Future peer reviews will have an increased focus upon nonattest services provided to attest clients. How do we know? Well, see the new peer review checklist questions below (for an attest engagement).
The big “no-no” is to assume management responsibilities and then perform an attest service. Here are additional questions from the peer review checklists. Notice the first item below: Accepting responsibility for the preparation and fair presentation of the client’s financial statements. The client must assume responsibility for the financial statements, even if we (as the CPA) prepare them.
If we prepare financial statements and perform an audit, review, or compilation, we have performed a nonattest service (preparation of financial statements) and an attest service (audit, review, compilation). Why is this important? Because if we perform a nonattest service and an attest service for the same client, we must assess our independence. And if we are not independent, then we can’t perform an audit or review engagement.
The peer review checklists also ask for:
- The name and title of the client personnel overseeing the nonattest service and
- A description of the accountant’s “assessment and factors leading to your satisfaction that the client personnel overseeing the service had sufficient skills, knowledge and experience”
Interestingly, later on in the peer review checklist (the one I’m presently referring to is the Not-for-Profit checklist), the following appears:
Does the auditor’s assessment of the skills, knowledge, and experience of client personnel overseeing non-attest services appear reasonable given indications within the engagement? Consider whether the auditor performed significant reconciliations and took into consideration the extent and significance of adjustments and journal entries, the control deficiencies, and so on.
Translation: If the auditor made several significant journal entries to clean up the records, does the client possess sufficient skill, knowledge, and experience?
Documentation of Nonattest Services
So do we need a new form to document our independence?
It certainly would not hurt to add a new form to document our independence. PPC offers such a form (and I am sure other work paper providers do the same). What I like about such forms (at least the one I have seen) is they provide us with a place to document all nonattest services and then to assess and document our client’s ability to assume responsibility for the nonattest services provided.
If the client can’t–or is unwilling to–assume responsibility for the financial statements, then we are not independent, and we cannot perform an audit or a review. This assumption of responsibility does not mean the client has the ability to create the financial statements, but it does mean that:
- that the client will oversee the nonattest service,
- that the client will evaluate the adequacy and results of the nonattest service, and
- that the client will accept responsibility for the nonattest service
Documentation of the above in our engagement letters is sufficient to meet standards (even though I like the idea of adding a separate independence form to the file). We should–in the engagement letter–specify the nonattest services and the responsibilities of management.
We have, for some time now, included the client responsibility language (about overseeing, evaluating, and accepting) in our engagement letters. But the language referring to nonattest services usually addressed tax preparation, depreciation schedule preparation, bookkeeping and the like. Now preparation of financial statements should be included as another nonattest service (assuming the accounting firm prepares the financials, which we usually do).
The requirement to treat financial statement preparation as a nonattest service is effective for engagements covering periods beginning on or after December 15, 2014.
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