| An essential part of selecting an audit firm for your organization is determining the quality and reputation of the firms considered. But what basis do you have to determine a firm’s quality?
A firm’s peer review report is one key piece of information that attests to the quality of its accounting and audit practice.
Rapid changes in auditing standards have significantly changed how audits are performed. A peer review by an independent accounting firm, with experience in the same industries as the audit firm, provides assurance that the audit firm is current in its knowledge about conducting audits and financial reporting requirements.
Certain organizations are required to have a peer review. They include firms performing audits for state and local governments or other audits under government auditing standards, such as the Department of Housing and Urban Development or nonprofits with government funding.
Also, a peer review is required for membership in the American Institute of Certified Public Accountants and for state licensing purposes if the firm provides attest services, such as audits, reviews, compilations and agreed-upon procedures.
Often a company receives only the audited financial statements − the end product of an annual audit − from the audit firm at the end of the audit. In most cases, the quality of the audit cannot be determined from the audit report alone.
Users of audited financial statements have no way to judge the quality of the audit process of a particular firm because they do not have access to a firm’s audit documentation. If a firm performs audits and does not have a peer review, there is no outside assurance that the audit will be conducted in accordance with professional standards.
Firms performing audits must follow extensive rules and regulations that dictate how audits are performed. In recent years, the volume and complexity of specific procedures required in every audit have increased rapidly, largely to address issues highlighted in public company audit failures.
In addition, documentation requirements have become very extensive. As a result, there can be a wide disparity in the quality of audits done.
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Peer review is a process in which other accountants review an accounting firm’s system of quality control over its accounting and auditing practice. Those who perform the peer review then issue a report about that system.
Reports use standard language to provide for comparability of firms and can be categorized as unmodified, modified to describe problems with the firm’s quality control system or adverse. The report may refer to a letter of comments describing minor exceptions noted during the peer review process.
The process resulting in the peer review report is extensive. The peer reviewers examine in detail a representative sample of engagements from the firm’s accounting and audit practice. They use standardized checklists, including industry-specific checklists, to ensure a thorough review.
Peer review team captains must be practicing audit partners in a CPA firm. Their experience in industries must match up with industries in the firm’s client base.
The peer review process extends beyond review of the accounting and audit engagements. The peer review team reviews the firm’s policies and procedures for ensuring independence, integrity and objectivity on all audit engagements.
Personnel management, which includes the firm’s hiring process, assignment of personnel to engagements, professional development of employees and advancement of employees, is also reviewed. Specific attention is focused on ensuring that continuing education requirements for all professional staff, including industry-specific requirements, are met.
Decisions regarding the acceptance and continuance of audit and other financial statement engagements are reviewed to ensure that the firm under review is selective in accepting clients − as well as continuing services to existing clients − by documenting the consideration of client integrity, industry expertise needed and other matters.
As part of the review of engagement performance, the firm’s use of authoritative literature and consultations with appropriate resources for unusual and complex issues are considered for timeliness and effectiveness. Lastly, the firm’s internal process for monitoring its quality control over financial reporting is reviewed. The peer review, which is performed every three years, is an integral part of this process.
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