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Peer Review Guide > Summary of Quality Control Standards

n Overview.. This standard provides guidance for implementing the monitoring element of a system of quality control for an accounting and auditing practice, which includes all audit, attest, and accounting and review services.

While a peer review may be a substitute for some or all of a firm’s inspection procedures (in the year of its external peer review), it does not substitute for monitoring procedures, which by their nature are ongoing rather than point-in-time.

n Effective Date.. The standard became effective for a firm’s system of quality control starting January 1, 1997.

n Goal of Monitoring.. Monitoring involves an ongoing consideration and evaluation of the:

• Relevance of the firm’s policies and procedures.
• Adequacy of the firm’s guidance materials and practice aids.
• Effectiveness of professional development programs.
• Compliance with the firm’s policies and procedures.

The collective goal of the monitoring procedures (described below) is to enable the firm to determine whether its system of quality control provides it with reasonable assurance of conforming with 1) professional standards and 2) its own system of quality.

n Monitoring Procedures. The standard provides guidance for implementing monitoring procedures and lists the following examples of monitoring procedures:

• Inspection procedures.
• Pre- or post-issuance review of selected engagements.
• Review of selected administrative and personnel records pertaining to the QC elements.
• Analysis and assessment of:
1. New professional pronouncements.
2. Results of independence confirmations.
3. Continuing professional development and similar activities.
4. Client/engagement acceptance and continuation decisions.
• Interviews of firm personnel.
• Determination of QC system corrective actions.
• Communication of weaknesses identified in the QC system or in personnel’s understanding or compliance with it.
• Follow-up by appropriate personnel to ensure timely, necessary modifications to the QC system.

n Inspection as a Component of Monitoring.. The need for and extent of inspection procedures depends on the existence and effectiveness of other monitoring procedures. The firm’s size, number of offices, organizational structure, and the nature, diversity and complexity of its practice affect decisions about the need for and extent of inspection procedures. The results of recent practice reviews and previous inspections also influence the decisions. In addition, appropriate cost-benefit considerations may be considered, but this does not relieve the firm of its responsibility to effectively monitor its practice.

Under the revised standards, inspections are no longer required, but for most firms it will likely remain an effective, critical monitoring procedure.

Typical inspection procedures include:

• Review of selected administrative and personnel records that relate to quality control elements.
• Review of engagement workpapers, reports and clients’ financial statements.
• Discussions with the firm’s personnel.
• Summarization of inspection findings at least annually and consideration of their systemic causes.
• Determination of corrective action with respect to specific engagements or to the firm’s system of quality control.
• Communication of inspection findings to appropriate firm management personnel.
• Oversight by firm management to determine that proper, timely adjustments are made to the firm’s QC system.

Inspection procedures may be performed at a fixed time of year, on an on-going basis or a combination of the two.

n Pre-issuance or Post-issuance Review of Engagements as a Component of Monitoring. Procedures for carrying out pre- or post-issuance review of engagement workpapers, reports, and clients’ financial statements may be considered part of the firm’s monitoring procedures if performed by a qualified management-level individual not directly associated with the performance of the engagement (or by a qualified person under his or her direction.)

Management-level individuals include:

1. All owner of the firm and
2. Individuals within the firm with a managerial position. Interpretation 101-9 of the Code of Professional Conduct defines managerial position.

Pre- or post-engagement review procedures may also be considered inspection procedures if the following conditions are met:

1. The procedures are sufficiently comprehensive to permit the reviewer to assess compliance with all applicable professional standards.
2. Findings that indicate the need for improved compliance with or design of the firm’s QC system are periodically summarized, documented, and communicated to the person responsible for the oversight of the system.
3. Management responsible for the system determines, on a timely basis, the systemic causes of findings that indicate improvements are needed and takes the appropriate action necessary in response to the findings.
4. The firm implements, communicates to affected personnel and monitors corrective action.

A pre-issuance or post-engagement review by the person with final engagement responsibility can not be considered a monitoring procedure. However, see the next section for the exception to this general rule as it may apply to a small firm with respect to a post-issuance review.

n Monitoring Issues in Small Firm... Monitoring in small firms with a limited number of qualified management-level personnel may necessitate the review of engagements and the QC system by the same individuals who perform the engagements and who maintain the QC system.

In a small firm with limited qualified management-level personnel, a post-issuance review by a person with final engagement responsibility may be considered an inspection procedure if the four conditions outlined above for a pre- or post-issuance review are met.

A small firm should consider that an individual inspecting his or her own work might be inherently less effective than having the work inspected by another qualified person. For example, if a person inspecting his or her own work is not aware or does not understand that a recent professional standard applied to an engagement being inspected, this matter may not come to the inspector’s attention during the inspection. To effectively monitor one’s own work, the person must be able to critically review their own work, assess their strengths and weaknesses and maintain an attitude of continual improvement.

Changes in the firm’s structure or operating environment may indicate a need for monitoring by a person outside the firm.

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Peer Review Guide > Summary of Quality Control Standards

© 1998-2001, Duane Reyhl, CPA
E-mail: dreyhl@reyhl.com
Updated: May 26, 2001