Evolving Peer Review

Written on May 16, 2017

By Laura Hay, CPA, CAE

In 2014, the AICPA started a comprehensive initiative to consider auditing of private entities through multiple touch points that affect audit quality. That resulted in a 6-Point Plan to Improve Audits, issued in May 2015. The 6-Point Plan outlined current and future activities to enhance audit quality within the CPA profession, from pre-licensure through enforcement.

One of the six points in the AICPA plan, Peer Review, specifically focuses on reforms to enhance the quality and accountability of enrolled firms and of peer reviewers. Several significant activities are changing the peer review environment in response to a need for continual assessment and improvement.

Enhanced oversight and targeted remediation
The AICPA Peer Review program piloted an enhanced oversight program in 2014, in which subject-matter experts conduct surprise examinations of a sample of engagements after the completion of the peer review and prior to committee evaluation. This program was expanded in 2015 and became a permanent part of the Peer Review Program in 2016.

In 2016, root cause analysis was added to the process to identify quality control practices that have the strongest correlation to audit quality. 2015 and 2016 reviews included increased focus

on the specialized industries and areas in which oversight noted the greatest issues. Beginning in 2017, reviewers will also perform an enhanced assessment of firms’ quality control systems, which will become part of the normal review.

Areas of most frequent audit challenges identified in the process include:

• Documentation
• Independence
• Quality control
• Sufficiency of audit evidence
• Employee benefit plan audits
• Issuers of municipal securities
• Single audits

Firms that fail to remediate are more quickly being terminated from the peer review program, which will place firms at risk of not meeting state licensing requirements.

“One of the biggest lessons from enhanced oversight was the frequency of sufficient audit evidence and documentation findings,” said Jim Brackens, CPA, AICPA vice president of ethics and practice quality. Brackens noted that the AICPA was preparing several free toolkits and resources to help practitioners with documentation requirements, including best practices and sample workpapers, and practice aids to support practitioners.

“This is what enhanced oversight is all about. When the program first started, the focus was on detecting quality challenges, but the primary focus has evolved to determining the characteristics of the firms we find are performing well, as well as digging deeper to discover why firms with performance issues are not performing well. Through this process, we are developing educational and other resources to raise the level of audit quality overall."

Reviewer quality
New peer reviewer training requirements have been added to help identify and address reviewer competencies. In its first year, enhanced oversight found five times more non-conforming engagements than the peer reviewers who conducted the engagements, resulting in significantly expanded reviewer remediation.

“We’ve been hearing from members that AICPA has gotten stricter and raised expectations for what should be considered a deficiency,” said Brackens. “In reality, oversight has increased the profession’s understanding of what is non-conforming.”

Completeness of population
AICPA has expanded its data-matching via publicly available databases to increase the likelihood that all firms that should be enrolled in peer review are enrolled and that all engagements that should be subject to review are included in the scope of reviews. To accomplish this, the Peer Review Program has begun collecting firm EINs, and is comparing them to public databases such as the U.S. Department of Labor EFAST2 for employee benefit plan audits, and the Federal Audit Clearinghouse for single audits.

Firms that fail to disclose engagements are more quickly being terminated from the peer review program.

Technology and self-service
The AICPA’s new Peer Review Information Management Application (PRIMA) launched in May 2017 provides self-service submission of peer review scheduling information and workpapers. As PRIMA evolves, the Peer Review Board is considering how annual reporting could allow for the dissemination of general and industry-specific audit quality information to firms in real-time as their practice changes.

Overall, enhancements to the peer review program within the AICPA Enhancing Audit Quality initiative are:

• Better identifying practice issues.
• Providing for more targeted and timely remediation.
• Providing new resources and tools to assist practitioners with prevention of audit quality issues.

Laura Hay, CPA, CAE, is executive vice president of The Ohio Society of CPAs and staff liaison to the Accounting & Auditing Committee. She can be reached at Lhay@ohiocpa.com or 614.321.2241.

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