Brief overview of peer review issues – 11/21.

Image courtesy of Adobe Stock.

To help auditors in the CPA community, the AIPCA peer review staff publishes PR Prompts, a newsletter with information for firms providing audits, review, compilations, and other attestation services.

The newsletter is unbranded and AICPA gives explicit permission to peer reviewers to put their logo and branding information on the newsletter. Those of us who are peer reviewers have specific permission to send it to our clients.

The following comments are provided to you courtesy of the AICPA.  I gratefully acknowledge their work in preparing this info and gladly share it with you. 

For ease of reading, I will not put all the following material in quotations.

Topics in this post:

  • Revenue recognition: 4 top concerns noted by peer reviewers
  • Have you considered reviewer independence implications if additional services are performed for your firm?
  • Do your clients need a single audit?

PR Prompts – Fall 2021:

Revenue recognition: 4 top concerns noted by peer reviewers

To learn where challenges exist for entities and their auditors, the AICPA conducted a survey of peer reviewers, asking them to identify the areas where their firm or their peer review clients have experienced challenges in auditing revenue recognition. Over 230 peer reviewers responded to the survey to share what they’ve seen or experienced relative to the new accounting standard, FASB Accounting Standards Codification (ASC) Topic 606, Revenue From Contracts With Customers. The biggest Topic 606-related challenges were identified as the following:

  • Assessing associated risks
  • Understanding of contracts
  • Did management appropriately apply Topic 606?
  • Evaluating management’s process for developing estimate(s)

Read the full story from the Journal of Accountancy.

Have you considered reviewer independence implications if additional services are performed for your firm?

As a condition of acceptance of your firm’s peer review and cooperation with the administering entity and the PRB, your firm may be required to have an outside party perform corrective action(s) or implementation plan(s).  Your firm may want a member of your peer review team to perform the service. However, there are circumstances, such as if your firm received an extension due to COVID-19 or other extenuating circumstances that caused delays, where performing the service may impair the person’s independence and ability to perform your firm’s next peer review as captain or team member (or anyone in their firm). 

For example, the person would be considered independent to perform the next peer review if he or she performs the pre-issuance review on an engagement with a period- or year-ending (report date for financial forecasts, projections, and agreed upon procedures) in the year immediately after the peer review year.  However, AICPA Peer Review Standards Interpretation No. 21-4, indicates that the person would not be considered independent (and thus would not be eligible to perform the next peer review) if he or she performs the pre-issuance review on an engagement with a year-ending in the year immediately before or during your firm’s next peer review year. An important factor to consider is the year-end of the engagement, not necessarily when the pre-issuance review is performed. As an example, see the following scenario:

Peer review year: Jan 1, 2020 – Dec 31, 2020

The year after the peer review year end: Jan 1, 2021 – Dec 31, 2021 – The person would remain independent if the pre-issuance reviews were on engagements with years-ending during this period.

The year immediately preceding the next peer review: Jan 1, 2022 – Dec 31, 2022 or the year within the peer review year: Jan 1, 2023- Dec 31, 2023 – The person’s independence would be impaired for the next peer review if he or she performed pre-issuance reviews on engagements with years-ending during these periods.

Likewise, the person would be considered independent on your firm’s next peer review if he or she performs any service involving your firm’s system of quality control for or during the year immediately after the previous peer review year. Such services include reviewing or performing your firm’s annual internal monitoring, reviewing your firm’s completion of the intended remedial actions in your Letter of Response or Findings for Further Consideration, and reviewing your firm’s Quality Control Document.

If a member of your peer review team cannot perform the service, he or she may recommend who can.  Additionally, the Peer Reviewer Search includes peer reviewers who have indicated on their resumes that they are willing to perform these services – select “I am a firm looking for an outside party or subject matter expert to perform consulting services for my firm” to identify an outside party.

Do your clients need a single audit?

The changes to the accounting profession in response to the COVID-19 pandemic have been swift. Legislation such as the CARES Act and the American Rescue Plan Act of 2021 have provided historic levels of federal funding to states and localities, not-for-profits, and other entities. With this new funding, many organizations may find themselves subject to a single audit for the first time. Single audits have a significant public interest component as they are relied on by federal agencies as part of their responsibilities for determining compliance with requirements of federal awards by nonfederal entities.

If your client expends $750,000 or more in federal awards in a fiscal year, a single audit is likely required. These funds can be provided directly from the federal agencies or pass-through entities such as state and local agencies or not-for-profit organizations. The single audit is a highly specialized organization-wide audit intended to provide assurance that a nonfederal entity has adequate internal controls in place and is in compliance with program requirements.

In conjunction to any single audits conducted, an audit in accordance with generally accepted government auditing standards (GAGAS) is also required.

If your firm performs a single audit engagement, it will be required to have a system peer review, which includes a review of your firm’s system of quality control and at least one single audit engagement (or the audit of those compliance requirements and internal controls over compliance with those requirements).

For more information on single audits, consider the following resources:

Leave a Comment

Your email address will not be published.