed at this time, as can those items which resulted in the issuance of a modified report. The reviewer may also give the firm a LOC, which notes matters of greater significance than those mentioned in the MFC.

The reviewer at this time will also discuss recent developments in accounting and auditing that may affect the firm’s practice. The reviewer may present ideas to improve the effectiveness or operational efficiency of the firm’s practice. The reviewer will also caution the firm not to discuss or distribute a copy of the peer review report to firm personnel, clients or others until it has been accepted by the Peer Review Committee. The reviewer will also remind the firm of the deadlines for submission of documentation to the Society.

The reviewer then will submit a copy of the peer review report and LOC, if any, to the firm and the NYSSCPA within 30 days of the exit conference date. The firm should then draft a LOR addressing the findings noted in the LOC and report. The letter will describe the remedial action the firm has taken to address the findings, or action planned to prevent a recurrence of the noted deficiencies. This letter is submitted to the reviewer for comment.

What Is the Report Acceptance Process?

After receiving any such comments, the firm should send the finalized LOR along with a copy of the report and LOC to the NYSSCPA. If the firm still does not agree with the reviewer’s LOC, any disagreement should be discussed with the NYSSCPA for possible resolution. If no resolution can be reached, the LOR should include reasons for the firm’s disagreement. This will be submitted to the Peer Review Committee as part of the reporting package and the committee will notify the firm and the reviewer of its decision. If the committee agrees with the reviewer, the firm may either revise its LOR or appeal the committee decision to the American Institute of CPAs.

The Peer Review Committee will notify the firm by letter once it accepts the peer review. The committee, where applicable, may issue a letter of acceptance that requests the firm to agree to submit proof of any follow-up action recommended by the committee as a condition of final acceptance of the review. When the firm confirms to the committee that it satisfactorily completed the follow-up action, a final, unconditional letter will be issued to the firm. Ninety days after the review has been accepted by the Peer Review Committee, the reviewer is required to return or shred the financial statements, reports, work papers and other materials used in the review.

A Note on Engagement and System Reviews

Despite many similarities to system reviews, engagement reviews have a lesser scope and complexity, and the report provides a different level of assurance. Both are designed to express limited assurance on a firm’s practice and also communicate opportunities for a firm to improve. In the case of a system review, circumstances may be identified that will enable the firm to make improvements to its quality control system. On the other hand, during engagement reviews the peer reviewer may note practices that will enhance the firm’s ability to conform with professional standards with respect to the financial statements, accountant’s reports, and related SSARS or SSAE documentation on engagements similar to those actually reviewed.

The next installment in this series will cover changes to the report, LOC and LOR for system reviews as a result of the 2005 revisions to peer review standards.

Suvro C.K. Banerjee, NYSSCPA quality assurance manager, ethics, assisted in the editing of this article.

Note: In the April 1, 2005, issue of The Trusted Professional, the first part of this series reported on some of the administrative aspects of the peer review program, with an outline of the events and processes involved in a system review. This article covers firms eligible for engagement reviews. A future article will discuss report reviews, which are required of firms that perform and report on only compilations that substantially omit all disclosures.