Peer Review: What is Changing and How Being a Peer Reviewer Can Enhance Your Practice

1. Peer Review: What is Changing and How Being a Peer Reviewer Can Enhance Your Practice A Governmental Audit Quality Center Web Event October 7, 2010

2. Administrative Notes • If you encounter any technical difficulties (e.g., audio issues) during this event please take the following steps: • Press the F5 key on your computer to refresh • Close and re-start your browser • Check your speakers, ensure they are not on mute • Turn off your pop-up blocker • Re-start you computer • Call InterCall Genesys Tech support 866. 871.4318, Conf ID# 1483198 • If none of the above work, submit a request for help on the “Send a Question Box” located on the left hand side of your screen. • If are unable to get assistance from Genesys for some reason, e-mail gaqc@aicpa.org or call 202-434-9207

3. Administrative Notes • We encourage you to submit your technical questions – please limit your questions to the content of today’s program • To submit a question, type it into the “Send a Question” box on left side of your screen; we will answer as many as possible • You can also submit questions to the GAQC member forum for consideration by other members • This event is being recorded and will be posted in an archive format to the GAQC Web site

4. Continuing Professional Education • Must have registered for CPE credit prior to this event; a link to the CPE Credit Approval Form was e-mailed to you • Listen for announcement of 4 CPE codes (7 digit codes: ALL_ _ _ _ ) and 4 polling questions during the event • Record CPE Codes on CPE Credit Approval Form and return completed form (by fax or mail) to AICPA Service Center for record of attendance; keep a copy for your records • If you are not receiving CPE for this call, ignore the CPE codes that we announce, but please answer the polling questions

5. PresentersCorey ArvizuHeinfeld, Meech & Co., PCJim BrackensAmerican Institute of CPAsRick ReederReeder & Associates PA

6. What we will cover? • Overview of Statement on Quality Control Standards • Additional Quality Control Requirements of Government Auditing Standards (Yellow Book) • Additional GAQC Membership Requirements Relating to your Firm’s System of Quality Control • Overview of Peer Review Standards Effective 1-1-2009 • Recent Peer Review Changes Relating to A-133 Single Audit Engagements • What Does it Take to be a Peer Reviewer and Team Captain? • How PR Can Add Value • How to Have a Successful Peer Review Practice

7. Overview of Statement on Quality Control Standards

8. System of Quality Control • Reasonable assurance that a firm complies with applicable standards and issues appropriate reports • Consists of policies and procedures, many of which are written • Elements of quality control are interrelated • Code of Professional Conduct is an integral part of any system of quality control

9. Required Elements of QC System • Leadership responsibilities for quality within the firm (the “tone at the top”) • Relevant ethical requirements • Acceptance and continuance of client relationships and specific engagements • Human resources • Engagement performance • Monitoring

10. SQCS No. 7 • Statement on Quality Control Standards (SQCS) No. 7, A Firm’s System of Quality Control(AICPA, Professional Standards, vol. 2, QC sec. 10) • Issued October 2007 • Supersedes all previous SQCSs • Effective as of January 1, 2009 • Compliance with PCAOB QC standards does not automatically mean compliance with SQCS 7

11. SQCS No. 7 • The firm must establish a system of quality control designed to provide it with reasonable assurance that: • The firm and its personnel comply with professional standards and applicable regulatory and legal requirements, and • Reports issued are appropriate in the circumstances • A system of quality control consists of: • Policies designed to achieve these objectives and • The procedures necessary to implement and monitor compliance with those policies.

12. SQCS No. 7 • Documentation and Communication • Required to document QC policies and procedures. • Extent based on firm characteristics • Required to communicate QC policies and procedures to personnel. • More effective if in writing, but not required to be.

13. Additional Quality Control Requirements of Government Auditing Standards (Yellow Book)

14. Yellow Book QC Requirements • July 2007 Revisions to Yellow Book • Enhanced and clarified the requirements for an audit organization’s system of quality control by specifying the elements of quality that an organization’s policies and procedures collectively address • Added a requirement that external audit organizations make their most recent peer review report publicly available • Paragraph 3.50 – 3.54 discuss QC Requirements • Requirements for system of quality control are consistent with the AICPA proposed statement on Quality Control Standards except that the GAGAS requirements state that reviews of the work and the report that are normally part of supervision are not monitoring controls when used alone

15. Yellow Book QC Requirements • Those audit organizations seeking to enter into a contract to perform a GAGAS audit or attestation engagement should provide the following to the party contracting for such services • Most recent peer review report and any letter of comment • Any subsequent peer review reports and letters of comment received during the period of the contract • Auditors who are using another audit organization’s work should request • The audit organization’s latest peer review report • Any letter of comment

16. Yellow Book QC Requirements • Must document & communicate • Policies must address: • Leadership Responsibilities • Independence, Legal & Ethical Requirements • Initiation, Acceptance and Continuance of Engagements • Human Resources • Engagement performance, documentation and reporting • Monitoring

