New standards alter quality control systems.
Citing a diversity of practice among CPA firms in applying existing quality control standards and because that guidance did not address engagements performed under statements on standards for attestation engagements, the American Institute of CPAs auditing standards board issued two statements on quality control standards to give firms improved guidance for establishing and maintaining a quality control system for their accounting and auditing practices.
SQCS no. 2, System of Quality Control for a CPA Firm's Accounting and Auditing Practice, and SQCS no. 3, Monitoring a CPA Firm's Accounting and Auditing Practice, are both effective in January 1997. SQCS no. 2 supersedes SQCS no. 1, System of Quality Control for a CPA Firm, issued in 1979.
The new standards are based on recommendations of the AICPA joint task force on quality control standards, which was established to develop general guidance for a system of quality control. In addition to ASB representation, the task force consisted of representatives of the AICPA practice-monitoring committees (AICPA division for CPA firms SEC practice section peer review committee, the AICPA peer review board and the former private companies practice section peer review committee) and of the AICPA tax, management consulting services and personal financial planning executive committees.
Although the latter three senior committees were represented, the quality control system described in SQCS no. 2 is required only for a firm's accounting and auditing practice. The task force did develop a framework for guidance on implementing a voluntary quality control system for other practice areas, including tax, MCS and PFP. Although the framework itself is not subject to the AICPA's due process and was distributed to certain senior committees only as a recommendation, it served as the basis for SQCS no. 2.
CHANGES FROM CURRENT REQUIREMENTS
Even though the standards do not introduce any entirely new quality control elements, they do differ from the original SQCS no. 1. The more significant changes are discussed below.
SQCS no. 2 redefines a firm's accounting and auditing practice to include all audit, attest and accounting and review services for which professional standards have been established by the ASB or the accounting and review services committee under rules 201 and 202 of the AICPA Code of Professional Conduct. Also included are engagements performed under statements on standards for attestation engagements (these standards had not been issued when SQCS no. 1 was developed) and any other professional standards that may be issued by those standard-setting entities in the future.
SQCS no. 2 replaces the nine specific quality control elements in SQCS no. 1 with five broad elements. Although many aspects of the previous elements were retained, there have been some changes. Following are the five quality control elements with a brief description and how each differs from SQCS no. 1.
1. Independence, integrity and objectivity. This element replaces the independence element in SQCS no. 1. It adds emphasis to the importance of such factors in a firm's quality control system and defines the terms.
2. Personnel management. This element combines the previous four elements of hiring, advancement, assigning personnel to engagements and professional development to emphasize their interrelationship. The goal is to have personnel with integrity, objectivity, competence, intelligence and motivation perform, supervise and review work. This new element adds a requirement for firms to establish policies and procedures to meet applicable CPE requirements of the AICPA and regulatory agencies, such as state boards of accountancy and the U.S. General Accounting Office.
3. Acceptance and continuance of clients and engagements. SQCS no. 1 limited this element to a discussion of the need to consider management's integrity in the acceptance and continuance of clients. The element was broadened to include consideration of the acceptance of client engagements (in addition to client relationships) to ensure a firm has in place policies and procedures to provide reasonable assurance that only engagements that can be completed with professional competence will be undertaken. A requirement 'also was included that policies and procedures provide for obtaining an understanding with the client about the nature, scope and limitations of the services to be performed. This element does not require a written understanding; however, it refers practitioners to professional standards for guidance as to whether the understanding should be oral or written.
4. Engagement performance. The practice-monitoring committees found practitioners often confused the supervision element in SQCS no. 1 with the supervision requirements of the first standard of fieldwork under generally accepted auditing standards. The retitled element includes the SQCS no. 1 elements of supervision and consultation and discusses the need for firms to establish policies and procedures to cover planning, performing, supervising, reviewing, documenting and communicating the results of each engagement in accordance with applicable professional standards. Firms also must establish policies and procedures that provide reasonable assurance that personnel refer to authoritative literature or other sources and consult, when appropriate, on a timely basis within or outside the firm. Consultation ordinarily would be required when addressing complex, unusual or unfamiliar issues.
5. Monitoring. This encompasses and expands the former inspection element. Inspection was deemed to be a retroactive evaluation of compliance with professional standards and a review of the continuing appropriateness of a firm's quality control policies and procedures and a firm's compliance with them. Monitoring involves ongoing consideration and evaluation of the relevance and adequacy of a firm's policies and procedures, appropriateness of its guidance materials and any practice aids, effectiveness of professional development activities and compliance with the firm's policies and procedures, SQCS no. 3, referred to as the monitoring standard, describes monitoring procedures and activities, including how inspection procedures can contribute to the monitoring function.
