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Feb 1991

More frequently-asked questions. (American Institute of Certified Public Accountants' Quality Review Program)

by Mancuso, Anthony J.

    Abstract- A series of basic questions concerning the American Institute of CPAs' (AICPA) Quality Review Program is presented. The objectives of the on-site quality review program are to review a firm's quality control system to determine whether it meets the AICPAs' quality control standards, and to ascertain whether the standards are being complied with. The quality review team uses a 12-month period ending on or prior to the previous calendar year for the review that is agreed upon by the firm and the captain of the review team. The type and number of accounting and auditing engagements that the team picks for reviews should provide the team with a reasonable basis for their conclusions on whether or not the firm's quality control system meets AICPA objectives.

The second full year of the Quality Review program begins in May 1991. Lessons have been learned and questions have been raised as a result of the first year of reviews presently being concluded. From time to time in this column, questions that frequently arise about quality review, with practical answers, are presented. This month's column includes some of the more basic questions for those firms that are facing their first quality reviews in 1991.

What are the objectives of an on-site review and how is it accomplished?

The objectives of an on-site quality review are that the reviewed firm's system of quality control for its accounting and auditing practice meets the objectives of quality control standards established by the AICPA, and that the system is being complied with in order to provide the firm with reasonable assurance of conforming with professional standards. A firm's quality control system consists of policies and procedures adopted by the firm to meet the objectives. The degree of formality in documenting the policies and procedures is normally a function of size and complexity of the firm's accounting and auditing practice. A two-person firm's policies and procedures could be quite simple and the extent of documentation could be minimal. On the other hand, a firm of 20 or more professionals would require more formalized procedures and might find a quality control document to be useful.

The objectives of a quality review are accomplished by performing a study and evaluation of the firm's quality control system (i.e., its policies and procedures) to ensure that it meets the requirements of the AICPA Statement on Quality Control Standards (SQCS) 1 and by considering whether the firm's quality control system is suitably designed for its size and nature of practice. Other objectives are accomplished by examining evidential matters, such as personnel files, correspondence files, CPE records and the contents of the firm's library. Interviews are also completed with selected professional personnel at various levels in the firm to assess their understanding of and compliance with the firm's quality control policies and procedures.

Reviews are made of selected engagements, including workpapers and reports, to determine that they conform with professional standards and with the firm's quality control policies and procedures. The on-site review is conducted in a manner similar to an audit and included planning, field work and issuance of a report, including a letter of comment, if appropriate. Standard programs, checklists, and forms provided by the AICPA for guidance in setting the scope of the review and in designing the nature and extent of review procedures are utilized by the reviewers. The quality review report and letter of comment, if any, is reviewed and accepted by the Quality review Executive Committee or the participating state CPA society.

What is the period that the review team will choose for review?

The quality review program does not specify the year-end to be covered by the review. However, the period to be reviewed should be a 12-month period that is mutually agreed on by the reviewed firm and the review team captain, and ends on or after the end of the previous calendar year. In making the selection, the review year-end does not have to coincide with the firm's fiscal year-end. The most advantageous review year-end is usually that of the majority of the firm's accounting and auditing engagements. Review of field work ordinarily begins three to six months after the end of the review year. Engagements selected by the review team for review would be those with year-ends during the review year, unless financial statements covering a more recent period have been issued.

In reviewing independence as one of the nine elements of quality control in an on-site review, what documentation or information will the reviewers expect to see?

The reviewers' inquiries will be directed to determining the following:

* Whether the firm, including all its professional personnel, adheres to the independence rules, regulations, interpretations, and rulings of the AICPA, state CPA society, State Board of Accountancy, state accountancy laws and the SEC and other regulatory agencies.

* Whether the firm informs its professional personnel of the applicable independence requirements.

* How the firm informs its professional personnel of new clients to which independence requirements apply.

* Whether the firm obtains at least annually written representations from all professional personnell concerning their compliance with applicable independence requirements or how the firm monitors compliance with its independence policies.

* Who is responsible for resolving independence questions.

* When resolving questions of independence, under what circumstances must the question and its resolution be documented.

* Where is the documentation maintained for resolution of independence questions.

* Whether any sources are or would be consulted in resolving independence questions.

* Whether the firm found it necessary within the last year to consult with individuals outside the firm on matters regarding the resolution of independence questions.

* Whether the firm has any engagements where it acts as principal auditor or accountant and another firm of CPAs is engaged to perform segments of the engagement.

* Whether the firm, when acting as principal auditor, confirms the independence of another CPA firm engaged to perform segments of the engagement, and if so, whether annually and in writing.

* Whether the firm reviews its accounts receivable from clients to ascertain whether any outstanding amounts have taken on some of the characteristics of loans and, therefore, impair the firm's independence.

* Who in the firm reviews its accounts receivable from clients and how often. Also whether there have been any such situations during the year under review.

Where appropriate, the reviewed firm should make reference to any documents that describe those policies and procedures in order to help the reviewer ascertain that quality control policies and procedures are in place. Examples of such documents might be audit and accounting manuals, quality control document, personnel manual, and forms and checklists used in practice. Again, the level or degree of documentation expected and required will be a function of the size and complexity of the firm. The areas of inquiry may seem extensive, but can be dealt with expeditiously in the review, if the firm is prepared for the review.

In conducting my on-site review, what will be the criteria for selection of engagements by the team captain?

Pursuant to the "Standards for Reporting on Quality Reviews," the number and type of accounting and auditing engagements selected should be sufficient to provide the review team with a reasonable basis for its conclusions regarding whether the firm's quality control system met the objectives of quality control standards established by the AICPA and was being complied with during the year under review.

Engagements selected for review should provide a reasonable cross section of the firm's accounting and auditing practice. The number of review and compilation engagements selected for review may be significantly limited when a substantial portion of the firm's accounting and auditing hours are devoted to audit engagements. Greater weight should be given to audit engagements that meet the following criteria:

* Engagements in which there is a significant public interest, such as publicly held clients, financial and lending institutions, and brokers and dealers in securities.

* Engagements in other specialized industries.

* Engagements that are large, complex, or high-risk or that are the reviewed firm's initial audits of clients.

In addition, the sample of engagements selected for review should include at least one audit conducted pursuant to Government Auditing Standards issued by the U.S. General Accounting Office (the "yellow book").

The process of engagement selection is not subject to definitive criteria. However, the review team generally should review work that represents 5% to 10% of the firm's accounting and auditing hours. Sometimes, the review team will find that meeting all of the suggested criteria would cause it to select engagements representing accounting and auditing hours substantially in excess of suggested percentage guidelines. In such circumstances, the review team will attempt to reduce the engagements to be revewed by considering whether:

* Adequate consideration has been given to the key audit area approach to engagement review;

* Too much weight is being given to the desirability of reviewing work performed by all or most supervisory personnel; or

* Adequate consideration has been given to engagement selection on a firm-wide basis.

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