17. Yellow Book QC Requirements • Monitoring: • Engagement Supervision alone is not Monitoring • Audit organizations to analyze and summarize the results of monitoring procedures at least annually • Include identification of any systemic issues needing improvement • Include recommendations for corrective action • Should be performed by individuals that collectively have sufficient expertise and authority

18. Additional GAQC Membership Requirements Relating to your Firm’s System of Quality Control

19. GAQC Membership Requirements • Policies & Procedures: • GAQC Policies to be Addressed in QC Document • Identify Designated Partner • Client Acceptance and Retention • Engagement Performance and Review • Training and Supervision • Internal Inspection • Peer Review • Methods of documenting: • Revise the firm’s QC document to address the governmental audit practice to comply with applicable professional standards and Center membership requirements. • Prepare an addendum to the firm’s existing QC Document

20. GAQC Membership Requirements • Policies & Procedures con’t: • Communicate • Circulate the revised firm QC document • Establish training to inform audit staff of the firm’s QC policies and procedures • Circulate communication to audit staff regarding the firm’s QC policies and procedures • Link to QC document on the firm’s intranet

21. GAQC Membership Requirements • Annual Internal Inspections: • Required to establish annual internal inspection procedures that include a review of the firm's governmental audit practice (that is, all audits performed under Government Auditing Standards) • Reviewer should have current experience & knowledge of governmental auditing and accounting practices • Engagements inspected should be representative of the firm’s governmental audit practice (e.g., single audits, program-specific audits, HUD audits, etc.) and the firm locations those audits are performed in • Inspection results should be made available to peer reviewer

22. GAQC Membership Requirements • Annual Internal Inspections con’t: • Firm’s monitoring process should Include a review of the firm’s compliance with GAQC membership requirements • A peer review is not a substitute for monitoring procedures • However, consistent with AICPA quality control standards, the peer review may substitute for some or all of its inspection procedures for the period covered by the peer review.

23. GAQC Membership Requirements • Annual Internal Inspections con’t: • Developing an Governmental Audit Practice Self-Inspection Strategy • Begin with the inventory of your governmental audits audits (that is, all performed under Government Auditing Standards) • Consider: • When is the best time of year to conduct this review? • Who should perform the review? • How long will it take? • How are we going to communicate the results? • What about multi-office issues? • How it differs from concurring partner reviews? • Obtain AICPA peer review checklist or develop firm checklist

24. GAQC Membership Requirements • DAQP - Designating an audit partner to have firm-wide responsibility for the quality of the firm's governmental audit practice.   • Having all audit partners of the firm residing in the United States and eligible for AICPA membership be members of the AICPA. • Ensuring that the DAQP meets the yellow book CPE requirements, even if that partner would not otherwise be subject to those CPE requirements.  • DAQP must participate in an annual Center-sponsored Webcast on recent developments in governmental auditing. • Making publicly available information about the firm’s most recently accepted peer review as determined by the Executive Committee. • Having firm’s governmental audits selected as part of the firms peer review reviewed by a peer review team member who is employed by a Center member firm.

25. GAQC Membership Requirements • Use the Q&A document on GAQC membership requirements located at: http://www.aicpa.org/interestareas/governmentalauditquality/membership/pages/q%20and%20a%20membership%20requirements.aspx

26. Overview of Peer Review StandardsEffective 1-1-2009

27. Detailed guidance is in the Interpretations All guidance was reevaluated, reengineered, updated and clarified Allows Standards to be applicable to a diverse population of users Allows PRB to be more responsive to user feedback and environmental changes via interpretive guidance Principles v. Rules Based Standards

28. About Reengineered to be more understandable and easier to use Provides transparency Promotes consistency Streamlines process How? Defined terms and enhanced process guidance Proposed expanded use of practice aids to communicate findings to the firm New reporting format Reporting Process

29. 1 page standalone document 3 paragraphs What was reviewed, under what standards, reviewer and firm responsibilities Includes a URL to the Standards for nature, objectives, scope, limitations and procedures performed, in Plain English If applicable, reference to GAGAS, EBP &/or FDICIA practice Opinion and peer review grade Pass Pass with deficiency Fail The Peer Review Report

30. Includes descriptions of deficiencies only for reports other than with a “Pass” grade Identifies the industry and level of service for any deficiencies or significant deficiencies that are determined to be industry specific included in the report Requires little tailoring The Peer Review Report

31. Team members not required to take the two day “How to” course Independence impairment for internal inspectors, consulting reviewers and pre-issuance reviewers intending to perform peer reviews Reporting on scope limitations under the revised standards Performing a system review at a location other than the reviewed firm’s office when it is cost prohibitive and/or extremely difficult to arrange Other Changes (from previous standards)

32. Recent Peer Review Changes Relating to A-133 Single Audit Engagements

33. History of Single Audit Quality Issues • History of quality issues: • Federal Single Audit Quality Study Results • The Project issued a report titled, Report on National Single Audit Sampling Project (the PCIE report), that was issued by the President’s Council on Integrity and Efficiency (PCIE) and can be accessed in its entirety at : http://www.ignet.gov/pande/audit/natsamprojrptfinal2.pdf

34. PMTF Actions Taken • Revision to Interpretation 63-1a (June 2009 Peer Review Alert) • “Must-selects” must include A-133 engagements • No further modification to System Report “must-select” paragraph • Effective for peer reviews commencing on or after September 1, 2009

35. Revised Interpretation 63-1a • Peer Review Standards Interpretation 63-1a has been updated.  The Peer Review Board (PRB) has revised this interpretation to require that additionally, if the engagement selected is of an entity subject to GAS but not subject to the Single Audit Act/OMB Circular A-133 and the firm performs engagements of entities subject to OMB Circular A-133, at least one such engagement should also be selected for review.

