i01
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Symptom: Lack of independence (unpaid prior year fees)
System Cause: No monitoring of potential independence conflicts

Comment - The firm's quality control system does not include a procedure for monitoring engagements in a way that can alert the firm to circumstances in which its independence may be impaired. As a result the firm issued a compilation report for a client with which lacked independence. Specifically, the engagement fees related to this client had not been paid for the previous year. The firm has indicated that it will report its lack of independence beginning with the next reporting period which is imminent.

Recommendation - The firm should expand its policies and procedures to monitor past due fees of client for which it performs financial reporting services. Such procedures may include the assigning someone the responsibility to monitor client receivables and inform engagement personnel when a prior year's fees have not been paid prior to the commencement of the current engagement. Alternatively, the firm could adopt an approach where the engagement personnel determines the collection of past due fees as part of the engagement review function.

i02
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Symptom: Lack of independence (unpaid prior year fees)
System Cause: Did not follow independence evaluation procedures

Comment - The firm's quality control policies and procedures require engagement personnel to monitor and evaluate circumstances where the firm's independence on an engagement might be impaired. This evaluation includes a review of its accounts receivable for unpaid fees on continuing clients. Our review disclosed an instance where the firm issued a report on a client's financial statements before the prior year's fee had been paid. As a result, the independence of the firm was considered impaired. The firm has recalled its report and has issued a compilation report stating that the firm lacks independence.

Recommendation - The firm should reemphasize its policy of evaluating and resolving all independence issues. We also recommend that the firm's partners comply with the firm's policy of determining whether there are nay prior year unpaid fees prior to issuance of any report on financial statements and, if so, to ensure that those fees are paid prior to the issuance of the report for the current year.

i03
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Symptom: Independence impairment not identified
System Cause: Personnel not familiar with situations that may impair independence

Comment - The firm's quality control policies and procedures require engagement personnel to monitor and evaluate circumstances where the firm's independence on an engagement might be impaired. However, not all personnel have been equally trained in identifying and evaluating circumstances that could impair the firm's independence with respect to attest engagements. As a result, our review disclosed an instance where the firm issued a report on a client's financial statements when the firm's independence was impaired. Specifically, the report was issued when the firm's fees for the prior year's engagement remained unpaid. The firm has recalled its report and disclaimed an opinion with respect to the financial statements.

Recommendation - The firm should reemphasize its policy of evaluating and resolving independence issues. In addition, the firm should consider a training session to 1) review circumstances that can impair independence and 2) provide guidance for answering independence questions. One way to resolve independence questions is to consult appropriate individuals or reference sources within the firm or by calling a technical hotline service.

i04
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Symptom: The firm did not complete annual independence questionnaires
System Cause: The firm did not comply with its established policy

Comment - The firm's quality control policies and procedures require engagement personnel to monitor and evaluate circumstances where the firm's independence on an engagement might be impaired. This policy is implemented, in part, by the firm's requirement that all personnel complete an annual independence questionnaire on an annual basis. Although we noted no instances where the firm lacked independence with respect to the engagement selected for review, we observed that the firm's procedure for completing its independence questionnaire was not followed during the year.

Recommendation - The firm should reemphasize its policy of completing the annual independence questionnaire. The questionnaires should be monitored on an annual basis.

i05
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Symptom: The firm co-signed checks for a client
System Cause: The firm erroneously concluded that it was independent

Comment - The firm's quality control policies and procedures require engagement personnel to monitor and evaluate circumstances where the firm's independence on an engagement might be impaired and to consult with appropriate sources when unusual circumstances arise. In one of the firm's compilation engagements, that firm assumed the function of a co-signor for the client's checking account, but the compilation report did not disclose the firm's lack of independence. While the firm considered its independence with respect to the situation, it erroneously concluded that independence was not impaired since the client 1) approved the related invoices before the firm co-signed the checks and 2) added the second signature after the firm signed the checks. The firm plans to correct its compilation report on the next monthly engagement.

Recommendation - The firm should reemphasize its policy of seeking consultation about matters, including independence, that are unusual in nature. One way the firm can supplement its existing system with respect to resolution of questions about independence is to consult with appropriate reference sources outside the firm or by calling a technical hotline service, although this is not required by professional quality control standards.

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Peer Review Guide > Report and LOC Guide > Sample LOC Findings