Engagement Review Information

What is an Engagement Review?

An Engagement Review is a type of peer review that is a study and appraisal by an independent evaluator(s), known as a peer reviewer, of a sample of a CPA firm’s actual accounting work, including accounting reports issued and documentation prepared by the CPA firm, as well as other procedures that the firm performed.

By definition, CPA firms undergoing Engagement Reviews do not perform audits or other similar engagements but do perform other accounting work including reviews and compilations, which are a lower level of service than audits. The peer reviewer’s objective is to evaluate whether the CPA firm’s reports are issued and procedures performed appropriately in accordance with applicable professional standards. Therefore, the objective of an Engagement Review is different from the objectives of a System Review, which is more system oriented and involves determining whether the system of quality control is designed in conformity with applicable professional standards and whether the firm is complying with its system appropriately.

The reviewer looks at a sample of the CPA firm’s work, individually called engagements. The scope of an Engagement Review only covers accounting engagements; it does not include tax or consulting services. An Engagement Review consists of reading the financial statements or information submitted by the reviewed firm and the accountant’s report thereon, together with certain background information and representations from the firm and, except for certain compilation engagements, the documentation required by applicable professional standards.

When the CPA firm receives a report with a peer review rating of pass, the peer reviewer has concluded that nothing came to his or her attention that the CPA firm’s work was not performed and reported on in conformity with applicable professional standards in all material respects. A report with a peer review rating of pass with deficiencies is issued when the reviewer concludes that nothing came to his or her attention that the work was not performed and reported on in conformity with applicable professional standards in all material respects, except in certain situations that are explained in detail in the report. A report with a peer review rating of fail is issued when the reviewer concludes that as a result of the situations described in the report, the work was not performed and/or reported on in conformity with applicable professional standards in all material respects.

An Engagement Review does not provide the reviewer with a basis for expressing any assurance as to the firm’s system of quality control for its accounting practice, and no opinion or any form of assurance is expressed on that system.

Preparing for an Engagement Review

In preparing for its peer review, your firm should:

• Read the prior report, the findings and recommendations in the prior letter of comments, if applicable, and your firm’s response to the letter of comments, and be certain that you have taken the actions in your letter of response.
• Perform on-going monitoring procedures to make sure any prior deficiencies have been corrected.
• Review its document of quality control policies and procedures and that the size, structure, and nature of the practice of the firm are considered in determining the extent of the documentation of established quality control policies and procedures.
• Read applicable peer review resources.

Once you have selected a peer reviewer, agreed on a commencement and completion date and have received confirmation from NEPR that the reviewer is acceptable, the peer review is ready to proceed.

Your peer reviewer will ask for:

• Summarized information showing the number of accounting and review engagements and attestation engagements, classified into major industry categories and broken down by each partner of the firm who is responsible for the issuance of reports on accounting and review services and attest services. Download the form that will be used for this purpose.
• A copy of the scheduling form that you have submitted to NEPR.
• A written representation letter.

The reviewer should select the types of engagements to be submitted for review in accordance with the following guidelines:

(A) One engagement should be selected from each of the following areas of service performed by the firm;

1. Review of historical financial statements (performed under SSARS)
2. Compilation of historical financial statements, with disclosures (performed under SSARS)
3. Compilation of historical financial statements that omits substantially all disclosures (performed under SSARS)
4. Engagements performed under the SSAEs other than examinations of prospective financial statements.

(B) One engagement should be selected from each partner, or individual of the firm, if not a partner, responsible for the issuance of reports listed in item (a).Ordinarily, at least two engagements should be selected for review.

The preceding criteria are not mutually exclusive. One of every type of engagement that a partner, or individual if not a partner, responsible for the issuance of the reports listed in item (a) in the previous list performs does not have to be reviewed as long as, for the firm taken as a whole, all types of engagements noted in item (A) in the previous list performed by the firm are covered.

Within thirty days of being notified by your reviewer of the engagements selected for review, the firm should submit the following information for each engagement selected—

1. A copy of the financial statements or information and the accountant’s report, and the firm’s documentation required by professional standards. The client’s name may be deleted from all reports, statements, or documentation; and, if that is done, the engagement should be assigned a code number by the firm. The firm should retain a record of those code numbers to facilitate responding to any questions by the reviewer in the course of the review.
2. A completed “engagement questionnaire”.

The engagements selected should be those with reports with financial statement periods ended during your firm's peer review year.

What is the impact on my firm’s peer review when my firm completes its first audit engagement after the completion of my engagement review?

When a firm, subsequent to the year-end of its engagement review, performs an engagement under the SASs, Government Auditing Standards or examinations of prospective financial statements under the SSAEs, or an audit of a non-Securities and Exchange Commission issuer performed pursuant to the standards of the PCAOB that would have required the firm to have a system review, the firm should (a) immediately notify NEPR and (b) undergo a system review.

The system review will ordinarily be due 18 months from the year-end of the engagement (for financial forecasts and projections 18 months from the date of report) requiring a system review or by the firm’s next scheduled due date, whichever is earlier. However, NEPR will consider the firm’s practice, the year-ends of engagements and when the procedures were performed, and the number of engagements to be encompassed in the review, as well as use its judgment, to determine the appropriate year-end and due date. Firms that fail to immediately inform the NEPR of the performance of such an engagement will be required to participate in a system review with a peer review year-end that covers the engagement. A firm’s subsequent peer review ordinarily will be due three years and six months from this peer review year-end.