Certified Public Accountants
May 22, 2001
To our peer review clients:
Annually we make an effort to highlight recent changes in professional standards for our peer review clients. We hope what follows is helpful to you in your accounting and auditing practice.
Peer Review Standards
In our letter last year, we described the revisions to the peer review standards adopted by the AICPA Peer Review Board in October 1999. Those new standards are effective for the first time this year, for peer reviews commencing on or after January 1, 2001.
Under the revised standards, there are three types of peer review: System, Engagement, and Report. The terms "on-site" and "off-site" peer review no longer apply.
A System review is the same as the old "on-site" review. It is simply a name change. If your firm has an audit practice, you need a System review. An Engagement review is similar to the old "off-site" review except that firms now have to submit selected working papers as well as the financial statements. This change affects only firms that issue reviewed financial statements or certain types of attest engagements. For review engagements, the working papers submitted are limited to the management representation letter and the documentation of inquiry and analytical procedures. If your firm performs reviews or compilations with disclosures, you will need an Engagement review. A Report review is available to firms whose accounting practice is restricted to compilations that omit all disclosures. There is no review of the working papers involved. The peer reviewer provides the firm with a list of comments and recommendations at the conclusion of the review. This list of comments and recommendations will not express any opinion and will not have any designation as to unmodified, modified, or adverse.
Quality Control Standards
The Peer Review Standards concern how your peer review is conducted, while the Quality Control Standards provide guidance on the design of your firms quality control system. The AICPA Peer Review Board has recently provided additional guidance to peer reviewers on how to address Statements on Quality Control Standards No. 2 and No. 3 in their peer reviews. These Statements were issued some time ago, in May 1996, but the Board is concerned that many firms have not fully implemented the Statements, particularly in the area of monitoring. The Statements require firms to monitor their quality control systems and to document the monitoring. Starting in early 2000 the Board is now asking peer reviewers to include a finding in the letter of comments when a firm does not perform monitoring or does not document its monitoring. Although monitoring is required for all CPA firms, your peer reviewer considers it only if you have a System review. Call us and we can help set you up with an efficient and effective monitoring program that meets professional standards.
Amendment to Statement on Standards for Accounting and Review Services
The AICPA recently issued SSARS 8, which is an amendment to SSARS 1. Effective for financial statements submitted after December 31, 2000, SSARS 8 does two things. First, it changes what constitutes the submission of financial statements. This is very important, because if you have not submitted the financial statements, SSARS 1 does not apply, which means you have not compiled the financial statements, which in turn means that you do not have to issue a compilation report. You will not be considered to have submitted financial statements unless you both prepare and present them to your client or to third parties. In determining whether you have prepared the financial statements, you can consider the difference between the performance of mere bookkeeping services and the preparation of financial statements. If you are performing bookkeeping services, in a Quickbooks engagement for example, it is possible to make material adjustments on the clients accounting software without also compiling the financial statements. In its Compilation and Review Alert for 2000-2001, the AICPA includes several examples of engagements that do not involve the submission of financial statements. In one example a CPA working at the clients office makes material adjustments to the clients accounting database, prints the adjusted financial statements, and presents the financial statements to the client. According to the AICPA this does not result in the submission of financial statements. "The accountant is providing bookkeeping services," says the AICPA, "but the accountant is not preparing financial statements. Material modifications no longer constitute a submission of financial statements. Although the financial statements were presented to the client, they were not prepared by the accountant." In a similar example, the client sends the CPA a disk containing information from the clients accounting database. The CPA makes material adjustments to the disk and returns it to the client. This also is not considered submission of financial statements. The AICPA does note that each of the examples requires professional judgment in determining whether the CPA has prepared financial statements. By using your knowledge, experience, and education, you may be deemed to have gone beyond mere bookkeeping services, in which case you will need to comply with SSARS 1 and issue a compilation report if you present the financial statements to the client or others.
The other thing that SSARS 8 does that is very exciting is that it allows you to submit financial statements to your client without issuing a compilation report (i.e., a "plain paper" engagement). You are still required to document your communication with the client concerning the limitations inherent in compilation services, but that communication may now be in the form of an engagement letter. This is helpful particularly on monthly financial statements, since the engagement letter is usually an annual affair as opposed to the monthly commitment that is involved when you are issuing compilation reports. In addition, you do not have to specifically address each of the GAAP departures in the engagement letter as you do in a compilation report. However, this approach is permitted only if you do not expect that a third party will be using the financial statements. A "third party" is defined as "all parties except for members of management who are knowledgeable about the nature of the procedures applied and the basis of accounting and assumptions used in the preparation of the financial statements." This is an interesting definition. Under this definition a member of management who is not knowledgeable about the nature of the procedures applied and assumptions used would be a "third party". Would this include board members, for example, or an absentee owner of a business? You will need to be careful about applying this standard, but you may find that it has some application in your firm.
These plain paper engagements are compilations and accordingly the AICPA Peer Review Board has advised peer reviewers that they are within the scope of the peer review if your firm is otherwise subject to peer review. However, according to the Board, if your accounting practice is limited to management use only compilations your firm will not be subject to peer review.
Firms with Audit Clients
SAS No. 89, Audit Adjustments, requires that the management representation letter include an acknowledgement to the effect that management has concluded that passed adjusting journal entries are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. A summary of the passed adjusting journal entries will need to be included in the management representation letter or attached to it. This requirement will also have to be addressed in the engagement letter or understanding with the client. SAS No. 89 is effective for audits of periods beginning on or after December 15, 1999.
Firms with governmental audit clients should review recent amendments to the Yellow Book. In the past, the Government Auditing Standards (or "Yellow Book") were revised on an irregular basis. Several years would go by without any changes. Now rather than revise the Yellow Book once every few years, the GAO will be issuing amendments on a more frequent basis. Amendment No. 1 and No. 2 are already out. Amendment No. 1, effective for periods ending on or after September 30, 1999, requires the auditor to document in the working papers the basis for assessing control risk at the maximum level when the clients records are maintained on a computer. Amendment No. 2, effective for periods ending on or after January 1, 2000, will require additions to the engagement letter and changes the audit report wording. Copies of the amendments may be obtained at the GAOs web site: www.gao.gov .
In October 2000, the AICPA issued SAS No. 93, Omnibus Statement on Auditing Standards2000. Among other things, the statement eliminates SAS 75, which had previously provided guidance for conducting agreed-upon procedures engagements on specified elements of the financial statements. Under the new statement, these types of engagements will be conducted under the attestation standards. Also, the new statement will require references in the standard audit report to the "country of origin" for the accounting principles and auditing standards used. The statement will be effective June 2001.
Firms with Attest Clients
The AICPA issued SSAE No. 10 in January 2001. This Statement completely revises the attestation standards from SSAE No. 1 through SSAE No. 9. The new attestation standards will incorporate engagements formerly conducted under SAS 75. The new SSAE eliminates the requirement in agreed-upon procedures engagements for the practitioner to obtain a written assertion. The Statement is effective when the subject matter or assertion is as of or for a period ending on or after June 1, 2001.
Our Peer Review Clients
When scheduling your peer review with the state society, the scheduling form requests information about the firm you have hired to perform the peer review. This is the information you will need if you select our firm to perform your peer review:
Name of Reviewing Firm: Read & Bose, PC
This letter will be posted on our award-winning home page, along with additional guidance on peer reviews.
Please do not hesitate to contact us if you have any questions. We appreciate your business.
Very truly yours,
Read & Bose, PC