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June 1992

The third year of Quality Review begins - now it's the sole practitioners' turn. (Quality Review)

by Mancuso, Anthony J.

    Abstract- The American Institute of Certified Public Accountants (AICPA) has been providing the Quality Review program as a service to the public since 1990. The monitoring program seeks to ensure that accounting firms provide clients with accounting and auditing services that are in accordance with professional standards. All AICPA members are required to enroll in the quality and peer review program, where reviews are conducted either on-site or off-site. The review could be performed by another accounting firm that has undergone review, reviewer(s) selected by the Committee Appointed Review Team or by the association itself. For the latter half of 1992, the AICPA is set to review the remaining one-third of accounting firms that are scheduled for the year. This last batch of reviewees are mostly sole practitioners.

Back to the Basics

For the benefit of those facing their first review, following below is a brief summary of what the Quality Review program is all about.

Quality Review is an AICPA practice monitoring program designed to provide assurance to the public that CPA firms are performing accounting and auditing services in accordance with professional standards. It is a condition of membership in the AICPA that its members practice public accounting only in firms that are enrolled in the Quality Review program or the similar Peer Review program of the AICPA's Division for CPA Firms.

Quality and Peer Review.. The principal difference between Quality Review and Peer Review is that the results of the review in a Peer Review are placed in a public file, whereas the results of a Quality Review are strictly confidential and known only to the reviewer, the reviewed firm, and the administering entity. Because of the size of the program, the AICPA has enlisted state CPA societies to act as administrators of the program in their states.

There are two types of quality reviews, depending on the nature of the accounting and auditing practice.

On-site Review. Firms that perform one or more audits of historical financial statements or examinations of prospective financial statements are required to undergo an on-site review. On-site reviews include a study and evaluation of the firm's quality control policies and procedures in effect for its accounting and auditing practice during the period of one year. A major part of the review entails a review of working papers and other documentation on selected accounting and auditing engagements. At the conclusion of an on-site review, the reviewer issues a report on the design and effectiveness of the firm's quality control policies and procedures.

The report can be unmodified (i.e., clean), modified, or adverse. In addition, the reviewer issues a letter of comments if the report is qualified or adverse, or, for unmodified reports, if there are matters that the review team believes resulted in conditions being created in which--in the words of the AICPA standards for performing quality reviews-- "there was more than a remote possibility that the firm would not conform with professional standards on accounting and auditing engagements." The reviewed firm must issue a letter of response to the letter of comments indicating the specific corrective action the firm plans to take.

Off-site Review . Firms that issue compilation or review reports, but do not perform audits historical financial statements or examinations of prospective financial information are required to have an off-site review. An off-site review consists solely of reading sample financial statements and accountants' reports, in addition to certain background information and representations provided by the reviewed firm. The report on an off-site review states in the form of negative assurance that nothing came to the attention of the reviewer that the reports submitted to the reviewer were not in conformance with professional standards in all material respects. The report can be modified for significant or other departures, or can be adverse. If the report is modified, the reviewed firm must issue a letter of response indicating the specific corrective action to be taken.

For both off-site and on-site reviews, the reports and letters issued are subject to a technical review by the administering entity, and by the Quality Review committee composed of qualified CPAs in public practice.

Choosing a Reviewer

Reviewers are matched to firms in three ways:

Firm-on-firm Review. A firm may select another firm to do its review. The firm selected must be enrolled in a practice monitoring program and have received an unqualified Quality Review or Peer Review report within the last three years, and the person heading up the review must meet certain qualifications.

Committee Appointed Review Team (CART) Review. A firm may request the administering entity to select one or more reviewers to perform the review. In that case, the review report will be on the administrator's letterhead.

Association Review. A firm that is a member of an association that has met the AICPA's requirements to do reviews may request that the association perform the review.

Lessons Learned From the First Two Years

The experience of Quality Review Acceptance Bodies and Technical Reviewers gives rise to the following advice to firms about to undergo their first review:

1. Consider a Firm-on-firm Review. With the program now two years old, a firm that decides to select another firm to perform its review has a large group of experienced firms from which to choose. An experienced firm should be able to perform the review in an efficient and cost- effective manner. Normally, after a brief survey, a firm seeking to do the review can give a reliable estimate of the cost and help prepare for the review. A firm seeking a reviewer should interview several firms to make sure the "chemistry" is right and that the firm has the qualifications to not only do the review, but to bring added value to the process. The added value can be in the form of suggestions for operating improvements that go beyond minimum professional standards.

To help firms select a firm-on-firm reviewer, many administrators have prepared a firm-on-firm directory of firms qualified and interested in performing Quality Reviews.

2. Understand the Billing Structure of a CART Review. In a CART review, the fees are established by the administrator and are based on the work done. In the case of an on-site review, fees are based on an hourly rate for the actual hours performed. A range of hours is estimated by the administrator based on the size of the firm's accounting and auditing hours. It is very common for firms to overestimate the size of their practice which can cause the reviewer to over select engagements for review and spend excess time. Firms should be extremely careful in developing that information to make it as accurate as possible.

CART reviewers are initially selected by the AICPA's computer on a random basis using certain criteria. Quite often, the computer selects reviewers that have not done many reviews. An inexperienced reviewer may have the tendency to "over audit" and incur excessive time. If a reviewed firm believes a reviewer is spending too much time on its review, it should discuss the situation with the administrator.

For an off-site review, fees are based on the number of reports reviewed, based upon criteria established by the AICPA. There has been much confusion over the number to be selected. Basically, a full disclosure set of financial statements, either compilation or review, must be reviewed for each partner, plus one compilation with no disclosures for the firm as a whole, if it provides such type of service. However, there is a minimum number of two full disclosure reports for each firm. Therefore, a reviewer could end up selecting three reports for a sole proprietor that provides a full range of accounting services--a review, a full disclosure compilation, and a no- disclosure compilation. Both firm and reviewer should understand the basis for selection, and ff there is any question, the administrator should be contacted for clarification. Applying Firm-on-firm Approach to Off-site CART Reviews

The administrators for the Quality Review program in both New York and New Jersey have combined the best of Firm-on-Firm and CART selection procedures for off-site reviews. Both state societies have developed a list of qualified firms interested in doing off-site CART reviews. If a firm requests that the administrators choose the reviewer, which is the equivalent of an off-site CART review, they will select one of the firms from the approved list. In this way, the reviewed firm is assigned an experienced reviewer and the administrator is confident that the review will be performed efficiently and in accordance with AICPA standards.

By Anthony J. Mancuso, CPA, Weber, LIPSHIE & Co.

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