Undergoing an off-site review under the AICPA Quality Review Program. (American Institute of Certified Public Accountants)by Mancuso, Anthony J.
The AICPA Quality Review Program is in full bloom. on-site reviews scheduled for 1990 have been completed and many firms have successfully completed the program. Soon it will be time for firms subject to off- site reviews to make ready. if you have not already done so, now is the time to begin review preparations. Although procedures for off-site reviews have been formulated, some modifications may be made by the AICPA Quality Review Executive Committee. The following information provides some insight to an off-site review and how your firm can make ready for the process. "Don't delay; today's the day."
Under the quality review program, if a firm performs no audits, but issues compilation and review reports, it will have an off-site review. However, although uncommon, a firm in this category can elect to undergo an on-site review. This situation could benefit a firm that has previously performed only compilation and review services, but anticipates being engaged to perform its first audit during the next review period.
Statement of Quality Control Standards No. 1 (SQCS 1), requires all firms to have a system of quality control for their accounting and auditing practices. Although the firm's quality control system will not be tested in an off-site review, the firm must have a quality control system that provides it with reasonable assurance of complying with professional standards.
The Standards for Performing and Reporting on Quality Reviews states, "The objective of an off-site quality review is to provide the reviewer with a reasonable basis for expressing limited assurance that the financial statements and related accountant's report on the review and compilation engagements submitted for review do not depart in a material respect from the requirements of professional standards."
The objectives of an off-site review are accomplished by reviewing selected financial statements and the reports issued by the firm, along with certain background information, to determine that those financial statements and reports comply with professional standards. The reviewer does not attempt to evaluate the adequacy of the firm's quality control system. As a result, off-site reviews consist only of reading the accountant's report and the related historical or prospective financial statements submitted by the firm, together with certain background information and representations provided by the reviewed firm. Off-site reviews do not involve a review of the workpapers prepared on the selected compilation or review engagements, tests of the firm's administrative or personnel files, interviews of selected firm personnel, or other procedures performed in on-site reviews.
Planning for an of-site review is not as extensive as that required for an on-site review. A certain amount of planning and effort by the firm is necessary to ensure that the review is carried out effectively and efficiently. The following should be done with regard to an off-site review:
* Designate a Member of Your Firm to Coordinate the Review. There are many administrative steps a firm must perform while planning and undergoing the actual review. There is continuous communication before, during, and after the review with the administering entity and the reviewer. Accordingly, the firm should select a coordinator and spokesperson to handle the liaison.
* Determine Which Administering Entity Will Conduct the Review. Each state CPA society in the quality review program elected to participate in varying degrees. This ranges from no participation, in which case the reviews of firms in that state would be administered by the AICPA, to full participation, in which case the reviews would be administered entirely by the state society. Firms should be aware of who their administering entities will be before they begin preparing for the review.
* Complete a Request for Scheduling. The administering entity will contact the firm to make arrangements for the review. At that time, the firm will complete a Request for Scheduling. The information required is not extensive and each firm will be asked to indicate: 1) whether the firm performs auditing or accounting engagements; 2) the entity the firm wishes to perform its quality review; 3) the type of services the firm provides; 4) whether the firm wishes to exercise its option to have an on-site review rather than an off-site review; 5) the industries in which the firm's clients conduct their practices; and 6) whether the firm performs any accounting or auditing engagements through a joint venture, partnership, or corporate arrangement with another accountant or accounting firm.
* Determine the Review Team An off-site review will usually require only one reviewer and will normally be appointed by the administering entity. Firms wishing to contract with other firms to perform their review may do so if this option is permitted by the administering entity. Some state societies administering the off-site quality review program do not allow this option. In those states, the reviewer is selected by the state CPA society. Because the off-site review does not include an examination of workpapers, administrative files, etc., the choice of reviewers is not as critical as for on-site reviews. One key consideration, however, is the cost of the review. Appointed reviewers will be compensated based on rates established by the entity administering the review, whereas the firm has the ability to negotiate the rates if it contracts directly with the reviewer. The reviewer, and the reviewer's firm, must be independent of the reviewed firm and free of conflicts of interest with the reviewed firm. Firms are prohibited from performing reciprocal reviews. If the firm elects to hire the reviewer itself, the administering entity will contact the firm four to six months prior to the review and will ask the firm to provide the name of the reviewing firm, the reviewer's name, and the estimated timing of the review. The administering entity will then assess the qualifications of the reviewer and notify the firm of its approval or disapproval.
Reasons for any disapproval will be communicated to the firm. If the firm elects to have the administering entity select its reviewer, the reviewer will be selected three to four months prior to the review. The firm will then be asked to approve the reviewer selected. Off-site reviewers must be members of the AICPA, licensed to practice as CPAS, and possess current knowledge of applicable professional standards. All off-site reviewers must also have at least five years experience in the accounting or auditing function of an enrolled firm within the past 10 years, culminating in a position as either a proprietor, partner, shareholder, or manager, or person with equivalent supervisory responsibilities.
* Select a Date for the Review. Firms enrolled in the quality review program who have not been previously reviewed will have their due dates assigned by the AICPA's Quality Review Division or the participating state society. The due date will be randomly chosen and will fall within the year of the scheduled phase-in for firms with no audits. off-site reviews are scheduled to be phased in through 1993.
* Establish the Year End of the Period to be Reviewed. The quality review program does not specify the year end to be covered by the review, except to state that it should be a 12-month period mutually agreed to by the firm and the reviewer, that ends after the end of the previous calendar year. Consideration should be given to selecting the year end of the majority of the firm's accounting and auditing engagements. Engagements selected by the reviewer for review would be based on those clients with year ends during the review year, unless financial statements covering a more recent period have been issued.
* Sign an Engagement Letter. Once the reviewer has been selected and the review date established, the reviewer or the administering entity, will send the firm an engagement letter. The letter should be carefully read and signed by the managing partner or other designated partner. The engagement letter will ordinarily include the: 1) timing of review; 2) statement of fee and clarification regarding expense reimbursement; 3) name of reviewer (if known); and 4) standard clauses stating that a) the review will be conducted in accordance with standards, b) the reviewed firm will obtain the permission of clients to have financial statements reviewed (if necessary), c) reviewers do not have client contact, d) inclusion of "hold harmless" paragraphs regarding subpoena to testify on a review.
* Submit Background Information about the Firm to the Reviewer. The administering entity will ask the firm to provide a summary of the number of its compilation and review engagements, classified by: 1) major industry; 2) highest level of service provided; and 3) engagement partner.
* Read Quality Review Manuals. As a final step in preparation for an off-site review, the firm should obtain and become familiar with the sections of the AICPA Quality Review Program Manual that relate to off- site reviews. Insight can be gained as to how the reviewer will conduct the review, as well as checklists the reviewer will use in determining whether the financial statements and reports submitted by the firm comply with professional standards.
The manual can he obtained from the AICPA. In addition, there are several companies that publish quality review manuals that can also be helpful in guiding you through quality review.
Note: Practitioners Publishing Company's Guide to Quality Control can be ordered by calling PPC at 1-800-323-8724.
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