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May 1991

A firm's experience with quality review. (excerpt from The Practicing CPA)

by Brody, Sheldon I.

    Abstract- Accounting firms that perform compilations, reviews, or audits must submit to a review that is approved by the American Institute of Certified Public Accountants (AICPA). The review will cover all of the firm's accounting and auditing operations. All AICPA members in public practice must participate in the monitoring program. Under the provisions of Statement on Quality Control Standards 1 and Statement on Auditing Standard 25, The Relationship of Generally Accepted Auditing Standards to Quality, Control Standards, firms must adopt a quality control system to receive assurance that personnel are performing under generally accepted auditing standards. The review will also ensure that the firm's unaudited financial statement and auditing practices conform to the nine generally recognized quality control standards.

Every AICPA member in public practice must be affiliated with a firm that participates in an effective AICPA-approved practice monitoring program. Statement on Auditing Standard 25, "The Relationship of Generally Accepted Auditing Standards to Quality, Control Standards," and "Statement on Quality Control Standards No. 1," emphasize and confirm that you must adopt a quality control system to obtain reasonable assurance that your staff is following GAAS and to establish that the nine generally recognized quality control standards apply to your unaudited financial statement practice as well as to your auditing practice.

A quality control system is the overall set of policies and procedures that you must establish to ensure compliance with the quality control standards of the accounting profession and the specific requirements of your firm, your personnel, and your clients.

Articles have been written and many courses given on the implementation of quality control and on how to prepare for a quality review. The following is the review process from the other side of the fence; a firm's experience of what getting ready entails, the anxiety and emotional struggle, and the final reward of the feeling of accomplishment.

"When your pride is on the line, a quality review is anything but routine," indicates Sheldon Brody, CPA, of Selmour Schneidman & Associates. After months of preparation, the firm successfully completed its first quality review. As a result, both partners and staff gained a heightened awareness of what is required of them by professional standards. The firm's quality reviewers made some suggestions, which, when implemented, should increase the firm's audit efficiency. The net result was that "the review was beneficial to the firm."

The firm initially concentrated its efforts on finding out all they could about the review process and the quality control standards, without allowing the fear of what was ahead to interfere with their goal to succeed. The anxiety building up was used positively to motivate the firm and its staff to take the necessary steps to ensure that they were prepared for the review. "We sought to derive the maximum benefit from the process."

The firm was able to accomplish many goals in a short time because of the complete commitment to the project by all of the partners and because one partner was assigned the task of spearheading the effort. Regardless of whether the service rendered was an audit, review, or compilation, the firm considered no engagement too small, too insignificant, or too rushed to dispense with any programs, checklists, or independent reviews.

Overall, the firm believed the quality of its accounting and auditing engagements was high, and the firm took pride in the reports and financial statements they issued. The firm, however, recognized the need to upgrade its audit approach and working papers before undergoing a review. Accounting manuals had been purchased and a quality control document drafted, but they were not put into practice. It was time for action.

The firm needed to get the staff behind the project and held a meeting with all staff to review the firm's quality control document, explain the requirements of the quality review program, and emphasize the firm's commitment to quality. Training sessions occurred for groups of five to 10 staff members who were segregated by level of experience. These educational sessions helped train staff members and made them active participants in the preparation process. It was during the early stage of preparation that the tone of the firm's approach to performing accounting and auditing engagements was set. Mr. Brody was convinced that "the benefit derived by a firm is directly related to the effort expended in preparing for it."

Having a plan, educating staff, and implementing the process is just the beginning. Then the system needed to be tested.

An inspection process of a fimr's accounting and auditing practice (one of the nine elements of quality control) should be performed sufficiently in advance of its quality review to enable the firm to take any corrective action regarding deficiencies identified by the inspection team.

The firm;'s inspection was performed by a consultant who took a critical look at the firm's practice and concluded in his report that, although the firm was doing a good job, he had comments and recommendations on how the firm could improve on its quality control. The inspection results gave the firm a perspective on what was accomplished and what challenges lie ahead.

The firm was in a position of implementing its quality review and was ready to face the task of choosing reviewers. The firm established certain defined criteria for the selection of its reviewers and decided not to have a CART review (a committee appointed review team) assembled by the AICPA Quality Review Administrators. The firm chose to engage a firm similar in size that was outside of the same geographic area. They desired a firm that had partners with the necessary industry and quality review experience and one that used the same accounting and auditing manuals as did the firm. Those criteria were established because the firm was interested in obtaining more out of the review than just a report. Because one of the major benefits of a practice review is the exchange of ideas between the parties, the firm wanted reviewers who understood their practice and who could give them help in addressing probelms. After conducting an extensive search, the firm's review arrangements were made.

The firm's actual review lasted three days, with minimal disruption to the firm's staff. At the conclusion of the review, none of the engagement issues raised were found to be of any significance. Mr. Brody believes that the results were directly attributable to his firm's preparation and their diligence in adhering to their quality control system.

It was the prospect of a quality review that set the firm to putting its house in order. Their pending review was the impetus for many of the changes that the firm had been contemplating for several years but had not implemented. They were now more focused on areas in quality control and administration that needed improvement. Additional benefits were gained from the review; such as all staff members at all levels having more of an awareness of what was expected of them and, therefore, being better able to plan engagements. Lines of communication were improved within the firm, enabling problems to be identified earlier and resolved more quickly. The firm's working paper documentation was improved and more emphasis was placed on the problem areas of engagements.

Mr. Brody indicated that one of the most important lessons learned is that a quality review is just the first step in improving the quality of a firm. As a result of the firm's effort over several months and the successful completion of their quality review, the firm has a greater awareness of what needs to be done and an improved framework for accomplising it. The firm's task ahead is to increase its audit efficiency without sacrificing quality. As long as the firm stays focused on what it wants to accomplish, they believe the twin goals of efficiency and quality are attainable.

Seymour Schneidman & Associates derived the benefits of undergoing a quality review. Now is the itme for you to share in the benefits.

In addition to the obvious benefit of complying with quality control standards, a good quality control system usually offers a firm the following collateral benefits.

1. Policy documentation;

2. A persuasive marketing tool;

3. Reasonable assurance about your work product;

4. Advance warning of potential problems;

5. An effective training tool;

6. Possible insurance premium savings;

7. Collection enhancement;

8. A way to motivate personnel and improve morale;

9. An opportunity to review other firms;

10. A tool for confirming with state board of accountancy requirements; and

11. A way to comply with revised Government Auditing Standards.

These factors should combine to give your firm a competitive edge.

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