To plan a System Review, a peer reviewer obtains an understanding of (1) the firm’s accounting and auditing practice, such as the industries of its clients, and (2) the design of the firm’s system, including its policies and procedures and how the firm checks itself that it is complying with them. The reviewer assesses the risk levels implicit within different aspects of the firm’s practice and its system. The reviewer obtains this understanding through inquiry of firm personnel and review of documentation on the system, such as firm manuals.
Based on the peer reviewer’s planning procedures, the reviewer looks at a sample of the CPA firm’s work, individually called engagements. The reviewer selects engagements for the period covered by the review from a cross section of the firm’s practice with emphasis on higher risk engagements. The scope of a peer review only covers accounting and auditing engagements; it does not include the firm’s SEC issuer practice, nor does it include tax or consulting services. The reviewer will also look at administrative elements of the firm’s practice to test the elements listed previously from the Statements on Quality Control Standards.
The reviewer examines engagement working paper files and reports, interviews selected firm personnel, reviews representations from the firm, and examines selected administrative and personnel files. The objectives of obtaining an understanding of the system and then testing the system forms the basis for the reviewer’s conclusions in the peer review report.
When a CPA firm receives a report from the peer reviewer with a peer review rating of pass, the report means that the system is appropriately designed and is being complied with by the CPA firm in all material respects. If a CPA firm receives a report with a peer review rating of pass with deficiencies, this means the system is designed and being complied with appropriately by the CPA firm in all material respects, except in certain situations that are explained in detail in the peer review report. When a firm receives a report with a peer review rating of fail, the peer reviewer has determined that the firm’s system is not suitably designed or being complied with, and the reasons why are explained in detail in the report.
Preparing for a System 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.
- Prepare the appropriate Quality Control Policies and Procedures Questionnaire.
- Read applicable peer review resources.
Once you have selected a peer reviewer, agreed on a commencement and exit conference 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:
- The completed Quality Control Policies and Procedures Questionnaire (describing your quality control system).
- An engagement list which includes summary information on the nature of your practice, services provided, clients served, industry concentrations and the number of accounting and auditing hours for these clients/industries. This summary information does not have to identify your clients - you may use codes. Please note that the estimated A&A hours should not included bookkeeping time
- A copy of the scheduling form that you have submitted to NEPR.
- A list of the firm’s professional personnel showing name, position and years of experience with the firm.
- A copy of the firm’s documentation maintained since its last peer review to demonstrate compliance with the monitoring element of quality control.
- A written representation letter.
Based on this information, the team captain will make a preliminary selection of the offices and engagements he or she intends to review. The initial selection of engagements to be reviewed will be provided no earlier than three weeks before the commencement of the peer review. This should provide ample time to enable the firm (or office) to assemble the required client information and engagement documentation before the review team commences the review. However, at least one engagement from the initial selection to be reviewed will be provided to the firm once the review commences and is not provided to the firm in advance. This engagement should be the firm’s highest level of service and should not increase the scope of the review.