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Selection Objective
Notifying the Firm of the Selection
Mandatory selections
Selection Documentation
How to Count Monthly Compilations
Over-Reliance on Percentages
Scope Expansion

Selection Objective.
Select a sample of engagements and offices, if applicable, that is representative of the firm's audit and accounting practice as a whole and that can be used as a basis for expressing an opinion on the firm's system of quality control. Engagement selection is based on the reviewer's assessment of peer review risk.

Notifying the Firm of the Selection
Once the review makes the engagement selection, he/she should not give the selection to the firm any earlier than two week before the commencement of the review. In addition, at least one of the selected engagements should be held until the first day of peer review fieldwork.

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Mandatory Selections

1. At least one audit subject to Government Auditing Standards (the Yellow Book) must be selected for review.
2. At least one audit subject to the Employee Retirement Income Security Act of 1974 (ERISA) must be selected for review.
3. A higher level of peer review risk should be given in the selection process to the firm's initial audits of clients because of the special auditing procedures that must be performed. The special audit procedures include:
   • Client acceptance procedures
   • Communications with predecessor auditors or accountants
   • Independence considerations
   • Auditing of beginning balances
   • Possibility of opinion shopping
4. At least one engagement subject to Federal Deposit Insurance Corporation (FDIC) Improvements Act of 1991 should be selected if the firm performs audits of federally insured depository institutions with more that $500 million in total assets and the peer review is intended to meet FDIC requirements.
5. Consider whether any requirements of the PCAOB apply, based on the following:

   Firms that perform audits or play a substantial role in the audits of SEC issuers, as defined by the Public Company Accounting Oversight Board (PCAOB), are required to be registered with and have their SEC issuer practice inspected by the PCAOB. Therefore, such engagements would not be included in the scope of the AICPA Peer Review Program (Program) except as follows:

   1. The firm was never registered with the PCAOB and the firm resigned, declined to stand for reelection, or has been dismissed as auditor of all such clients prior to the PCAOB’s requirement that firms discussed above be registered with the PCAOB by October 22, 2003. Therefore, because there is a significant public interest in, and a higher risk associated with, audits of SEC issuers, such engagements should be assessed at a higher level of peer review risk. If a firm performs the audit of one or more SEC issuers with a year-end during the year under review (and only under the situation described above) and at least one such audit engagement is not selected for review, the review team should document its justification as to why in the SRM. In addition, the reviewer should satisfy himself or herself that the SEC has been notified by appropriate filings of Form 8-Ks that the firm has resigned, declined to stand for reelection, or has been dismissed as auditor of such the SEC issuer clients (and only under the situation described above) that were clients at any time since the date of the firm’s last peer review or during the year under review if the reviewed firm has not previously had a review. Peer reviewers should not review any SEC issuers that were performed by the firm on or after October 22, 2003 under any circumstances. If a firm was never registered with the PCAOB when it was (is) required to be, the reviewer or the administering entity should immediately contact Program staff prior to the peer review commencing.

   2. The firm was previously registered with the PCAOB, and no longer is because the firm resigned, declined to stand for reelection, or have been dismissed as auditor of all such clients. Once firms are registered with the PCAOB and wish to withdrawal from registration because they no longer audit SEC issuers, the PCAOB plans to keep those firms registered until the SEC engagements have been inspected. Therefore, SEC issuer engagements from such firms should not be included in the scope of the Program except for only reviewing the firm’s PCAOB registration/withdrawal from registration forms.

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Selection Documentation.
You should document your sample selection in section III of the Summary Review Memorandum. The statistics chart is divided into three sections pertaining to SAS, SSARS, and SSAE (Statements on Standards for Attestation Engagements) engagements. The SAS section includes a line for agreed-upon procedures engagements performed under SAS No. 75. A separate SSARS section splits compilation engagements into those with disclosure and those that omit disclosures. The SSAE section includes a line for financial forecasts and projections with space for other attestation engagements that may apply.

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How to Count Monthly Compilations.
Do monthly compilations count as one engagement or 12? Monthly compilations performed for the same client count as 12 engagements. Likewise, quarterly compilations or reviews for the same client would count as four engagements. In preparing your engagement statistics, you will want to know whether or not a large percentage of compilation engagement consists of monthly engagements. Why? Your selection decisions might be different if, for example, the firm performed 120 year-end compilations for different clients as compared with 12 monthly compilations each for ten clients.

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Over-Reliance on Percentages.
As a general rule of thumb, five to ten percent of audit and accounting hours is a useful guide for selecting a sample for an system review. However, with many small firms, this guideline may not yield a representative cross-section of the firm's practice and a higher percentage may be necessary to achieve a reasonable basis for your peer review opinion.

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Scope Expansion.
You may conclude that it is necessary to expand your scope in order to determine if a matter is system-based or isolated. Here are four general steps to follow when a scope expansion is necessary:

1. Identify the matter. Identify the matter that may exist in other engagements. The matter could relate to a specific financial statement element or disclosure, an audit or review procedure, workpaper documentation, or a particular reporting element. If the matter was applicable to other engagements included in your scope, verify whether the item was treated correctly in those engagements. If the firm indicates that the matter was treated the same way in other engagements it may not be necessary to verify this condition through inspection of additional files. Otherwise, inspection of additional files is likely.

2. Select additional engagements. Ask the firm to identify engagements where the matter you wish to investigate could be present. Scan the engagements to determine if the matter noted in the original selection is also present in the expanded sample. If you can not expand your scope, because, for example, the firm has no other engagements with similar conditions, document this in the Summary Review Memorandum (Peer Review Program Manual (PRP) §4800). The inability to test for isolation could prevent you from concluding that a deficiency is isolated and you should consider possible systemic causes.

3. Document the results of the expanded procedures. Document the results of your expanded test in the SRM. Include the number of additional engagements selected and the extent and results of your expanded procedures.

4. Draw conclusions. Determine whether the original matter was isolated to the original engagement sample selected or also present in the expanded sample. If the condition is not isolated, then the matter is a likely LOC finding.

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Peer Review Guide > Engagement Selection - System

Updated: January 16, 2005