What to expect during the actual off-site review. (part 2 of 2) (Quality Review)by Mancuso, Anthony J.
By Anthony J. Mancuso, CPA, Weber Lipshie & Co. Portions of this article were adapted from Guide to Quality Control, by Dennis R. Meals, Howard P. McMurrian, and Steven Weinstein, Practitioners Publishing Company, Fort Worth, Texas, Copyright 1990.
Editor's Note: This is the second of two articles on off-site reviews. The first appeared in the March 1991 issue of The CPA Journal.
In an off-site review, the reviewer does not attempt to evaluate the adequacy of the firm's quality control system. Consequently, off-site reviews do not involve review of the workpapers prepared in support of the selected compilation and review engagements, tests of the firm's administrative or personnel files, interviews of selected firm personnel, or other similar procedures performed for on-site reviews.
The off-site quality reviewer, or the administering entity, will review the firm's summary of its compilation and review engagements, and advise the firm of the types of engagements to be selected for review. In determining the types of reports that must be submitted, reviewers attempt to obtain both compilation and review reports, reports for clients in different industries, and reports on prospective and historical financial information. The firm then determines what engagements it must submit to satisfy those general guidelines.
Generally, the firm must submit one compilation or review report on a completed set of financial statements for each partner. A minimum of two reports must be submitted. In addition, the firm must submit at least one compilation report on financial statements in which substantially all disclosures were omitted. If the firm's practice consists only of compilations that omit substantially all disclosures, two of this type report must be submitted.
Reports are Transmitted to Reviewer
Within 30 days of being notified of the types of engagements to be selected, the firm must submit the appropriate financial statements and reports to the reviewer. The firm may choose not to identify the client on all reports and financial statements submitted. If this is the case, the firm should assign a code number to each report and maintain a record of the code numbers assigned. The firm is also required to supply certain background information and representations by completing an engagement questionnaire for each engagement selected. The information provided consists primarily of the following:
* The period covered by the financial statements, the date of the report, and the date the report was released; * Summary financial information (total assets, long-term debt, etc.); * The client's major line of business; * The names of the engagement partner and in-charge accountant; * The nature of the entity; * The nature of the service provided; * A listing of the financial statements included; * The accounting basis used; and * Other specific engagement questions.
With disclosure checklists as an aid, the reviewer's procedures consist of reading the financial statements to determine compliance with GAAP or other comprehensive basis of accounting and reading the accountants' reports to determine compliance with professional standards.
Once the procedures are performed, the reviewer must evaluate the review findings. In doing so, the off-site reviewer should communicate with the reviewed firm all matters arising during the review that require additional information or explanations from the reviewed firm. This may be done either orally or in writing using a Matter for Further Consideration (MFC) form. Matters noted in off-site reviews are not classified as performance, compliance, documentation, or design related, as is an on-site review. This is because the off-site review does not involve testing the firm's quality control system. Consequently, any matters noted during an off-site review will be performance related.
Follow-up on MFCs
MFCs prepared by an off-site reviewer may be resolved orally or in writing. The reviewer will discuss the matters with the firm and will document the firm's explanations. The reviewer is not required to obtain the engagement partner's signature on all MFCs. The firm should receive a copy of the completed MFC form showing the reviewer's documentation of the firm's response. The firm is required to respond to all questions raised during the review, whether communicated in writing or by telephone, and it is in the firm's best interest to cooperate fully with the reviewer. Firms should carefully draft their responses to all MFCs or questions and should coordinate those responses through a designated partner.
No Exit Conference
The formal exit conference that takes place in an on-site review, does not take place in an off-site review. The reviewer contacts the firm before issuing the report to resolve any remaining questions, and the reviewer is required to notify the firm if the report is to be modified.
Generally, off-site review procedures are completed within 30 days of the date the reviewer receives the materials to be reviewed. At the time of this concluding conversation with the reviewer, the firm is made aware of the report that will be issued and each comment that will be included in the report. The reviewer should consider consultation with the administering entity on the type of report to be issued and any disagreement with the reviewer and the reviewed firm.
Although the firm may or may not agree with the reviewer's decision on specific matters raised during the review, the firm should ensure that its response to the matter, and its support for that response, are properly documented.
Within 30 days of the completion of the review, the reviewer must supply the firm with the written review report. This report will be dated as of the date the review is completed and will be signed by the reviewer or by the reviewing firm. The reviewer will also notify the administering entity of the completion of the review and submit a copy of the report and the completed programs and checklists. In an off-site quality review no letter of comment is issued.
The various reports that can be issued in off-site reviews are discussed below.
The Standard Report
The report issued in an off-site review is similar in many respects to an accountant's report issued in a review engagement. It contains an introductory paragraph describing the scope of the review and the fact that the firm has represented that it performed no audits during the year under review. It contains a second paragraph describing the limited nature of an off-site review and disclaiming an opinion or any form of assurance about the firm's quality control system, and a final paragraph indicating whether anything came to the reviewer's attention that caused the reviewer to believe that the reports submitted for review did not conform to the requirements of professional standards in all material respects.
An off-site review report will be modified when significant departures from professional standards are discovered. These involve: 1. A departure from the measurement or disclosure requirements of GAAP or other comprehensive basis of accounting that is not described in the accountant's report, but may have a significant effect on a user's understanding of the financial statements. 2. The issuance of an accountant's compilation or review report that is misleading in the circumstances, e.g., failure to state that substantially all disclosures are omitted where applicable, or failure to properly identify the basis of accounting used.
When the report is modified, the third paragraph of the standard report will reference to the added paragraphs describing any significant departures identified.
A reviewer may also identify other departures from professional standards that are not considered significant, but that should be considered by the firm in evaluating its quality control system. In an off-site quality review report, these would be described in a third paragraph inserted prior to the standard concluding paragraph.
An adverse report is required if the reviewer concludes that the firm did not have reasonable assurance of conforming with professional standards in the conduct of its accounting practice during the year and is the result of serious departures from professional standards being identified in numerous engagements.
If such a conclusion were reached by an off-site quality reviewer, the departures would be summarized in a third paragraph prior to the concluding paragraph, and the concluding paragraph would state that, in the reviewer's opinion, the firm did not have reasonable assurance of conforming with professional standards during the review year. The reviewed firm receiving the adverse report would be required to make appropriate changes to its quality control system and would ordinarily be required to have another off-site review within 12 months. The firm may also be required to take action to prevent future reliance on any previously issued report in which serious deficiencies were found.
Reviewed Firm's Response
Within 30 days of receiving the report, the firm is required to submit to the administering entity a copy of the report and the firm's response to any matters noted in the report.
The final acceptance of the quality review by the report acceptance committee of the participating state CPA society is based on whether:
* The review has been performed in accordance with AICPA standards and related guidance materials; * The report, letter of comments, if any, and the response thereto are in accordance with the AICPA standards and related guidance materials; * It should require any remedial, corrective actions in addition to those described in the letter of response; and * It should monitor the corrective actions implemented by the reviewed firm.
The acceptance committee may require additional corrective actions or monitoring activities as a condition of acceptance of the review.
If the acceptance committee agrees with the report, and letter of response, and deems that no further actions are necessary, the review will be accepted. For firms participating in the quality review program, their review reports are not placed in a public file, however, the firms may distribute copies to firm personnel, clients, or others as soon as they have been notified by the administering entity that the report has been accepted.
Editor: Anthony J. Mancuso, CPA Weber Lipshie & Co.
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