June 15, 2020
To our peer review clients:
Annually we make an effort to highlight recent changes in professional standards for our peer review clients. We hope what follows is helpful in your accounting and auditing practice.
Extensions and Postponements Due to Covid-19
In response to the COVID-19 pandemic, the Peer Review Board (PRB) approved a six-month extension for all firms with original peer review due dates from January 1, 2020 through September 30, 2020. If this applies to your firm, you should have received an email from the AICPA notifying you that the automatic extension has been provided. Normally peer reviews are due six months from the end of the firm’s peer review year. With this automatic extension you will have 12 months from peer review year end to submit the peer review. For example, a firm with a peer review year ended December 31, 2019, which normally would have been due June 30, 2020, is now due December 31, 2020.
If your firm’s review has been extended, please contact us as soon as you can so we can plan to perform your review at a mutually convenient time. Deferring the due date, though providing welcome relief now, will cause the latter part of this year to be busier than usual.
In addition to the relief provided by the six-month extension, the PRB is allowing system peer reviews, which are normally conducted on site, to be performed remotely as long as the peer review commences prior to September 30, 2020. When planning your system peer review, we will take this option for an off-site review into consideration.
Many of the new professional standards with effective dates scheduled for 2020 and 2021 have been delayed.
The new revenue recognition standard, ASU 2014-09, which was scheduled to be effective for the year ended December 31, 2019, is postponed by one year to the year ended December 31, 2020. In addition, ASU 2016-02 on accounting for leases will now be effective for the year ended December 31, 2022.
The Auditing Standards Board (ASB) agreed to defer implementation of the seven most recently issued Statements on Auditing Standards (SASs). SAS Nos. 134-140, which, among other things, substantially change the auditor’s report language, will be deferred one year and are now effective for periods ending on or after December 15, 2021.
The AICPA has launched an A&A resource center addressing COVID-19 at aicpa.org/covidaudit where you can access guidance on topics like remote auditing, subsequent event disclosures and going concern. For information about how COVID-19 may impact areas of your practice other than audit, including your tax practice, check out aicpa.org/coronavirus.
Impact of Covid-19 on Reporting and Disclosure
The subsequent events footnote should likely include mention of Covid-19 as a Type II subsequent event. Here is an example footnote from the AICPA Center for Plain English Accounting:
The Company’s operations may be affected by the recent and ongoing outbreak of the coronavirus disease 2019 (COVID-19) which was declared a pandemic by the World Health Organization in March 2020. The ultimate disruption which may be caused by the outbreak is uncertain; however, it may result in a material adverse impact on the Company’s financial position, operations, and cash flows. Possible effects may include, but are not limited to, disruption to the Company’s customers and revenue, absenteeism in the Company’s labor workforce, unavailability of products and supplies used in operations, and a decline in value of assets held by the Company, including inventories, property and equipment, and marketable securities.
Accounting estimates, such as the bad debt allowance for accounts receivable trade, may be affected by the consequences of COVID-19.
The ability of an entity to continue as a going concern may be affected by COVID-19, which would impact disclosure, presentation and reporting.
If you are issuing an audit report, consider adding an emphasis of matter (EOM) paragraph. AU-C 706A indicates that a major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position is an example of circumstances when the auditor may consider it necessary to include an EOM paragraph.
Note that there is no requirement in the standards to include disclosure of declines in market value subsequent to year end of, for example, stock or bond portfolios.
Some of the More Frequent Peer Review Findings
Here are some of the more common findings seen recently in peer review:
- Inadequate risk assessment during the planning phase of an audit has become an extremely common finding on system peer reviews because the National Peer Review Board has directed peer reviewers to pay special attention to the firm’s risk assessment performance and documentation. If firms are not in compliance with the professional standards for risk assessment, their audit engagements are deemed non-conforming. For peer reviews commencing after September 30, 2021, noncompliance will automatically result in a pass with deficiency peer review. Until then, noncompliance results in mandatory CPE. In addition, the firm may have to submit an audit engagement performed subsequent to the peer review for review by an outside party. The AICPA has established a useful resource center at:
https://www.aicpa.org/eaq/aicpa-risk-assessment-resources.html
- SSARS No. 23 has been in effect since May 1, 2017, yet many firms are unaware of its impact on the language used in compilation and review reports. This standard, which followed close on SSARS No. 21 but may have got lost in the shuffle, requires new language in the accountant’s report when the presentation includes supplementary information.
- Many peer review findings are naturally driven by the questions on the peer review engagement checklists, and the engagement checklists have numerous questions on nonattest services, resulting in many findings on this topic. Although nonattest considerations can be adequately documented in a properly drafted engagement letter, we recommend completing the independence worksheet in your third-party practice aid too. You need to be very careful about your documentation on this one.
- Another common finding driven by the peer review engagement checklists is the failure to reference both years of a comparative presentation in the management representation letter.
- Although ASU No. 2015-03 has been effective starting with the 2016 calendar year, many firms continue to record unamortized loan fees as a deferred charge in other assets on the balance sheet, when this account should be recorded as a direct deduction from the carrying amount of the related debt obligations, allocated between the current and noncurrent portions of debt. In the footnote disclosure, we recommend you record the individual loan obligations on a gross basis as before, determine and record a subtotal, then subtract as a separately captioned item total unamortized loan fees. The five years maturities schedule records the gross obligation exclusive of the debt issuance costs.