ISSUES RAISED DURING COMMENT PERIOD
During the comment period, the Institute received approximately 40 letters; the AICPA staff also tracked informal comments on the Accountants Forum. The task force and the ASB addressed all substantive comments and made appropriate revisions. Some of the issues raised are clarified below.
Definitions of independence, integrity and objectivity. Paragraph 10 of SQCS no. 2 describes these terms. Some commentators believed the descriptions of this element's components were intended to supersede or override the related AICPA professional standards or the Code of Professional Conduct. The intent of including the descriptions in SQCS no. 2 was not to contradict existing standards but, rather, to enhance the practitioner's understanding of the meaning of the three terms in the context of a quality control system. AICPA members must still adhere to the code the new standards do not amend it in any way.
Definition of a professional. What type of professionals would be included in the scope of personnel, as defined in SQCS no. 2, and do all professionals require CPE? In SQCS no. 2, personnel refers to all individuals who perform professional services for which the firm is responsible-- whether or not they are CPAs. The determination of who in an organization is deemed a professional lies in the firm's judgment. Professional services covered under SQCS no. 2 are those included in a firm's accounting and auditing practice. The standards do not change existing CPE requirements, which are set by the AICPA and others. SQCS no. 2 requires firms to establish policies and procedures to provide reasonable assurance that these requirements are met for all professional personnel, whether or not they are CPAs.
Previously, the AICPA division for CPA firms issued guidance that helped members determine when an employee should be considered a professional and whether he or she is subject to its CPE membership requirements. The following are included:
* CPAs and individuals qualified to seek that status.
* Part-time employees who work on a year-round basis on accounting and auditing engagements.
* Individuals who provide client service on accounting and auditing engagements regardless of their education, depending on the duties they perform.
Questions practitioners have asked about the new standards and their practice-monitoring implications include the following:
* How will the new standards be considered during a peer review year when they may be applicable to only part of the year?
* Will all elements of quality control be subject to peer review?
* What level of compliance will be acceptable under the practice-monitoring programs?
* How much will it cost to implement the new standards? These questions are being addressed by the applicable practice-monitoring committee because the task force does not have the authority to make decisions about how practice-monitoring programs will be affected. The practice-monitoring committees and AICPA staff will be revising applicable materials, including the peer review checklists, to reflect SQCS nos. 2 and 3 appropriately. Task force representatives will work with the committees to ensure a smooth transition. The task force believes implementation of the new standards will not be costly for firms currently maintaining an appropriate quality control system.
In determining the need for--and the extent of--documenting the firm's quality control policies and procedures, the size, structure and nature of the practice should be considered. A "quality control document" is not required under SQCS no. 2; however, most firms are expected to document quality control policies and procedures in some fashion. An appropriate professional practice aid published by an outside vendor might be sufficient for most firms.
A firm is required to document its compliance with the five quality control elements. The form and content of the documentation are a matter of judgment. The extent of the documentation may vary from firm to firm based on firm size, number of offices, degree of authority allowed its personnel, nature and complexity of the firm's practice, firm organization and appropriate cost-benefit. Documentation of compliance with the firm's policies and procedures must be retained long enough to enable those performing the firm's monitoring procedures and peer review to evaluate its compliance with its system of quality control.
Here are some examples of documentation that may be maintained, evidencing the monitoring of a quality control system:
* Independence confirmations and correspondence about the resolution of independence matters by the firm.
* Documentation of clients and engagement acceptance and continuance decisions.
* A file that contains the documentation of consultations--in-house or outside sources--that took place during the year.
* Copies of memos issued to staff about changes in professional standards and the effect on the firm's practice.
* Documentation or memoranda summarizing the results of annual inspection procedures.
* Documentation of the summary and review of evaluations of training programs.
* Evidence of compliance with appropriate CPE requirements for the firm's professional staff.
* Results of interviews of selected professional personnel regarding the effectiveness of training programs.
MONITORING A SYSTEM OF QUALITY CONTROL
Monitoring is perhaps the most difficult element to understand. Many people find it hard to differentiate between monitoring and inspection. Monitoring involves an ongoing consideration and evaluation of the relevance and adequacy of the design and application of each of the other elements of quality control. Monitoring includes
* Inspection procedures.
* Pre- and postissuance review of selected engagements when the results of such reviews are appropriately summarized and communicated to firm personnel indicating the need for improved compliance with or changes to the system of quality control.
* Analysis and assessment of new professional pronouncements, results of independence confirmations, CPE and other professional development activities, decisions related to acceptance and continuance of client relationships and engagements and interviews of firm personnel.
* Determination of corrective actions to be taken and improvements to the quality control system.
* Communication to appropriate personnel of weaknesses in the quality control system.
