June 5, 2000
To our peer review clients:
Once a year, 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 exposure draft the AICPA issued in May 1999 that contained proposed revisions to the peer review standards. Under the exposure draft, any firm issuing reviewed financial statements would be subject to an on-site peer review, involving the steps and procedures that previously applied only to firms with an audit practice. There was a significant negative response from practitioners regarding this change to the peer review standards. As a result, under the final revisions to the peer review standards adopted by the AICPA Peer Review Board in October 1999, firms without an audit practice continue to be exempt from on-site peer reviews.
However, there are significant changes from current practice in the new peer review standards, which are effective for peer reviews commencing on or after January 1, 2001. Under the revised standards, there will be three types of peer reviews: 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. The same firms are subject to a System review as were subject to an "on-site" review, and the procedures performed are the same. This is simply a name change. If your firm has an audit practice, you will need a System review.
An Engagement review is similar to the old "off-site" review except firms will now have to submit the working papers as well as the financial statements. On a review engagement, for example, working papers would include the management representation letter and 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 limited to compilations that omit all disclosures. All disclosures must be omitted. If there are any disclosures, even if only a few of them in the form of "Selected Information," an Engagement review will be required. If a firm qualifies for a Report review, it will submit only the financial statements to the peer reviewer, who will provide 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. The firm will only need to sign an acknowledgement at the bottom of the report and submit it to the state society. The state peer review committee may impose corrective actions on the firm, however, if there are significant issues identified by the peer reviewer.
Quality Control Standard
The Peer Review Standards concern how your peer review is conducted, while the Quality Control Standards provide guidance on the design of your firm’s quality control system. The AICPA recently issued two new Quality Control Standards: Statements No. 4 and No. 5. Statement No. 4 only affects firms with a SEC practice. Statement No. 5 requires that a firm’s policies and procedures be designed to provide the firm with reasonable assurance that the accountant in charge of an engagement possesses the "kinds of competencies that are appropriate given the circumstances of individual client engagements." For example, putting the tax partner in charge of a complex governmental audit engagement may not be advisable. Firms that have written Quality Control Documents may need to revise them to incorporate Statement No. 5.
New Disclosure
SFAS No. 132, Employer’s Disclosures about Pensions and Other Postretirement Benefits, effective for fiscal years beginning after December 15, 1997, revises employer’s disclosures about pension and other postretirement benefit plans. For clients that have only defined contribution plans, there is actually less disclosure than required previously. As before, you need to disclose the cost recognized during the periods reported on and any significant matters affecting comparability between periods, but you no longer are specifically required to disclose the employee groups covered by the plan or the basis for determining the contributions to the plan.
SOP 98-5, Reporting on the Costs of Start-Up Activities, provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs be expensed as incurred. It is effective for fiscal years beginning after December 15, 1998, and initial application should be reported as the cumulative effect of a change in accounting principle.
Plain Paper Financial Statements
The AICPA issued an exposure draft on December 31, 1999 that will significantly revise the Statements on Standards for Accounting and Review Services (SSARS). This proposed amendment to SSARS #1 if adopted will allow firms to issue plain paper financial statements as long as it is not anticipated that the financial statements will go to a third party. If you "reasonably expect" that the financial statements will be used by a third party, such as a bank, then at a minimum you will still have to perform a normal compilation engagement and issue a compilation report. The AICPA proposed a similar amendment several years ago that never got beyond the exposure draft stage. What has changed since then can be expressed in one word: Quickbooks. Many of our clients now look to us for assistance with Quickbooks, and that assistance often includes the preparation of financial statements that are intended only for management’s use. Under the new standard, you either need to obtain an engagement letter from management or you need to write a letter to management. The engagement letter or the letter to management, whichever is used, should note that the financial statements are only for management’s use and that they may contain material GAAP departures. In addition, you will need to include a reference on each page of the financial statements, such as "Restricted for Management’s Use Only."
Firms with Audit Client
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 Governmental Accounting Standards Board Technical Bulletin No. 2000-1 and recent amendments to the Yellow Book. The GASB had been requiring governments to disclose how they are addressing the year 2000 issue. Bulletin No. 2000-1 rescinds this requirement for financial statements issued after February 22, 2000. 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 client’s 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 GAO’s web site: www.gao.gov .
On May 1, 2000, the AICPA issued an exposure draft entitled Proposed Statement on Auditing Standards. Among other things, the statement if adopted would eliminate SAS 75, which currently provides 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 for periods ending on or after December 15, 2000.
Firms with Attest Client
SSAE No. 9 amends the standards for attestation engagements and is effective for reports issued after June 30, 1999. SSAE No. 9 allows you to report directly on the subject matter rather than management’s assertion, and revises the report language. In addition, there is an exposure draft out that would completely revise the attestation standards from SSAE No. 1 through SSAE No. 9. The new attestation standards will incorporate engagements formerly conducted under SAS 75. The effective date will be June 15, 2001.
Our Peer Review Client
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
AICPA Firm Number: 10083621
Team Captain’s Name: Harry Bose
AICPA Member Number: 01153765
Any of the exposure drafts discussed above may be obtained on the AICPA web site at: www.aicpa.org/members/div/auditstd/drafts.htm
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