- ASU No. 2015-11 requires the use of the net realizable value method in determining the fair value of inventory and was effective starting with the 2017 calendar year. Many firms still refer to “lower of cost or market” in their footnote disclosure for inventory. The use of term “market” arguably is acceptable under ASU No. 2015-11, but peer reviewers tend to write a finding if “market” has not been replaced by “net realizable value.”
- Firms are not necessarily aware of the major new standard on the nonprofit industry, FASB ASU 2016-14, which was effective with the 2018 calendar year. The failure to adopt this standard has become a frequent finding in peer review and can result in a pass with deficiency peer review outcome. The AICPA has several resources available, including a revised Audit and Accounting Industry Guide and a help center on its website. The AICPA help center is extensive and includes Excel and Word documents with the new formats and disclosures at:
https://www.aicpa.org/interestareas/frc/accountingfinancialreporting/nfp-financial-reporting-standard-asu-2016-14.html
Reporting
Regarding reviews:
In February 2020, the Accounting and Review Services Committee issued SSARS No. 25, Materiality in a Review of Financial Statements and Adverse Conclusions, which is effective for periods ending on or after December 15, 2021. In an effort to converge our standards with the international standards for review engagements, SSARS No. 25 requires the accountant to calculate and document materiality in a review engagement. In addition, the new standard increases the number of required inquiries and in several instances changes their nature, expanding and revising the list currently found at AR-C 90.2 in the codification. Further, the standard requires a statement regarding independence in the accountant’s review report and allows for an adverse conclusion in a review report when there are pervasive material misstatements in the financial statements. Be certain to revise the language in your review reports to include the statement regarding independence. If you do not update your report language, you will likely receive a finding in your peer review. Also, it is likely that the peer reviewer will ask for documentation of your materiality calculations.
Regarding audits:
In May 2019, the AICPA issued SAS No. 134 on the auditor’s report, converging AICPA auditor reporting standards with those of the International Standards on Auditing. SAS No. 134 changes the sequence of the paragraphs in the report and adds as much as another page of narrative. The opinion paragraph is presented first in the updated report followed by a new paragraph on the basis for the opinion. With the extension granted due to COVID-19 discussed above, the standard is not effective until periods ending on or after December 15, 2021.
Data Hosting Update
The AICPA issued an independence interpretation in August 2017 (ET 1.295.143) on “data hosting.” According to this interpretation, as we noted in our letter for the past two years, if you have sole custody of the client’s depreciation schedule your independence is impaired. To retain your independence, you must provide a copy of the depreciation schedule and underlying information (e.g., depreciation method, useful life, etc.) to your client so that the client’s records are complete. If you provide a copy to the client via a drop box folder or a portal, you should terminate the client’s access to the shared folder within a reasonable period of time. As a rule of thumb, this period of time may be one year. The interpretation was effective July 1, 2019.
Given this new ethics guidance, and the requirements in SSARS No. 24 with respect to going concern, there are two new representations to add to the management representation letters on review engagements. Take care when drafting representation letters to include them.
Firms with Nonprofit Industry Clients
ASU 2018-08 clarifies the reporting of contributions in the context of ASU 2014-09, the new revenue recognition standard. Although FASB deferred the implementation of ASU 2014-19 in response to COVID-19, FASB decided not to defer the implementation date of ASU 2018-08. The Board concluded that the guidance and requirements contained in the ASU would be useful to the recipients of the various grants and loans provided under the CARES Act and by the Small Business Administration. ASU 2018-08 is effective for contributions received in 2019 and includes new disclosure requirements for conditional donations.
Accounting for Variable Interest Entities
In response to Enron, FASB implemented the Variable Interest Entities (VIE) standards in 2001, compelling many companies under common control to consolidate when consolidation had not previously been required. In 2014, FASB provided an exemption for nonpublic companies when “common-control leasing arrangements” are involved. This addressed the most common scenario private entities face when determining whether a VIE should be consolidated, which is when the stockholders in the operating company also have ownership in the entity that owns and leases back the building housing the operations to the operating company. In October 2018, FASB issued ASU No. 2018-17, expanding the private company alternative. Now a private company may elect out of consolidating entities under common control in all circumstances. However, footnote disclosure about entities under common control is required. ASU No. 2018-17 is effective for fiscal years beginning after December 15, 2019, but early adoption is allowed. It is all or nothing; you either continue to consolidate VIEs or deconsolidate all of them. You will need a footnote on change in accounting principles if you implement the standard and on audits you should include an EOM paragraph in the report.
Revenue Recognition Standard
ASU 2014-09 on revenue recognition is a comprehensive new standard that was to be effective for fiscal years beginning after December 15, 2018, but due to COVID-19 is now effective for fiscal years beginning after December 15, 2019. Your clients need to be working on this right now though, so you need to be in communication with them about this standard.
