review

Major revision to Quality Control Standards on the horizon.

4 Comments / Audits, Compilations & reviews, Peer Review / By
Let’s dial up the quality of our A&A work. Image courtesy of Adobe Stock.

The AICPA’s Auditing Standards Board is proposing a massive overhaul of the Quality Control Standards.

Who will this affect? All CPA firms who provide any audit, review, compilation, preparation, or attestation engagements. In other words, anyone with any accounting & auditing work.

As a mere starting point, the new standards will be relabelled as Quality Management Standards.  Instead of QC system, we will now have a QM system.

As a reminder, QC or QM standards apply regardless of whether you go through a system review or engagement review during your tri-annual peer review. The QC/QM system is tested in a system review but you still must have a formal QC/QM system even if you only do comps and reviews.

This post will provide a quick mention of what I see as the three biggest changes followed by a lengthy summary.

Major changes

A massive change that will impact small firms is that the annual inspection (which is currently required and will continue to be required) may not be performed by anyone who worked on the engagement.

For one person firms, this will require us to get someone outside the firm to perform the annual inspection. Two or three partner firms where the partners do essentially all of the work will also have to get someone from outside to do the inspection.

Two of the other changes of note: new risk assessment process and annual evaluation of quality management system.

The risk assessment process will require establishing quality objectives, identifying risks to achieving those quality objectives, and implement responses to address the quality risks.

After a one year delay to allow running the new QM system for a while the new requirement of an annual assessment of the QM system will kick in.

Proposed effective dates

The first Statements on Quality Management Standards, referred to as SQMS #1, is proposed to require the new quality management system be designed and implemented by December 15, 2023. The first annual evaluation of the system of quality management is proposed to be required within one year following December 15, 2023.

Rephrasing the effective date, the new QM system has to be in place before the end of 2023 (by 12/15/23 to be exact). That is about 2½ years from now. The first annual evaluation will be required one year after that, by the end of 2024 (specific deadline 12/15/24).

Summary of exposure drafts

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How can a football team’s position for scoring the game winning points illustrate the differences between an audit, review, compilation, and preparation?

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Image courtesy of Adobe Stock.

(Cross-posted from my other blog, Nonprofit Update, not because CPAs need this information, but because it might be helpful for your clients. You might also be able to use this illustration as a tool to explain different service levels to your clients.)

Let’s think about a football team and how they are positioned for scoring the winning points in the last few seconds of a tied game. They could be 4th-and-goal or perhaps not yet to a position for a field goal attempt.

Let’s use that illustration to explain the services provided by your outside accountant.

A CPA can provide four levels of services if you’re looking for financial statements.

You can hire a CPA firm to provide:

  • audit,
  • review,
  • compilation, or
  • preparation service.

What is winning the game?

We all know what that is in football.

In our accounting illustration a winning score would be perfect financial statements. Every number is correct. Not just close-enough, but exactly correct. Every disclosure complies with every single requirement.  The presentation and classification are picture perfect.

That probably never happens in real life, so let’s simplify it by saying that there is nothing even close to materially incorrect in any number, presentation, or disclosure. The financial statements are as close to perfect as is humanly possible.

That is what a win looks like.

Audit

Let’s say there is under a minute left in a tied game. Our favorite football team has just completed a successful drive and is sitting on the 1 yard line on fourth down. There’s only one play left in 30 seconds and the game is over.

Likelihood of getting a touchdown and winning the game is pretty good. Right about now the odds look incredible.

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Why I talk about economic indicators so often.

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Image courtesy of Adobe Stock.

One of the frustrations I have experienced as an auditor is the statistical information made visible by the AICPA and publications from others is that the economic data mentioned routinely lags behind two or three quarters on the date it is published.  Another trade association reports giving trends in the religious communities, but the survey information is provided late in the year for the prior calendar year.

The result is when I’m working on an audit or review several months later, the readily available economic data is from the start of the fiscal year I’m analyzing. Sometimes the data is for the prior fiscal year I’m considering. That doesn’t do me much good.

Long time ago I came across a comment that CPAs ought to start tracking key economic indicators on their own.

What a great idea!

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News For CPAs During The Pandemic: AICPA guidance on accounting, reporting, and auditing – 4/10

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Image courtesy of Adobe.

Guidance from AICPA can help with financial reporting and auditing. Also, there is a need for COBOL programmers.

If you had not noticed, the California Society of CPAs is offering a lot of CPE webcasts on tax and auditing issues during the pandemic. Many of them are free. Yeah, no charge CPE. How ‘bout that?

