A look at last year’s peer review
Common deficiencies examined
Sara DeRoo, CPA, Christianson PLLP | November 2021 Footnote
Editor's note: Updated October 29, 2021
As we reflect on this past year, it’s likely you are thinking, “Wow, what a year it’s been!” The value that CPAs provide, and our ability to adapt, has been strengthened by keeping abreast of continuous changes impacting tax law, audit and accounting standards, and COVID-19 relief incentives, as well as preparing for proposed changes to quality management standards.
Firms have peer reviews because of the public’s interest in the quality of accounting, auditing and attestation services provided by a public accounting firm. Peer reviews are meant to be an educational process, to continually enhance quality in our profession. It’s important to monitor your own firm for specific areas of quality improvement to ensure compliance with peer review standards. It’s also important to review trends to stay on top of what issues firms are facing.
The MNCPA is responsible for the administration of the peer review program for Minnesota and North Dakota firms. Firms that perform attestation engagements are required to undergo a peer review every three years.
There are two types of reviews performed depending on the level of services a firm performs — engagement reviews and system reviews. We will break these down and analyze trends and results from the past three years of peer reviews from the MNCPA Peer Review Committee. When looking at trends, it’s important to note COVID-19’s influence during 2020 and 2021, with many extensions granted during these periods.
Engagement reviews
An engagement review is for firms that perform engagements under SSARS and includes reviewing specific engagements from each level of service — this would include reviews, compilations, preparation and agreed upon procedures engagements.
| Engagement reviews |
| Sept. 1– Aug. 31 |
Pass |
Pass with
deficiencies |
Fail |
Total |
| 2021 |
60 (81%) |
9 (12%) |
5(7%) |
74 |
| 2020 |
66 (74%) |
18 (20%) |
5 (6%) |
89 |
| 2019 |
87 (74%) |
19 (16%) |
12 (10%) |
118 |
As you can see, firms are improving!
Common deficiencies in engagement reviews include:
- Failure to implement ASC 606 – Revenue Recognition.
- Missing elements or incorrect references for special purpose framework from reports and engagement letters.
- Inadequate documentation of expectations developed when performing analytical procedures for review engagements.
System reviews
A system review is required for firms that perform audits or other engagements under SAS or SSAEs. A system review is more comprehensive because it looks at the overall system of quality control at a firm in addition to reviewing a sample of engagements performed.
| System reviews |
| Sept. 1– Aug. 31 |
Pass |
Pass with
deficiencies |
Fail |
Total |
|
| 2021 |
57 (88%) |
7 (1%) |
1 (1%) |
65 |
|
| 2020 |
43 (77%) |
11 (20%) |
2 (3%) |
56 |
|
| 2019 |
61 (77%) |
12 (15%) |
6 (8%) |
79 |
|
Again, note the improvement in the percentage of pass reports and, overall, in 2021. The most noted deficiencies for system reviews include:
- Inadequate monitoring by the firm.
- Failure to implement ASC 606 – Revenue Recognition.
- Inadequate risk assessment performed.
- Personnel assigned to the engagement did not have the appropriate CPE and/or training.
- Nonprofit financial statement disclosures were not up to date, including the donor and nondonor designated net assets, liquidity reporting and disclosure of functional allocation of costs.
So, what are key takeaways as we continue to adapt through these ever-changing times? The following are focus areas that you should be mindful of as you work to continually enhance the quality management in your firm:
- Risk assessment will continue to be an area of focus. Make sure you are assessing risk at the assertion level for each significant audit area and have proper linkage with assessed risks and procedures performed. Beginning Oct. 1, 2021, issues with improper risk assessment will be elevated above a Finding for Further Consideration (FFC) in peer reviews.
- COVID impacts need be considered and documented in your engagements. SALY (same as last year) will most likely not be relevant in analytical procedures performed.
- Also make sure you are documenting expectations when performing analytical procedures.
- New audit standards, SAS 134–140, are applicable for periods ending on or after Dec. 15, 2021. This will require modifications to your audit report and engagement letters. Make sure your firm is aware of the new standards and impact to your engagements.
- Make sure you are documenting your analysis and conclusions reached per ASC 606–Revenue Recognition. An assessment needs to be performed and documented, even if there is no impact to revenues by applying the new standard.
- Agreed upon procedures; there are new requirements under SSAE 19, which will impact AUP reports issued on or after July 15, 2021.
- Financial statement preparation is now required to be a significant threat for Yellow Book audits, which means safeguards will need to be applied.
- There is currently an AICPA exposure draft for proposed changes to quality management standards, which will require firms to transition from a system of quality control over their accounting and auditing practice to a system of quality management. A central concept in the proposed standards is for firms to assess risks to quality based on the unique environment in which the firm operates. The standard is expected to be finalized in 2022. Stay tuned for information and guidance on this change that will affect every firm with an accounting and auditing practice.
Stay focused
By keeping these key areas in focus and continuing to adapt and execute on new requirements, we will further enhance the quality within our profession.
Sara DeRoo, CPA is a partner with Christianson PLLP. She has more than 18 years of public accounting experience in auditing, taxation and general business consulting in a variety of industries, including biofuels, manufacturing and nonprofit organizations. Sara is the MNCPA Peer Review Committee chair and has been a committee member for 10 years.
