The Peer Review Process and Standards

Introduction

Peer review process can be defined as practice – monitoring of a certified public accountant firm compliance with its quality control systems by another certified public accountant. Peer review is important in the field of accounting because of a number of factors. For the purpose of professional development and continuity of improvement of service among professionals, it has become necessary for professionals to review fellow professional compliance standards. This is because, auditing is a practical activity which is meant to give the public information that is required. All members of America institute of certified public accountant that practice in the US and neighboring territories where certified public accountant standards are applicable is required to carry out peer reviews. Therefore all firms practice report on peer reviews because of public interest in quality services of accounts and auditing.

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Peer review is meant for all practicing accountants for the purpose of monitoring the professional standards provided. It is meant to provide quality and effective information in the field of accountancy and ensure that the accounting profession is not discredited.

Critical Literature Review

In order to ensure that the auditor performs his duties to perfection, his objectives for auditing, the scope of auditing, procedures are to be followed are reviewed. In normal auditing environment auditors have principles of auditing.

Quality control

It is a primary importance to the business world in general and the auditing profession in particular that an audit should be a quality product. Audits should be done extremely well and be completed expeditiously and economically.

There is a statement of auditing standards and quality control for audit work. A reviewing firm/ auditor should recognize that each firm has its own needs depending on size, geographical spread, special expertise etc. But all firms must organize quality control policy and procedures which ensure that reviews are performed;

  1. In accordance with approved standards.
  2. In conformity with statutory and contractual requirements.
  3. In conformity with personal standards.
  4. In conformity with any professional standards set by the firm itself – many firms pride themselves on their professionalism.
  5. With minimum risk.

The procedures required are:

  1. Each firm should establish and monitor control policies and procedures and communicate these to all partners and staff. Larger firms employ printed manuals but smaller firms may have to rely on verbal instructions.
  2. Acceptance and reappointments as auditors. There should be a procedure of evaluating prospective clients with consideration of the firm’s ability to meet the clients’ needs and for making the decision on acceptance which may be made by an individual partner, or by a committee.
  3. Professional ethics. Procedures to ensure all partners and staff are aware of and adhere to the principles of independence, integrity, objectivity and confidentiality. It is important to instruct staffs who are not members of professional bodies to monitor observance of ethical standards. For example, staff might not be aware on the prohibition of ownership of shares in client companies or may be unwilling to sell them if they are so aware. Consideration should be given to the auditor’s independence and ability to serve the client properly and to the integrity of the client’s management.

Skills and competence: the objective is to have a full competent and skilled set of partners and staff. Procedures include:

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  1. Recruitment of suitable, qualified and expert staff- Only qualified staff should be employed and staffing needs should be planned ahead.
  2. Technical training and updating-All partners and staff should be encouraged to learn, and to keep up- to-date with technical matters. The firm should provide literature, maintain a technical library, send people to courses and conduct courses themselves. Some firms produce special newsletters at intervals to update staff with technical developments.
  3. On- the – job training and professional development- Planning, controlling and recording emphasizes the importance of relating staff abilities to client needs but opportunities should also be provided for staff to have adequate experience on a range of clients as on-the – job training. Performance of staff should be evaluated and discussed with staff concerned. This kind of assessment and feedback is not a common practice in all walks of life.

Consultation- individual members of the firm should not take decisions on problem areas without consultation with others. Problem areas might be technical or matters of risk whereby the sole practitioners are advised to consult with other firms or with other professional advisory services.

Monitoring the firm’s quality control procedures-Suitable procedures should be introduced to ensure that all procedures are working adequately.

Auditing Independence

In auditing, an auditor should be independent, and infact appearance and integrity should be seen while doing the audit. The purpose of this paper is to discuss the research design including the approach that Andrea should consider, the assessment of her position in relation to the number of responses and the advice that should be given regarding the possible options to improve the chances of project’s completion. In addition, this paper will further discuss the benefits and drawbacks in seeking the interview via email as well as the practical issues that needs to be addressed and selecting a sample and research that includes topic such as auditor independence and integrity.

In order to ensure that the auditor is performing his duties to perfection, his objectives for auditing, the scope of auditing, procedures to be followed are reviewed. In normal auditing environment auditors have principles of auditing;