4/8/20 – Journal of Accountancy – AICPA issues audit and accounting guidance FAQs on COVID-19 – The AICPA published a 21 page document on accounting and audit issues: Audit Matters and Auditor Reporting Issues Related to COVID?19. 

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Articles for CPAs during the pandemic: CECL postponement & going concern – 4/4

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Your new office. Image courtesy of Adobe Stock.

A few more articles as you work through your audits, reviews, and compilations during the pandemic, plus a video on how to make your own cloth masks out of a t-shirt.

Key issues in this post:

  • Postponement of new CECL accounting
  • Deep dive into going concern assessment

3/26/20 – Nicola White at Bloomberg Tax – Congress Poised to Derail Biggest Bank Accounting Change in Decades – Congress put a provision in the giantic CARES Act to postpone CECL until 12/31/20 or when the governemnt declares the pandemic over.  CECL otherwise went into effect on 1/1/20.  This is the first time Congress has dictated accounting rules.  Article mentions this is a reminder of the debate over mark-to-market during the Great Recession.

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Financial reporting issues to consider during early stages of COVID-19 pandemic

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Image courtesy of Adobe Stock.

A range of financial reporting issues need careful attention during the COVID-19 pandemic. These issues are old news in the professional literature but need to be considered more intentionally.

The AICPA published a special report on March 18, 2020. The report, Consequences of COVID-19 Financial Reporting Considerations, was drafted by the Center for Plain English Accounting and is available at no charge.

On 3/14/29, I was Pondering impact of coronavirus prevention steps on financial statements. An auditor’s perspective. The AICPA report goes into far more detail.

Here, in bullet point italics, are the items mentioned for your focus, with a few of my comments for highlight:

  • Subsequent Events

Type II subsequent events are those which take place after the financial statement date which are so significant that they warrant mention in the financial statements to keep those statements from being misleading.

  • Subsequent Events – Market-Value Declines

A technical Q&A (TQA 9070.06) indicates there are some occasions that can arise which warrant adjusting financial statements based on subsequent declines in market value.

  • Subsequent Events – COVID-19

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Average cost of health insurance plan. Reference point for your next analytical review of health insurance costs.

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Image courtesy of Adobe Stock.

Here are some tidbits for your next analytical review of health insurance costs during an audit or review.

From annual survey by Kaiser Family Foundation of employer provided health insurance:

  • $20,576 – average annual cost of family plan in 2019
  • $19,616 – average annual cost of family plan in 2018
  • 71% – average portion of costs paid by employer

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Comments from recent continuing education classes worth repeating: “get in or get out”

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If you are an auditor and that is a diagram of new audit rules, then you need to completely understand the graph. Image courtesy of Adobe Stock.

Here are some fun or interesting or useful tidbits from the October 2018 A&A and the June 2019 Not-for-profit conferences presented by California Society of CPAs.

Previous posts had comments on accounting and auditing as well as peer review.

“Get in or get out”

The second speaker who discussed peer review in previous post also said that if you are doing A&A work you need to “get in or get out.”

Let me translate that…

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Summary of disciplinary actions from California Board of Accountancy, Winter 2018

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What you will be doing if you ignore professional standards and then get caught messing up your audits and reviews, although the amount won’t be quite as large. Image courtesy of Adobe Stock.

The new Update newsletter from the California Board of Accountancy goes back to providing details on disciplinary actions. The Winter 2018 edition (#86) takes 20 pages to describe the 24 actions. The previous Update provided far less detail, which generated lots of feedback to the board, so the newsletter will again give the ugly details for the causes for discipline.

Update 11/30/18:  Thanks to CBA for listing the messy details on what CPAs are doing to earn their consequences.

Three things jump out at me from the current list of discipline.

First, every action comes with a substantial financial penalty in the form of reimbursing the CBA for their investigative costs.

Second, just about every CPA that got in trouble for audit or review problems was given a ban from performing attestation work until some time in the future when the firm requests and receives permission from CBA to again perform such work.

Third, several CPAs received a suspension from their CPA practice. This means the individual may not perform any actions which would otherwise require a license. I think that means the firm halts all their attestation work and unless also holding an enrolled agent credential ceases their tax compliance work.

Here is my summary of the causes of discipline for the license surrenders and the stayed revocations:

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Summary of disciplinary actions from California Board of Accountancy, Winter 2018Read More »

How to stay away from the most popular ways to get in trouble with the California Board of Accountancy.

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Don’t send one of these to CBA unnecessarily. Image courtesy of Adobe Stock.

These must be the preferred ways CPAs pick to get in trouble with the regulators because the board of accountancy says these are the three most common reasons they issue monetary penalties.

What are the three most popular ways to draw a fine from CBA?

