Peer Review in Accounting: Process and Standards for the CPA Exam
Understand the AICPA peer review process for the CPA AUD exam. Covers system reviews, engagement reviews, reporting, and quality control implications.
Overview of the Peer Review Program
The AICPA Peer Review Program is a quality monitoring system designed to evaluate and improve the quality of accounting and auditing practices of CPA firms. Most state boards of accountancy and the AICPA require firms that perform accounting, auditing, and attestation services to undergo peer review. For CPA candidates, understanding the peer review process is important because it relates to quality control, professional responsibilities, and the self-regulatory nature of the accounting profession.
The peer review program operates on the principle that external evaluation by qualified peers can identify deficiencies in a firm's quality control system and suggest improvements. The reviews are conducted by other CPA firms or by teams organized by state CPA societies, which act as administering entities for the AICPA.
Types of Peer Reviews
System Reviews
A system review is required for firms that perform engagements under the SASs (auditing standards), Government Auditing Standards, PCAOB standards, or examinations of prospective financial statements under SSAE standards. The system review evaluates the firm's system of quality control as a whole and includes a review of selected engagements to assess whether the system is providing reasonable assurance that the firm conforms with professional standards. The reviewer selects a sample of engagements that cover the different levels of service performed by the firm.
Engagement Reviews
An engagement review is required for firms that perform only compilation, review, and preparation engagements under SSARS and attestation engagements not subject to system review. The engagement review focuses on whether the selected engagements and related financial statements conform with professional standards. The reviewer selects specific engagements and evaluates the work performed and the reports issued.
The Peer Review Process
Selection and Scheduling
Firms are required to have a peer review within specified time periods, typically every three years. The administering entity oversees the scheduling and monitoring of reviews. The firm selects a reviewer (another CPA firm or an individual meeting specified qualifications), subject to approval by the administering entity. The reviewer must meet competence requirements and be independent of the firm being reviewed.
Performing the Review
During the review, the reviewer examines the firm's quality control policies and procedures, reviews selected engagements and associated documentation, interviews firm personnel, and evaluates whether the firm's system of quality control is designed and operating effectively. For a system review, the reviewer considers all elements of quality control: leadership, ethical requirements, acceptance and continuance, human resources, engagement performance, and monitoring.
Reporting Results
The reviewer issues a report with one of three ratings: pass, pass with deficiencies, or fail. A pass rating indicates that the firm's system of quality control was suitably designed and was being complied with to provide reasonable assurance of conforming with professional standards. A pass with deficiencies indicates that the system was suitably designed except for certain deficiencies. A fail rating indicates that the system was not suitably designed or was not being complied with to provide reasonable assurance.
Consequences and Remediation
When a review results in findings, the firm may be required to take corrective actions such as additional CPE, revisions to quality control documents, pre-issuance review of certain engagements, or follow-up visits. The administering entity monitors the firm's implementation of corrective actions. In serious cases, a firm may face referral to a hearing panel, which can impose additional requirements or sanctions.
CPA Exam Focus Areas
- Know the difference between system reviews and engagement reviews, including which types of firms require each.
- Peer review ratings are pass, pass with deficiencies, or fail. There is no qualified or adverse rating terminology.
- Peer reviews evaluate the firm's quality control system, not individual engagement performance, although engagements are examined as evidence of system effectiveness.
- The peer reviewer must be independent of the firm being reviewed and meet competence requirements.
- Peer review is required every three years for firms performing accounting, auditing, and attestation services.
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