Peer Review Guide > Sample Recommendations for Strengthening Quality
Introduction
Definition of a system weakness
Types and examples of system weaknesses:
Design | Compliance | Performance | Documentation
Introduction. Many opportunities exist to strengthen your firm’s system of quality control--just as they exist for your clients. The best solutions depend on the size and nature of your firm and the type of engagements you perform. You should carefully consider the unique nature of your firm when proposing recommendations for change. Alternative solutions have varying degrees of effectiveness and efficiency. Your goal for any solution is to prevent the recurrence of some deficiency in performing engagements or carrying out the firm’s objectives for quality service. The solutions mentioned in this guide are geared toward improving the performance of accounting and auditing practices of local firms and sole practitioners, although, with some variation, may apply to large firms as well. Use this guide as a "tickler." Alternative solutions may apply to your firm. Be creative. The list of solutions is not meant to be all-inclusive or to establish "minimum requirements."
Discovering the best ways to prevent departures from professional standards requires that you understand and differentiate between two levels of deficiencies. The two levels correlate to the notion of cause and effect. The first level, symptomatic deficiencies ("symptom" for short), includes departures from professional standards as they pertain to engagements, but also include departures from one of the firm’s administrative policies. Symptoms are effects. An example of an engagement-related symptom or "effect" is the omission of information normally included in a financial statement footnote or the nonperformance of a required audit planning step. An example of a firm policy-related symptom might be the failure of some members of the firm to acquire all necessary continuing education for licensing purposes. Symptoms are usually effects of (in other words caused by) the second, broader level of deficiencies called systemic deficiencies.
Systemic deficiencies, as the name implies, are weaknesses in a system. While the concept seems simple, it can be it difficult to apply. It helps to recall what a quality control system is. Think of it as part of a CPA firm’s overall internal control. A segment of the internal control structure includes the collective policies and procedures that govern a firm’s technical services. That segment is called the firm’s quality control system. These policies and procedures can be formal or informal. The latter type consists of policies that are generally understood to be the firm’s practice even though they are not written. Most firms supplement formal policies with informal ones. Since the existence of a system does not depend on its formality, all firms, including sole practitioners, have some type of system.
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Definition of a system weakness
Design | Compliance | Performance | Documentation
Definition of a system weakness. A system weakness is a condition within the quality control system that increases the firm’s risk that it may depart from professional standards in some material respect and not detect the departure on a timely basis. Like conditions that you might find in a client’s internal control structure, systemic weaknesses in a CPA firm’s quality control system can exist in the:
Weaknesses are important to identify and correct because systemic deficiencies can create conditions that lead to cause symptomatic deficiencies. Hence, the cause and effect relationship.
When you identify and correct weaknesses in your system for quality, you increase your ability to prevent engagement deficiencies from recurring. The cause and effect approach to analyzing a quality control system, identifying alternative solutions to weaknesses, choosing a solution and monitoring results applies equally to all technical areas of your CPA firm’s practice. For example, you can use it to improve the quality and effectiveness of your tax practice by identifying opportunities for strengthening or streamlining the way members of your firm research tax problems or how firm members prepare tax workpapers in a way that facilitates owner review. For our discussion here, however, we’ll focus on that part of the firm’s system that governs the audit and accounting practice.
Design and application/execution weaknesses can yield four types of deficiencies: design, compliance, performance and documentation. Design deficiencies are weaknesses that exist in the firm's stated system of quality control and increase the risk that the firm may not comply with professional standards that self-explanatory. Application/execution weaknesses may consist of compliance performance or documentation deficiencies.
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Definition of a system weakness
Design | Compliance | Performance | Documentation
Design Weaknesses. A design weakness is one type of systemic deficiency. The design of a policy or procedure, even if fully complied with, is weak if a particular quality control objective is not likely to be accomplished. It suggests that a firm should add or strengthen a policy or procedure because a critical policy may be missing, not comprehensive enough or too general to be effective. Examples of design weaknesses include:
To correct design weaknesses:
The effectiveness of a given solution depends on the size and nature of your firm’s practice.
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Definition of a system weakness
Design | Compliance | Performance | Documentation
Compliance Weaknesses. A compliance weakness belongs to the application and execution category of weaknesses and exists when a firm’s policy or procedure (formal or informal) is not routinely followed. A deficiency of this type can exist even when the policy or procedure exceeds the requirements of professional standards. Existence of a policy implies that the firm has considered it necessary in order to meet it quality control objectives. Compliance deficiencies are accompanied sometimes by a lack of understanding of the policy. Your firm is especially prone to compliance deficiencies when you have recently hired new personnel or experienced turnover. New members of the firm may not be completely familiar with your policies and practices so the likelihood of noncompliance goes up. Examples of a compliance deficiencies include those instances where a written or informal policy or procedure is not followed on a consistent basis with respect to:
To correct compliance weaknesses:
Compliance weaknesses are the simplest to correct as long as all members of the firm support your system of quality control. The level of support is directly affected by the firm’s control environment which is influenced by the leadership of the firm’s owners who set the tone for the behavior and attitudes for other personnel in the firm. The easiest way to correct compliance deficiencies is to remind members of the firm about the policy or procedure and then monitor future compliance. Sometimes noncompliance can result from an unnecessarily complicated firm process. If you believe this is the case, consider ways to simplify the process.
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Definition of a system weakness
Design | Compliance | Performance | Documentation
Performance Weaknesses. A performance deficiency is a type of engagement deficiency where there was a failure to adhere to professional standards. A performance weakness can occur even though a firm has an appropriately designed system of quality control that it otherwise has complied with. The performance failure can be minor or significant. For instance, a particular professional standard may be misapplied or not performed. A performance deficiency can be a symptom of a broader design or compliance deficiency. It may also be accompanied by a lack of understanding of a professional standard or QC policy, but can result from isolated human error. Examples of design or compliance weaknesses that might lead to performance deficiencies include:
To correct performance weaknesses:
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Definition of a system weakness
Design | Compliance | Performance | Documentation
Documentation Weaknesses. A documentation weakness is another category of symptomatic deficiencies. A documentation deficiency exists when a firm has performed a procedure, but its workpapers do not document that performance. Like performance deficiencies, documentation deficiencies may have a system design or compliance orientation or may result from isolated human error. If a documentation weakness relates to a key engagement area, it may be difficult to support a conclusion that the procedure was performed. Common documentation deficiencies include:
To correct documentation weaknesses:
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Definition of a system weakness
Design |
Compliance |
Performance |
Documentation
Duane Reyhl > Peer Review Guide > Sample Recommendations for Strengthening Quality