  • Don’t get minimum of 20 hours each year of your license term or don’t get 12 of those hours in technical topics.
  • Ignore a formal inquiry from CBA.
  • Don’t submit that Peer Review Reporting Form with your license renewal.

For more detail, check out the following article, quoted with permission, from the California Board of Accountancy.  Since it is quoted verbatim, I won’t put quotes around the entire article.

 

IT’S EASY TO AVOID CBA CITATIONS

To help increase awareness of CBA requirements and prevent licensees from receiving a citation, below are the top three violations that led to a citation in the previous fiscal year. Citations are posted on the CBA website and may include an administrative fine of $100 to $5,000.

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Another round of disciplinary actions from California Board of Accountancy

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The firms that make up the following list were not traveling on the above highway. Image courtesy of Adobe Stock.

Starting with the newest Update report for Fall 2017 (#85), the California Board of Accountancy has stopped listing the underlying problem leading to disciplinary action. This means it only took 16 pages to list the 44 actions reported currently. It also seems the CBA is listing actions against firms and the practitioner together.

This means the cringe inducing details are not immediately visible, even though the full disciplinary reports are public records and publicly available. I didn’t bother to take the time to research the reports.

I have tallied the current batch of discipline cases. Underlying problem is inferred by me based on the comments in the newsletter. I haven’t looked up any of the cases or looked up the reg sections cited for discipline. So, with those caveats, here are my inferences of the current disciplinary actions:

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Free update on new and recent accounting rules from CCH

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For a summary of the accounting rules released in 2017 and the most significant new rules from 2016, 2015, and 2014, check out A Closer Look: Discussion and Analysis of Current Accounting and Audit Issues.

CCH made this update available for free to people on their mailing list. I received permission from my editor at CCH to make it available on my blog.

Click here to download the 54 page newsletter. CCH does not  have a separate landing page for the document, so that link automatically downloads the newsletter. UPDATE:  If link didn’t work for you, please try again. I reloaded the link and it is working now.

For each of the accounting rules covered, the newsletter provides:

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What can you learn from a list of common auditor mistakes?

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Image courtesy of Adobe Stock.

You might learn a few things from a list of Forty Mistakes Auditors Make. If you can identify a few ways to improve your audit approach you could save time, improve the quality of your audit, and maybe reduce your risk.

Lots of auditors are in the midst of planning their year-end audits and reviews. Now would be a really good time to think about how to do better, more efficient work.

Writing at CPA Scribo, my friend Charles Hall outlines a number of goofs made by auditors. I’ll list a few tidbits in order to encourage you to read and ponder the whole list:

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Highlights of common deficiencies in compilation and review engagements

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Image courtesy of Adobe Stock.

There is a six page listing of common deficiencies identified during peer reviews of complexion and review engagements described in the AICPA’s new risk alert Developments in Preparation, compilation, and Review Engagements – 2017/2018.

Here are a few paraphrased highlights of the deficiencies. I will list items that I perceive are more serious or more pervasive.

You might consider reading through the full list and mentally comparing it to how you perform review and compilation engagements to see if there’s something you are missing.

Here are some of the highlights:

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Updates for CPAs: going concern and location of debt issue costs

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Image courtesy of DollarPhotoClub before they merged into Adobe Stock.
Image courtesy of DollarPhotoClub before they merged into Adobe Stock.

The accelerating pace of change doesn’t slow down merely because I have multiple audits in progress plus more that just started. Here are a few articles to help keep all of us up to date on two newly effective standards:

Going concern

For a long time the professional requirements for addressing going concern issues have been located in the audit literature. Yeah, the accounting requirement was in the audit standards.  There has been an effort for several years to this guidance out of the SASs and into GAAP. Two articles show the substantial progress:

11/8/16 – Charles Hall at CPA-Scribo – It’s Time to Apply FASB’s New Going Concern Standard –  ASU 2014-15 creates a requirement in GAAP for management to assess whether there are conditions or events which raise substantial doubt about ability to continue as going concern.

This is effective for financial statements ending on or after December 15, 2016. Translation: 12/31/16 financial statements. That would be the ones you’re auditing or reviewing or compiling at the moment.

If you haven’t tuned into this new requirement, check out Mr. Hall’s article before you download the ASU for study. Hint: the new requirements on management will seem remarkably familiar.

In case you hadn’t thought about it, having a GAAP-based going concern requirement placed on management means that there is now a specific need to address going concern in a review or comp.

2/22/17 – Accounting Today – AICPA changes going concern audit standard – Now that the going concern requirements are in GAAP, the ASB has modified the rules in the audit literature.

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