January 26, 1998
To our peer review clients:
Once a year, we make an effort to highlight recent changes in professional standards for our peer review clients. We hope what follows is helpful to you in your accounting and auditing practice.
Peer Review Standards
As described in our letter last year, two new statements on quality control standards took effect in 1997. If you have a written quality control document, and haven't yet revised it for the new quality control standards, contact us, and we will send you a draft document you may use as a guide. There is no requirement that you have a written quality control document, however.
Starting in 1998, the peer review standards are also changing. These are the standards your peer reviewer follows when conducting your peer review. They were originally scheduled for revision in 1997, the same year the quality control standards for firms were revised, but the effective date was deferred one year, until 1998.
A firm undergoing a peer review will probably not notice much difference in how its peer review is conducted.
Perhaps the most significant change for firms is that they can continue using the same CPA to perform their peer reviews. Previously, a firm could not engage the same CPA for its peer review more than two times in a row. Now there is no such limitation.
Another change, affecting sole proprietors undergoing off-site peer reviews, may allow the reviewer to select only one full-disclosure engagement for review, when two were necessary under the old peer review standards.
Also, firms performing agreed-upon procedures engagements under SAS 75, will now need an on-site peer review, when an off-site had been sufficient under the old standards unless the firm also had audit clients.
Private Companies Practice Section
The Private Companies Practice Section (PCPS) recently announced a significant restructuring. Even its name will be different, "Partnering for CPA Practice Success," although it will still be PCPS for short. PCPS is now completely out of the peer review business. There will now be no difference between peer reviews conducted for PCPS firms and other CPA firms, although peer review reports for PCPS firms will still be kept in a public file. The firm conducting your review no longer needs to be a member of the PCPS. Read & Bose plans to continue its membership.
Disclosures
There is a new auditing interpretation, Evaluating the Adequacy of Disclosure in Financial Statements Prepared on the Cash, Modified Cash, or Income Tax Basis of Accounting. What's interesting about this interpretation is that it permits less comprehensive disclosure on OCBOA financial statements than is necessary in GAAP financial statements. Although this interpretation technically applies only to audited financial statements, it will likely also be used as a reference for accountants preparing compiled and reviewed financial statements. According to this interpretation, narrative may be substituted in OCBOA financial statements for some of the quantitative information required in a GAAP presentation. Also, GAAP disclosure requirements not relevant to OCBOA basis need not be considered. The interpretation gives as an example of a disclosure not relevant to cash or tax basis the disclosure of the use of management estimates.
SAS No. 129, Disclosure of Information about Capital Structure, will require additional disclosures about the number of shares of stock issued during the year, and about the different classes of stock outstanding. This is some of the disclosure that used to apply only to public companies, but that now applies to nonpublic companies as well. It's effective with 1997 calendar year financial statements.
New Basic Financial Statement
You may have heard that FASB will be requiring a new basic financial statement, in addition to the balance sheet, income statement, and statement of cash flows. This is the Statement of Comprehensive Income, as described in SFAS No. 130. First of all, SFAS No. 130 doesn't apply to an enterprise that has no items of "other comprehensive income" for the periods presented, nor does it apply to not-for-profit organizations. Second, a separate statement isn't necessary, as the disclosure can be included either on the income statement or in a statement of changes in stockholders' equity. What is "other comprehensive income"? It's income that bypasses the income statement in GAAP financial statements. The only such income your clients are likely to have is unrealized holding gains and losses on available-for-sale marketable securities. So unless your clients have marketable securities, SFAS No. 130 will probably not affect you.
Firms with Audit Clients
SAS No. 83, Establishing an Understanding with the Client, will require firms to establish an understanding with its audit clients, and to document the understanding in its working papers, "preferably through a written communication with the client." Practically speaking, this means engagement letters with audit clients will now be virtually unavoidable. The SAS is effective for engagements for periods ending on or after June 15, 1998.
SAS No. 85, Management Representations, will change the wording you use in your management representation letters.
As discussed in our letter last year, SAS No. 78, on the consideration of internal control in an audit, and SAS No. 82, on fraud detection, are effective for audits of calendar year 1997 financial statements. These statements will require significant changes in your audit working papers regarding consideration of internal control and will require, for the first time, documentation of fraud considerations.
Firms with governmental or nonprofit audit clients are probably already familiar with the revised Circular A-133, which now covers governmentals as well as nonprofits. Firms need to be aware that the number and wording of the internal control and compliance reports changes effective with audits for years ended June 30, 1997, and thereafter. Contact us, and we can send you the new wording. Although it's now less likely you will need to conduct a single audit, even the reports for audits conducted under the "Yellow Book" have changed. Instead of separate internal control and compliance reports, there is a combined report.
This letter will be posted on our home page, along with additional guidance on peer reviews. Our web site won an award from Harcourt Brace as as outstanding accounting web site in 1997. Its address is http://www.oregontrail.net/readbose/peer.html.
Please do not hesitate to contact us if you have any questions. We appreciate your business.
Very truly yours,
Read & Bose