The AICPA has an Audit and Accounting Guide on the new revenue recognition standard, which we recommend you purchase. Several industries, including construction, have separate chapters devoted to them.
Peer reviewers may not be able to determine whether you have properly implemented the standard insofar as the impact on the financial statements, but at a minimum they will be looking for new footnote disclosure required by the standard. Private companies have fewer disclosure requirements than public companies but will need to disclose the following:
- Revenue recognized from contracts with customers separated from other sources of revenue;
- Revenue disaggregated in accordance with the timing of transfer of goods or services;
- The opening and closing balances of receivables, contract assets and contract liabilities;
- Information about the nature of the performance obligations, such as when the company satisfies its performance obligations;
- Significant payment terms, obligations for returns and refunds, and warranties;
- Significant judgments in the application of the standard and information about the methods used; and
- In the year of implementation, include disclosure regarding adopting a new accounting principle.
Standards for Leases
ASU No. 2016-02 on accounting for leases is a comprehensive new standard that was to be effective for fiscal years beginning after December 15, 2019, but due to COVID-19 is now effective for years beginning after December 15, 2021. Under the standard, operating leases will be reported on the balance sheet as assets and liabilities. It is not too early to coordinate with your clients, locate and review the lease documents, and create the spreadsheets to compute the assets and liabilities.
Other New Accounting Standards
In May 2012, FASB established the Private Company Council (PCC) to better tailor accounting standards for small and midsize companies. The PCC standards are referred to as “PCC Accounting Alternatives.” In addition, starting in 2014 FASB has undertaken a “Simplification Initiative,” which is intended to reduce the cost of complying with professional standards. Further, FASB issued a concepts statement in 2018 on the topic of footnote disclosure. As a result of these FASB actions, there have been numerous new ASUs over the past few years. If your financial statements include fair value disclosures, deferred income taxes, goodwill, debt issuance costs, or inventory, you will want to review these standards. As addressed in our letter last year, there are additional new standards impacting presentation in such areas as marketable securities, allowance for doubtful accounts, and the cash flow statement to consider.
Take special care to implement ASU 2016-01 when preparing your 2019 financial statements. This standard removes the distinction between trading and available-for-sale securities and requires the change in the fair value of all marketable equity securities go to net income rather than appearing in Other Comprehensive Income, which will require a prior period adjustment for change in accounting method.
Firms with Clients Audited under Government Auditing Standards
The new Yellow Book was published July 17, 2018 and is effective for periods ending on or after June 30, 2020. Take care when drafting your auditor reports under the new Yellow Book, as there may be changes to the language. The recommended language will not be available until the AICPA issues the 2020 edition of its audit guide for Government Auditing Standards and Single Audits, which is scheduled for this summer. PPC will post the updated report language when it becomes available to: http://thomsonreuterstaxsupport.force.com/
The CPE requirements are mostly unchanged under the new Yellow Book, although new staff will now have to obtain the CPE before beginning work on the audit. Due to COVID-19, the GAO has issued modifications to the CPE requirement for CPE two-year periods ending between February 29, 2020 and December 31, 2020, allowing six months after the CPE two-year period elapses to make up a deficiency in CPE hours, and in certain circumstances you will be allowed to carry over up to 40 hours of CPE obtained after February 29, 2020 and prior to December 31, 2020 to the subsequent two-year measurement period.
The 2018 Yellow Book clarifies that when the auditor prepares the financial statements, this is always a significant threat requiring a safeguard. Perhaps the best safeguard to apply is a second partner review or equivalent. Note that this second review can be limited to the financial statements and related disclosures. Review of the working papers is not necessary.
The 2018 Yellow Book, Paragraph 5.64, requires GAO approval for peer review extensions of more than 90 days. Due to COVID-19, that requirement is currently waived.
Firms with Single Audit Clients
Under the Enhanced Audit Quality program, the AICPA continues to hire Subject Matter Experts (SME) to oversight peer reviewers on high risk engagements such as Single Audits. The SME will frequently challenge the peer reviewer’s judgment as to whether the Single Audit conforms to professional standards.
There have been questions as to which COVID-19 relief programs are subject to Single Audit. According to the Small Business Administration, the Paycheck Protection Program Loans going to nonprofit organizations will not be subject, while the Economic Injury Disaster Loans will be deemed federal financial assistance subject to Single Audit.
According to the OMB, entities with fiscal year ends through June 30, 2020 have a six-month extension beyond the normal due date for submitting to the Federal Audit Clearinghouse.
We recommend you read the Government Audit Quality Center Alert #382 for guidance on completing the newly revised Single Audit data collection form. Note that the Google Chrome browser does not function well with the new data collection form.
Our Peer Review Clients
When scheduling your peer review with the state society, the scheduling form requests information about the firm you have hired to perform the peer review. Using the PRIMA system, you can enter my last name “Bose” and all of the relevant information will load automatically. In case that doesn’t work, my AICPA member number is 1153765, and my firm number is 10083621.
This letter, along with additional guidance on peer reviews, will be posted to our website. Our website address is: www.peer-review.com. Our email address, if you wish to contact us about peer review, is: hbose@rbhcpas.com.
Very truly yours,
The RBH Group, LLC