* Follow-up by firm personnel to ensure necessary modifications are made to the quality control system.
Inspection procedures evaluate the adequacy of and compliance with the firm's quality control policies and procedures and may include
* A review of selected administrative and personnel records.
* A review of engagement working papers, reports and clients' financial statements.
* Discussions with firm personnel.
* Summarization of findings from inspection procedures.
* Determination of corrective actions to be taken or improvements to be made.
* Communication of findings to appropriate personnel.
* Consideration of inspection findings by appropriate firm management, which also should determine actions necessary, including modifications to the quality control system.
The monitoring standard does not require that inspection procedures be performed if other effective monitoring procedures exist. Some factors a CPA firm needs to consider in determining the need for inspection procedures include
* The nature, complexity and diversity of--and the risks associated with--the firm's practice.
* The firm's size, number of offices, degree of authority allowed its personnel and its offices and organizational structure.
* The results of recent practice reviews and previous inspection procedures.
* Appropriate cost-benefit considerations.
As a practical matter, most firms will need to perform some type of inspection procedures. A firm that contemplates not doing so is urged to discuss this with its peer review firm to help determine in advance that its monitoring procedures will be appropriate.
Included as a monitoring procedure is the pre- and postissuance review of engagement working papers, reports and clients' financial statements. These procedures may be considered monitoring procedures, provided those performing or supervising the pre- or postissuance review are not directly associated with the performance of the engagement. However, a pre- or postissuance review may constitute an inspection procedure as long as
* It is sufficiently comprehensive to enable the firm to assess compliance with all applicable professional standards and the firm's quality control policies and procedures.
* Findings that may indicate the need to improve compliance with or modify the firm's quality control policies and procedures are periodically summarized, documented and communicated to the firm's management personnel having the responsibility and authority to make changes in those policies and procedures.
* The firm's management personnel consider on a timely basis the systemic causes of findings that indicate improvements are needed and determine appropriate actions to be taken.
* The firm implements on a timely basis such planned actions, communicates changes to personnel who might be affected and follows up to determine that the planned actions actually were taken.
If the above conditions are met, a postissuance review performed in a small firm with a limited number of qualified management-level individuals may constitute an inspection procedure-even if performed by the person with final responsibility for the engagement.
If a firm has questions or is not confident in setting up an appropriate system for monitoring its system of quality control, the task force strongly recommends it consult with its peer reviewer, another qualified reviewer, or AICPA peer review division staff for assistance.
The task force is completing an implementation guide that will present the task force's recommendations regarding establishing and maintaining policies and procedures for firms of various sizes and characteristics. The systems that will be presented in the guide are for illustrative purposes only; however, the task force believes the examples will be extremely useful to firms of all sizes when designing and maintaining their own systems. The task force expects the guide to be issued before the January 1, 1997, effective date of the new standards.
* TWO STATEMENTS ON QUALITY control standards were issued by the auditing standards board to give CPA firms improved guidance on establishing and maintaining a quality control system for their accounting and auditing practices. SQCS no. 2, System of Quality Control for a CPA Firm's Accounting and Auditing Practice, and SQCS no. 3, Monitoring a CPA Firm's Accounting and Auditing Practice, are effective in January 1997.
* THE STATEMENTS ARE BASED on recommendations of the AICPA joint task force on quality control standards. The AICPA practice-monitoring committees observed a diversity of practice in applying SQCS no. 1, System of Quality Control for a CPA Firm, which was superseded by SQCS no. 2.
* SQCS NO. 2 REDEFINES A CPA FIRM'S accounting and auditing practice to include all of the audit, attest and accounting and review services for which professional standards have been established. It replaces nine specific quality control elements with five broad elements.
* THE AICPA PRACTICE-MONITORING division is revising its materials, including peer review checklists, to appropriately reflect SQCS nos. 2 and 3. Implementation of the new standards is not expected to be costly for firms currently maintaining appropriate quality control systems
* THE TASK FORCE IS COMPLETING AN implementation guide that will be useful to firms of all sizes when designing and maintaining their own systems. It is expected to be available before yearend.
BARRY BARBER, CPA, is the national quality assurance partner of Grant Thornton LLP in New York City and chairman of the AICPA joint task force on quality control standards. He also is a member of the SEC practice section peer review committee and AICPA professional ethics executive committee. KIM M. GIBSON, CPA, is a technical manager in the AICPA audit and attest standards division. Ms. Gibson is an employee of the American Institute of CPAs. Her views, as expressed in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.
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|Title Annotation:||auditing standards|
|Author:||Gibson, Kim M.|
|Publication:||Journal of Accountancy|
|Date:||Aug 1, 1996|
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