Do you know what the most common peer review deficiencies are … and how to avoid them? Recently the AICPA published the General Audit Risk Alert for 2018, noting several common peer review findings. As an aside, Wolters Kluwer’s Accounting Research Manager solution is a great place to find information like this, if you were not aware. You can find out more about CCH Accounting Research Manager on CCHGroup.com.
To continue, it is prudent for all firms to:
- Understand these peer review findings
- Continuously examine their audit practices
- Know peer reviews are becoming tougher
- Consider how to use technology to help with the quality required, while simultaneously increasing efficiencies
Following are some key insights that will help you out regarding the identified common peer review deficiencies. Each insight includes a reference and a tip. Also, by the way, be sure to read the full report. Reading it will be worth your time.
Peer Review Deficiency #1 – Failure to date the auditor’s report appropriately
This first common peer review deficiency seems like it should be easy to get right. However, you must consider some detailed items. Foremost, date the auditor’s report no earlier than the date that the auditor obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial statements. This includes evidence that:
- The audit documentation has been reviewed
- All statements that comprise the financial statements have been prepared, including the related notes
- Management has asserted that they have taken responsibility for the financial statements
(Reference AU-C section 700, Forming an Opinion and Reporting on Financial Statements, paragraph .41)
Tip: CCH ProSystem fx Knowledge Coach has the guidance for firms to follow to ensure they meet the above requirements. The Overall Audit Program is also a great tool to use as a roadmap throughout the entire audit.
#2 – Failure to adequately document sampling methodology
Now, this second common peer review deficiency can be tricky, even though you may be performing sampling during an audit engagement. It is tricky because you may not be capturing all of the information necessary. What you have to demonstrate in your sampling is that you have obtained sufficient appropriate audit evidence. Peer review commonly identifies insufficient sampling documentation as a deficiency. If you do not properly document your samples, the reviewer may not be able to evaluate whether the procedure provided is appropriate audit evidence.
(Reference AU-C section 530, Audit Sampling)
Tip: There are key workpapers within the Knowledge-Based Audit (KBA) Methodology that enable documenting your methodology. Notably, AID-701 Audit Sampling Worksheet for Tests of Controls assists in performing, evaluating, and documenting sampling for tests of controls. AID-801 Audit Sampling Worksheet for Substantive Details Tests assists in performing and documenting substantive tests of details using non-statistical sampling. AUD-701 Audit Program for designing test of controls helps the auditor design tests of the operating effectiveness of internal controls.
Bonus tip: Additionally, TeamMate Analytics – another core piece of Wolters Kluwer’s Integrated Audit Approach along with Knowledge Coach – includes additional testing tools that will help you perform your sampling.
#3 – Failure to include audit documentation that contains sufficient competent evidence to support the firm’s opinion on the financial statements
Then we have common peer review deficiency number three, which is this. It is critical to ensure that you have the documentation to support the audit. Yes, this seems like Audit 101. However, firms are still struggling with this one because there are extensive considerations. It is important that you have a guide that you can always use to ensure your documentation is complete.
(Reference AU-C section 230, Audit Documentation)
Tip: Use the Knowledge Coach KBA-904, Audit Documentation Checklist helps ensure the auditor has obtained sufficient appropriate audit evidence to support his or her opinion.
#4 – Failure to update the auditor’s report for the clarified auditing standards
Common peer review deficiency number four is also interesting. These standards became effective for audits of financial statements for periods ending on or after December 15, 2012. Even so, though, peer review continues to identify this as a common deficiency. Now is the time to make sure you are using the most up to date content available so you are in compliance.
Tip: Tightly integrated, Knowledge Coach and CCH ProSystem fx Engagement always update to the latest content – either ‘on the fly’ or during the roll forward process. That is a HUGE benefit. Moreover, there are also visual cues in your Engagement binder that show when you are using older versions of the content. Now is the time to double check that you are using the right reports!