36. Revised Governmental and Not-For-Profit Audit Engagement Checklist(and Engagement Profiles) • PRP Manual Section 20,500 and 20,600 • Enhanced Key A-133 Single Audit Data • Single Audit Major Program Determination worksheet or include current and two prior years’ SEFAs and Summary of Auditor’s Results (from Schedule of Findings and Questioned Costs)

37. Part A & B Single Audit/A-133 Supplemental Checklists • Part A Supplemental Checklist for Review of Single Audit Act/A-133 Engagements PRP Manual Section 22100A • Begin with Part A Checklist • Addresses most problematic concerns • Determination of major programs • Audit of major programs • Audit findings • Schedule of Expenditures of Federal Awards • Mandatory use effective for peer reviews commencing November 1, 2009 and after

38. Part A & B Single Audit/A-133 Supplemental Checklists • Reviewer should complete Part A • If there are any “no” answers in Part A, the reviewer is not required to complete Part B but needs to consider expanding scope as necessary per the standards • If there are no “no” answers in Part A, the reviewer should complete Part B. • Part A and Part B – conclusion section at the end of Part A checklist

39. Part A “No” Answers • Generally result in an engagement not performed in accordance with standards. • Focus on areas which have been common deficiencies noted in the PCIE sampling project, Peer Review and Ethics

40. Part A Deficiencies • Major Program Determination • 2 year look back rule • % of coverage • Low risk determination • Threshold calculation for major programs

41. Part A Deficiencies • Applicable, direct and material compliance requirements • Internal control • Understanding • Testing • Low level of control risk • Compliance testing • RMNC determination

42. Part A Deficiencies • Findings and questioned costs • Appropriation evaluation • Presentation • Criteria, condition, cause, effect, recommendations, views of responsible officials • Questioned costs

43. Part A Deficiencies • SEFA presentation • CFDA numbers • ARRA presentation • Pass-through information • Notes re significant accounting policies • Non cash assistance • Reconciliation to financial statements

44. Enhanced Report Acceptance Process • Enhanced report acceptance process approved by the PRB at its January, 2010 meeting • For Reviews commencing on or after June 1, 2010, peer reviewer must submit the Part A Checklist and Engagement Profile • Part A and engagement profile submitted to Report Acceptance Body • Recalculation of major program determination • Greater scrutiny of peer reviewer’s handling of “no answers” on checklists

45. What Does it Take to be a Peer Reviewer and Team Captain?

46. Public practitioners who: Have a successful audit practice serving clients in the public sector, private companies, employee benefit plans or governmental entities Are committed to enhancing the audit quality of the profession See peer reviews as a venue to work with and serve other public practitioners Who are Peer Reviewers?

47. What Does it Take to be a Peer Reviewer and Team Captain • The requirements to be a team member are the following: • Be a member of the AICPA • Possess current knowledge of applicable professional standards • Five years of recent experience in the practice of public accounting in the accounting or auditing function. • Currently active in public practice at a supervisory level in the accounting or auditing function of a firm enrolled in an approved practice-monitoring program • Must complete a resume online

48. What Does it Take to be a Peer Reviewer and Team Captain • In order to be a peer reviewer and perform engagement reviews on their own, the team members must take the first day of the two day introductory How-to course • Use the same set of practice management skills as you do on an audit – delegate appropriately to the team member and review his/her work • You are using the same set of knowledge as you use for an audit. For example, if it’s an GAO and/or OMB A-133 review you are using the same set of knowledge as you use for your governmental audit.

49. What Does it Take to be a Peer Reviewer and Team Captain • Specialized industry expertise (GAO, OMB A-133, ERISA) will give you an advantage similar to the way it does in an audit practice • Requests to be a team member • Client referrals from the firms you peer review (may decide to give up their one or two specialized audits) • Make sure you include your industry specializations in the State Society directory and any of your other marketing materials

50. What Does it Take to be a Peer Reviewer and Team Captain • Use Team Members • Team members can be located easily via a search on the AICPA website: http://peerreview.aicpaservices.org/resume/default.asp • Team members for a specialized industry are required for scheduling a review; based on the risk assessment, they may or may not be utilized (unless a “must select”). • Team members must be approved by the Administering Entity • Team members should receive their standard rate • Team member fees should be passed straight through to the firm • Team members can perform the review of the engagement off-site • Present it to the firm as a non-issue and it will be perceived that way.