  • Integrity: If auditors do not act with integrity that is being honesty and adhere to moral principles; their reports would not be believed by anybody thus the whole audit process would have no value. Therefore conforming to integrity requirements is an innate morality of accountants but also because of strict regulation and fear of litigation.
  • Independence: If auditors are not independent, then their reports will not be believed and again the whole audit process will have no value. Essentially, auditors must be objective, give their opinions without fear or favour and be unaffected by conflicts of interest or pressures from any source. Auditors tend to carry on additional work to the audit and their independence is by no means total. Your author believes that attempts to distance the auditors from the directors by such means, as their relations with the company being mediated through an audit committee of non- executive directors are not much more than cosmetic. Ultimately auditors will need to be truly independent of commercial clients in the same way as they are with local authorities.
  • Competence: If auditors are not competent, then the whole audit process is of no value. In general auditors are seen as competent but a number of recent events including company failures, criminal trials and civil litigation have given rise to some doubts in the minds of the business community. The government has legislated for competence and the professional bodies have encouraged it and the auditing practice board has issued numerous prescriptions. An interesting idea is that competence is constantly being improved but at the same time economics have dictated that the time spent on auditing is constantly being reduced even though in modern laws, accounting systems and structures are steadily becoming more complex.
  • Rigour: This word implies that auditors should apply strictness in conducting their work and in forming their opinions. Auditors should apply a degree of professional skeptics to their work, should assess the risks involved and obtain sufficient reliable evidence on matters from a range of sources. The range from negligence cases is that auditors do not always apply sufficient rigour especially in complex cases, where clients are dominated by single individuals and in the valuation of subsidiary companies.
  • Accountability: Auditors should act in the best interests of shareholders whilst having regard to the wider public interest. The audit agenda suggests that where these responsibilities conflict, auditors should generally place the interests of the shareholders first except where this could materially damage the interests of the public. It is difficult to think of specific instances of such conflicts of interests but your author tends to the view that auditors would be more highly regarded if the public interests always prevailed.
  • Judgment: Auditors should apply sound professional judgment in specific areas where judgment is required which includes assessment of reasonable assurance, material misstatement and risk.
  • Communication: There are two strands to this, firstly, auditors should openly disclose all matters necessary to a full understanding of their opinion and secondly, they should make disclosure to the proper authorities on matters of public interest. The former is met by the long standard form of audit report which I imagine is read by nobody. The latter is a new departure and is too new to assess as yet. Auditors tend to be constrained by fears of suits for defamation and by a natural tendency to confidentiality.
  • Providing value: Clearly auditing should be conducted with a minimum of resources input and with a maximum of utility to the business community. There is a trade off here and some auditors would assert that despite massive improvements in auditing techniques, audits are often conducted too cheaply. The audit agenda suggests that value can be achieved in providing greater benefits to the shareholders, in innovating new services as well as in more economical auditing. This seems to conflict with the principle of independence.

Auditing is not an easy task but considered as one of the difficult tasks wherein an auditor gives significant emphasis. Though there are lots of aspects that should be given consideration, the important thing is the independence and integrity of an auditor who is making the audit. An unqualified opinion means communicating a favorable signal regarding to the financial position and operations’ result including the cash flows. Most auditors are using fair and uniform language to issue the standard and unqualified report.

Pre-engagement in auditing is one of the critical issues that should be considered in auditing. These may include identifying potential clients, evaluating the relationship between the potential client and auditor, and audit’s evaluation including integrity of management.

Personnel Management

Personnel are very resourceful in the sense that they carry out audit with reasonableness and gather significant information in relation to auditing for the opinion to be drawn. Their training and professional qualification is very important and it needs to be reviewed to determine whether reports produced are of good quality. The major benefits and drawbacks of seeking to review qualification are considerably practical and not costly. The practical issues that needs to be addressed when collecting data are the personal files, the responsibility of senior auditors, the responsibility of auditor and his/her opinion with regards to the overall audit made with the company.

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Acceptance and Continuance of Clients and Engagements

It covers the potential for the quality of auditing because of the acceptance of any engagements on the part of the auditor who will require changes of many factors such personnel. Peer review measures whether there was capacity to firm before accepting any engagement. Without this there will be no need of testing mechanisms whether they did their jobs properly if they did not have capacity. The difficulty in determining whether auditors have fulfilled their functions properly is very difficult since they can simply declare that they have done the audit check even if it is not true due lack of capacity. It is interesting to note that the job of the auditors is to watch over any potential mishaps and abuse by the company personnel who take more jobs which may incapacitate them.

Engagement performance

It is imperative to note that any person holding auditing assignment is accountable and lawfully responsible for that particular audit. To be accountable is defined as being responsible and fully answerable for the efficient fulfillment of the assignments, therefore engagement performance is very important. The level by which auditors are successful and independent in discharging of their duties responsively determines their accountability. The general public maintains that the Auditors that stand for them in any task must honestly give details in any auditing.

The liability information revealed in any Auditor is believed to permit the users of financial information to review the policies and the honesty of execution affairs of the company.

Monitoring

The safekeeping of any organization depends on someone guarding the whole system. It follows however that the kind of integrity the auditing sector will have depends on their internal personnel’s values. There is no one that can possibly watch them except themselves. It is not practical for anymore to create another watch dog like themselves and have these agents in turn slack off from their jobs. The only reasonable solution is to present the problem to the auditors and pursue all steps in order to gain their true and deep commitment to the task at hand. It all boils down to whom you can trust for the client company. The skills are not a question, the personal values of the people doing the audit is more important.

