Findings from peer review
Improve your firm’s outcome
Gavin Burnham, CPA | November 2020 Footnote
Editor's note: Updated October 30, 2020
Firms have peer reviews because of the public interest in the quality of the accounting, auditing and attestation services provided by public accounting firms. In addition, firms indicate that peer review contributes to the quality and effectiveness of their practices. Some regulators require peer review to perform engagements and to issue reports under their standards.
The MNCPA is responsible for the administration of the peer review program for Minnesota and North Dakota firms who don’t audit public reporting companies. The firms that perform attestation engagements are required to undergo a peer review generally every three years.
Types of peer reviews
There are two types of peer reviews: engagement reviews and system reviews. An engagement review is for firms that perform engagements under Statements on Standards for Accounting and Review Services (SSARS); it involves reviewing specific engagements and includes at least one engagement from each level of service. A system review is for firms that perform audits or other engagements under Statements on Auditing Standards (SAS) or examinations under Statement on Standards for Attestation Engagements (SSAE). It involves a more comprehensive look at the overall system of quality control, including a review of a sample of engagements performed by the firm.
When looking at the trends, it is essential to note COVID-19’s influence during the current period, with extensions granted for the pandemic. Here is a summary of the number and percentage of Pass, Pass with Deficiencies and Fail reports for engagement and system reviews for the past three years from the MNCPA Peer Review Committee.
| Engagement reviews |
| Year ended Aug. 31 |
Pass |
Pass with
deficiencies |
Fail |
Total |
| 2020 |
66 (74%) |
18 (20%) |
5 (6%) |
89 |
| 2019 |
87 (74%) |
19 (16%) |
12 (10%) |
118 |
| 2018 |
47 (69%) |
12 (18%) |
9 (13%) |
68 |
| System reviews |
| Year ended Aug. 31 |
Pass |
Pass with
deficiencies |
Fail |
Total |
| 2020 |
43 (77%) |
11 (20%) |
2 (3%) |
56 |
| 2019 |
61 (77%) |
12 (15%) |
6 (8%) |
79 |
| 2018 |
61 (91%) |
5 (7%) |
1 (2%) |
67 |
As shown, there is consistency in the type of peer review report over the last couple of years, but we, as a profession, can continue to improve the outcomes defined by the peer review standards. Some common issues resulting in deficiencies cited in engagement and system reviews are as follows.
Engagement reviews
- Engagement letters not obtained or inadequate.
- Failure to document and/or disclose in the financial statements the adoption of Accounting Standards Update (ASU) 606.
- Inadequate documentation of expectations (reviews).
- Reports not in compliance with standards, including reports modified for special purpose framework.
- Missing or inadequate disclosures.
System reviews
- Inadequate monitoring.
- Engagement quality control review not being defined or performed, when applicable.
- Inadequate documentation of non-attest services, including threats and safeguards, especially for Yellow Book engagements.
- Lack of testing of compliance requirements and internal controls over compliance (for single audits).
- Lack of or improper documentation around risk assessment and linkage for audits. During the past 18 months, more than 35% of the firms whose system review has come before the peer review committee have been assigned CPE in risk assessment due to findings or deficiencies noted in this area by the peer reviewer.
One other common deficiency found on both types of reviews is with
preparation engagements. Common issues found in preparation engagements include: no engagement letter; lack of identification of special purpose framework (if applicable); omission of the statement for no assurance, no disclosures, and/or no cash flow (for GAAP engagements).
Areas of focus in peer review
During the recent AICPA Peer Review Conference, presenters noted several areas of focus for upcoming reviews:
- Risk assessment. Documentation of risk assessment, evaluating risk at the assertion level, documentation of control and inherent risk when less than high, improper use of third-party practice aids and linkage to planned responses and work performed.
- Engagement acceptance. Proper acceptance process, including firm and partner qualification in the industry and engagement type to perform that engagement.
- Revenue recognition. Documentation of ASU 606 for all Generally Accepted Accounting Principles (GAAP) financial statements (audits, reviews, compilations) and proper disclosures. Proper testing of the significant revenue streams (audits).
- SOC engagements. Awareness of current and relevant standards, documentation of multiple aspects of testing and including all required elements of reporting.
- 2018 Yellow Book. Clarified that preparation of the client’s financial statements is a significant threat, and auditors need to document the safeguards to eliminate or reduce threats to an acceptable level, which includes safeguards the firm has put in place.
- Analytical procedures. Documentation must include first the development of expectations, then procedures performed, inquiries made and other critical elements. For a review engagement, failure to perform any of these would result in a nonconforming engagement.
- COVID-19. Performing engagements remotely and how this might change risk assessment and internal control, subsequent events, going concern and reporting implications related to COVID-19.
- Documentation. This will always be an area of focus. If you are not formally documenting the procedures in the work papers, the work is considered “not done.” The work papers should allow an experienced third party to determine how the firm arrived at conclusions and what procedures were performed.
- New Accounting and Assurance Standards. There will always be new standards. Having in place a system focused on being up to date on standards will improve the quality of your work and the peer review process.
Keep improving
In recent years, peer review has become more focused on new accounting and auditing standards, and changes in peer review guidance. However, the design of peer review is to serve as an educational process, and a means to improve quality within our profession.
Gavin Burnham, CPA is a principal with Olsen Thielen & Co., Ltd, and serves as the MNCPA Peer Review Committee Chair. You may reach him at gburnham@otcpas.com or 651-621-8504.