#5 – Failure to appropriate address fraud considerations
The fifth peer review deficiency is a failure that has been common over the last several years as well. So, make sure to understand your responsibilities as they relate to:
- Fraud in an audit of financial statements
- Performing audit procedures in response to the risk
- How to evaluate the audit evidence obtained
(Reference AU-C sections 240, Consideration of Fraud in a Financial Statement Audit; 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement; and 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating Audit Evidence Obtained)
Tip: Knowledge Coach has guidance built into the methodology so you can avoid this deficiency. Specifically, a resource workpaper provides a cross reference between the key requirements and the applicable forms. That resource workpaper is RES-003 Consideration of Fraud in the Knowledge-Based Audit. In addition, additional Audit Programs document the audit plan for the performance of audit procedures pertaining to compliance with laws and regulations. Those Audit Programs include AUD-903 Consideration of Fraud and AUD-904 Compliance with Laws and Regulations.
#6 – Failure to appropriately document planning procedures relating to risk assessment and the linkage of risks to the procedures performed
Peer review deficiency number six is a big one. Consider these two questions. Are you designing your audit programs in direct response to your client’s risk assessment? Are you updating the risk assessment and your plan throughout your engagement? Too many firms answer no. Thus, this continues to cause trouble for firms over the last number of years. It is critical to know your responsibility as an auditor, to than assess the risk, and finally to plan the audit accordingly.
(Reference AU-C section 315 and 330)
Tip: The design of Knowledge Coach is in direct response to the assessed risk for your client – including financial statement level risks, specific risks, and risks at the assertion level. With Knowledge Coach tightly integrated with Engagement, you will assess risk throughout your entire audit and receive prompts to address any given risk with the appropriate steps. There is one central place to add your risks and review your overall plan. That is in KBA-502 Overall Audit Program.
Through a series of tailoring, diagnostics and links, the steps you take to assess the risk you will have more assurance and, therefore, you will build a higher quality audit. Additionally, since you are designing the programs in direct response to the risk, you will also gain efficiencies. You will link the procedures directly to the identified risk and be able to re-evaluate whether other procedures are necessary. This step alone will help you avoid the trap of over auditing.
#7 – Failure to communicate or document required communications with those charged with governance
Next, we will discuss communication, or lack thereof, which is common peer review deficiency number seven. Are you always communicating with those charged with governance – and documenting that communication? There is guidance that outlines the auditor’s requirements regarding the auditor’s responsibility to communicate with those charged with governance regarding the audit. There is also guidance that addresses the auditor’s responsibility to communicate appropriately with that governance any signiﬁcant deﬁciencies or material weaknesses in internal control that the auditor has identiﬁed in an audit of ﬁnancial statements.
(Reference AU-C section 260, The Auditor’s Communication with Those Charged with Governance; AU-C section 265, Communicating Internal Control Related Matters Identiﬁed in an Audit)
Tip: Knowledge Coach has correspondence designed specifically to avoid this deficiency. There is guidance in the methodology to prompt you to use the correspondence as well! COR-903 is a sample letter from the auditor to those charged with governance. COR-904 is a sample letter from the auditor to the client with significant deficiencies and or material weaknesses.
#8 Failure to obtain appropriate management representation letters
Finally, the last common peer review deficiency noted was the failure to obtain appropriate management representation letter. This included
- Failure to update the letter in conformity with the clariﬁed auditing standard’s requirements
- Date the letter appropriately
- Include the appropriate ﬁnancial statement periods
- Include required representations
(Reference AU-C section 580, Written Representations)
Tip: Knowledge Coach has examples to use that satisfy this requirement – COR-901 Management Representation Letter and COR-902 Updating Management Representation Letter. Furthermore, as noted previously, the solution prompts you during the audit to use the correspondence, thus ensuring you are in compliance.
To read more detail on these eight common audit deficiencies, and continue learning more about how Knowledge Coach can help, check out this whitepaper.