Peer Review Summary
Summary of the Nature, Objectives, Scope, Limitations of, and Procedures Performed in System and Engagement Reviews (as Referred to in a Peer Review Report)
1. Firms (and individuals) enrolled in the AICPA Peer Review Program (the program) are required to have a peer review, of their accounting and auditing practice once every three years according to the AICPA Standards for Performing and Reporting on Peer Reviews, Effective for Peer Reviews Commencing on or After May 1, 2022 (the standards). An accounting and auditing practice is defined by the standards as a practice that performs engagements under Statements on Auditing Standards (SASs), Statements on Standards for Accounting and Review Services (SSARSs), Statements on Standards for Attestation Engagements (SSAEs), Government Auditing Standards (the Yellow Book) issued by the U.S. Government Accountability Office, or Public Company Accounting Oversight Board (PCAOB) standards. Engagements covered in the scope of the program are those included in the firm’s accounting and auditing practice that are not subject to PCAOB permanent inspection. A firm is not required to enroll in the program if it only performs preparation engagements under the SSARSs, however, if it elects to enroll due to licensing or other requirements, it is required to have a peer review under the standards. The peer review is conducted by an independent evaluator, known as a peer reviewer (reviewer). The AICPA oversees the program and the peer review is administered by an entity approved by the AICPA to perform that role.
2. The peer review helps to monitor a firm’s accounting and auditing practice (practice monitoring). The objective of practice monitoring, and the program itself, is to promote and enhance quality in the accounting and auditing services provided by firms (and individuals) subject to the standards, in service of the public interest.
3. There are two types of peer reviews: system reviews and engagement reviews. System reviews focus on a firm’s system of quality control and engagement reviews focus on work performed on particular submitted engagements. A further description of system and engagement reviews, as well as a summary of the nature, objectives, scope, limitations of, and procedures performed on them, is provided in the following sections.
System Reviews
4. A system review is a study and appraisal by a reviewer, of a firm’s system of quality control (system) to perform accounting and auditing work. The system represents the policies and procedures that the firm has designed and is expected to follow when performing its work. The reviewer’s objectives are to
a. obtain reasonable assurance that the reviewed firm’s system of quality control for its accounting and auditing practice has been designed and complied with to provide the firm with reasonable assurance of performing or reporting in conformity with the requirements of applicable professional standards in all material respects, and
b. report on the reviewed firm’s system of quality control as required by the standards.
5. Professional standards are literature, issued by various organizations, that contain the framework and rules that a firm is expected to comply with when designing its system and when performing its work. Professional standards for design of and compliance with a system of quality control include but are not limited to quality control standards issued by the AICPA that pertain to leadership responsibilities for quality within the firm (the “tone at the top”), relevant ethical requirements (such as independence, integrity and objectivity), acceptance and continuance of client relationships and specific engagements, human resources, engagement performance, and monitoring.
6. To plan a system review, a reviewer obtains an understanding of (1) the firm’s accounting and auditing practice, such as the industries of its clients, and (2) the design of the firm’s system of quality control, including its policies and procedures and how the firm monitors its compliance with those policies and procedures. The reviewer assesses the risk levels within different aspects of the firm’s practice and its system. The reviewer obtains this understanding through inquiry of firm personnel and review of documentation on the system, such as firm manuals.
7. Based on the engagements firms perform, their practices may be reviewed or inspected on a periodic basis by regulatory or governmental entities, including but not limited to the Department of Health and Human Service, the Department of Labor, and the PCAOB. The reviewer obtains an understanding of those reviews or inspections, and considers the effect on the nature and extent of peer review procedures performed.
8. Based on the reviewer’s planning procedures, a sample of the firm’s work is reviewed, individually called engagements. The reviewer selects engagements for the period covered by the peer review from a cross section of the firm’s accounting and auditing practice with emphasis on higher risk engagements. The reviewer’s selection of engagements is required to include those performed under Government Auditing Standards, including compliance audits under the Single Audit Act, audits of employee benefit plans pursuant to the Employee Retirement Income Security Act of 1974, audits of federally insured depository institutions, and examinations of service organizations (SOC 1® and SOC 2® engagements) when applicable (these are known as must select engagements). The scope of a peer review only covers accounting and auditing engagements performed under the SASs, the SSARSs, SSAEs, Government Auditing Standards, and PCAOB standards but does not include the firm’s engagements subject to PCAOB permanent inspection, nor does it include tax or consulting services. The reviewer will also consider administrative elements of the firm’s practice to test the elements listed previously from quality control standards.
