Peer Review Inherent Risk Questions Revised

Separate inherent risk assessments are not required by GAAS; however, changes to peer review checklists (several months ago) were causing “no” answers (which implies a deficiency) when audit firms did not use separate practice aids to assess inherent risk.

These “no” answers were an unintended consequence of the way the peer review inherent risk questions were worded. (I scratched my head the first time I saw them.) The questions are now revised.

Now the peer reviewer will focus on the risk assessments related to the risk of material misstatement (RMM) (which is the result of the control risk and the inherent risk). The revised questions still ask the reviewer to consider if the RMM is impacted by a less-than-high inherent risk assessment.

The intent of the inherent risk questions, I believe, is to cause the reviewer to consider whether the inherent risk assessment is appropriate and not used to falsely reduce the amount of substantive work.

Remember Inherent Risk x Control Risk = RMM, so an auditor could lessen his response to risk (substantive work) by lowering the inherent risk (without a proper basis for doing so).

What does this mean for you? Make sure you can defend your lower inherent risk assessments (provide a logical explanation for the lower IR assessment).

SSARS 21 Preparation of Financial Statements Service to Be Included in Some Peer Reviews

For several months CPAs have wondered if the new Preparation of Financial Statements service as provided for in SSARS 21 will be subject to peer review. We now have an answer. It’s…maybe.

I just received the February 2015 AICPA Peer Review Update newsletter. Below you can see an excerpt from the newsletter:

On November 18, 2014, the Peer Review Board (PRB) issued an exposure draft, which proposed that firms that only perform preparation engagements under AR-C Section 70 – Preparation of Financial Statements (issued as part of Statement on Standards for Accounting and Review Services (SSARS) No. 21, Statement on Standards for Accounting and Review Services: Clarification and Recodification) would not be required to enroll in the AICPA peer review program (Program). However, it also proposed that a firm’s preparation engagements would be included in the scope of a peer review when the firm either elects to enroll in the program (e.g. to comply with licensing or other requirements) or is already enrolled due to other engagements it performs. This proposal was issued in order to address the effect of these engagements on the scope of the Program.

The PRB considered comments raised by the peer review community about the proposal and elected to adopt the proposed guidance changes. The changes are effective for peer reviews commencing on or after February 1, 2015.

The key points of this communication are:

  1. Firms that only perform the Preparation of Financial Statement service under section 70 of SSARS 21 are not required to enroll in the AICPA peer review program.
  2. Firms that are enrolled in the peer review program will have the Preparation of Financial Statements service included in the scope of their peer reviews.

Implication for Firms in a Peer Review Program

Since the Preparation service will be included in the scope of peer reviews, consider that firms enrolled in a peer review program need to track the number of Preparation services provided. Otherwise, the peer reviewer will not be able to determine the mix of work performed by the firm to be reviewed.