Internal Controls

An audit firm at its peak performance is usually faced by a number of risks; this is due to involvement of a large number of people in its operations. For the security of audit business preview, internal control should be undertaken as key and part of policies making in terms of business and fiscal operations. This is to help the audit against wastage of resources, decline of efficiency, and fraudulence. In addition to that it helps in ascertaining reliability and accuracy in auditing and maintaining the auditing standards. And lastly internal controls aid in evaluation of the performance of the auditing.

The most important control that should be first instituted in the auditing firm is the internal control which defines policies concerning auditing, procedures involved in auditing, flow of information including how to control audit file and communication to the clients. In the umbrella of the Audit control, there will be also general & administrative audit control, information and assets control. Also aids in evaluating the effectiveness of the implemented controls and how effective they are, after which the noted progress or decline in progress is change or improved so as to suit the business goals.

Review

Firms should ensure that an independent review is undertaken for all listed company audits. In addition firms should establish policies setting out the circumstances in which an independent review should be performed for other audits, whether on the grounds of the public interest or audit risk. The independent review should take place before the issue of the audit report to provide an objective, independent assessment of the quality of the audit. The policies should set out in detail the manner in which the review is to be performed.

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The independent review involves consideration of the following matters in order to assess the quality of the audit:

  1. The objectivity of the audit engagement partner and the key audit staff and the independence of the firm.
  2. The rigor of the planning process including the analysis of the key components of audit risks identified by the audit team and adequacy of the planned responses to those risks.
  3. The results of audit work and the appropriateness of the key judgments made, particularly in high risk areas.
  4. The significance of any potential changes to the financial statements that the firm is aware of but which the management of the audited entity has declined to make.
  5. Whether all matters which may reasonably be judged by the auditors to be important and relevant to the directors, identified during the course of the audit, have been considered for reporting to the board of directors and /or the audit committee.
  6. The appropriateness of the draft auditors report.

Conclusion

Peer review is intended to assist practicing public accounting to keep proper quality standards for the profession. When carrying out system review, the reviewing entity is required to understand the accounting and auditing practice as well as system of control of flow of information within the firm under consideration. Without this understanding it will be very difficult to carry out a successive and quality review. Reviewing entails a number of sections of the firm. The sections that are covered under the firm include; how administrative issues are handled within the organization. The independence, integrity and objectivity of audit review is carried out to understand how the firm manages their work. Planning and performance compliance test are reviewed to understand how the firm carries out their audit whether accounting and auditing standards are taken into consideration when carrying out audit. It is also important to note that electronic systems of the firm are also reviewed on how it works on various issues of audit. Working papers of audit engagement letters and assignments are also reviewed to reveal how the firm handles those issues. The firm that is carrying out the business review should understand the business risks associated with review.

Understanding the business risk approach

The direction from the audit is from the risks to the financial statements. Earlier approaches to auditing tended to start with the financial statements.

There is still a lack of clarity in the articulation between business risk and audit risk. However the idea of interest risk and control risk has tended to merge into the larger idea of business risk.

The idea of inherent risk and control risk can be called residual risk which has to be minimized by audit action. And audit action carries with it detection risk.

The approach is very much a very high level approach. Much less of the ‘can wages be paid to non –employees?’ and much more of could the client close its Bristol factory and manufacture in China and what are the possible consequences for the company and its financial statement.

Because of the better understanding of the client business it is possible to use analytical review more frequently as a verification of assertions procedure. It is an aid to the client acceptance and continuation procedures.

Going concerns considerations are a natural by –product of business risk investigation and separate consideration of growing concern may be unnecessary. The audit needs to be tailor- made and a generalized approach to audits is neither productive nor economical. However this needs better trained and higher level staffs.

Auditors need more understanding of business and to that end the larger firms should set up large databases of information about the economy and the business world. The concept implies a continuing relationship with the client rather than a one of, each year separate.

References

AICPA peer review Program or Center for Public Company Audit Firms peer review Program Enrollment. 2008. Web.

Case 7. Auditor Independence and integrity in accounting firms. Pp.240-241.

Casterella J.R., Jensen K.L. and Knechel W.R.(2007); Is Self-Regulated Peer review Effective at Signaling Audit Quality? Web.

Gray, L. and Manson, S.; The Audit Process: Principles, Practice and Cases (3rd edn), London, Thomson Learning 2007 page 231-250.

Guide For Conducting External peer Reviews Of The Audit Operations of Offices of Inspector General. 2008. Web.

Porter,B., Simon, J. and Hatherly, D.J. Principles of External Auditing (2nd edition), 2003 page 251-256 Chichester, Wiley.

Sandra Senft, et al , “Information Technology Control and Audit, Frederick Gallegos, 2008 pg 451-458.

William F. Messier, Jr, , Auditing & Assurance Services”, 3rd Edition, 2008 page 45.

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