9. The reviewer examines engagement working paper files and reports, interviews selected firm personnel, reviews representations from the firm, and examines selected administrative and personnel files. Obtaining an understanding of the system and testing it forms the basis for the reviewer’s conclusions in the peer review report.
10. When a firm receives a report from the reviewer with a peer review rating of pass, it means that the firm’s system is appropriately designed and is being complied with to provide the firm with reasonable assurance of performing and reporting in conformity with applicable professional standards in all material respects. If a firm receives a report with a peer review rating of pass with deficiencies, this means that except for the deficiencies described, the system of quality control for the accounting and auditing practice of the reviewed firm in effect for the year ended has been suitably designed and complied with to provide the firm with reasonable assurance of performing and reporting in conformity with applicable professional standards in all material respect. When a firm receives a report with a peer review rating of fail, the reviewer has determined as a result of the significant deficiencies described, the system of quality control for the accounting and auditing practice of the reviewed firm in effect for the year ended was not suitably designed or complied with to provide the firm with reasonable assurance of performing and reporting in conformity with applicable professional standards in all material respects.
11. If a deficiency or significant deficiency included in the peer review report is associated with an engagement that was not performed and reported on in conformity with applicable professional standards in all material respects (“nonconforming”) in a must select engagement or is industry specific, the report will identify the must-select engagement or industry. However, because the purpose of a system review is to report on the firm’s system of quality control, the peer review report may not describe every engagement that was deemed nonconforming.
12. The firm is responsible for evaluating actions to promptly remediate nonconforming engagements when appropriate, and for remediating weaknesses in its system of quality control, if any. The firm’s response is evaluated to determine if it is appropriate, whether lack of response is indicative of other weaknesses in the firm’s system of quality control, or whether monitoring procedures are necessary to determine if the deficiencies and nonconforming engagements were remediated.
13. There are inherent limitations in the effectiveness of any system and, therefore, noncompliance with the system may occur and not be detected. A peer review is based on selective tests, directed to assess whether the design of and compliance with the firm’s system provides the firm with reasonable, not absolute, assurance of performing and reporting in conformity with applicable professional standards in all material respects. Consequently, the peer review would not necessarily detect all weaknesses in the design of or compliance with the system. The peer review does not provide assurance with respect to any individual engagement conducted by the firm or that none of the financial statements audited by the firm should be restated. Projection of any evaluation of a system to future periods is subject to the risk that the system may become inadequate because of changes in conditions or because the degree of compliance with the policies or procedures may deteriorate.
Engagement Reviews
14. An engagement review is a study and appraisal by a reviewer, of a sample of a firm’s accounting work. The reviewer’s objectives are to
a. evaluate whether the engagements submitted for review are performed and reported on in conformity with applicable professional standards in all material respects and
b. report on the evaluation of selected engagements.
15. Engagement reviews are available to firms that do not perform audits or other similar work and perform work only under the SSARSs and the SSAEs, other than examinations as their highest levels of service.
16. Professional standards are literature, issued by various organizations, that contain the framework and rules that a firm is expected to comply with when performing accounting work.
17. The reviewer looks at a sample of the firm’s work, individually called engagements. The scope of an engagement review covers only accounting or attestation engagements; it does not include tax or consulting services. An engagement review consists of reading the financial statements or information submitted by the firm and the accountant’s report thereon, together with certain background information and representations from the firm and, except for certain compilation engagements, the documentation required by applicable professional standards.
18. When the firm receives a report with a review rating of pass, the reviewer has concluded that nothing came to the reviewer’s attention that caused the reviewer to believe that the engagements submitted for review were not performed and reported on in conformity with the requirements of applicable professional standards in all material respects. A report with a peer review rating of pass with deficiencies is issued when the reviewer has concluded at least one but not all the engagements submitted for review were nonconforming. A report with a peer review rating of fail is issued when the reviewer has concluded all the engagements submitted for review were nonconforming.
19. If a industry-specific noncompliance results in a nonconforming engagement, the deficiency in the report will identify the industry.
20. The firm is responsible for evaluating actions to promptly remediate engagements deemed as nonconforming, when appropriate.
21. Review of the firm’s documentation or procedures related to its system of quality control is outside the scope of an engagement review. An engagement review does not include tests of the firm’s administrative or personnel files, interviews of selected firm personnel, or other procedures performed in a system review. Therefore, an engagement review does not provide the reviewer with a basis for expressing any form of assurance on the firm’s system of quality control for its accounting practice.
