Peer Review: What’s New
Rachel K. Hall
 Accounting and Financial
Reporting
 Compilation Services
 Review Services
 Audit and Attest
Accounting and Financial
Reporting
•Income Taxes
•Fair Value Measurement
•Debt
•Statement of Cash Flows
•Risks and Uncertainties
Common Peer Review Matters Related
to Accounting
Since the issuance of FIN 48, there have been many matters identified that
are associated with these new requirements. For example, some
entities’ disclosures relative to uncertain tax positions did not include
the open years as required by FIN 48.
The FASB ASC 740
• Clarifies accounting for tax positions in an entity’s financial statement
• Prescribes a more-likely-than-not recognition threshold
• Measurement of a tax position taken or expected to be taken
• Recognition, derecognition, and measurement
• Classification and Disclosure
• Undistributed earnings of a subsidiary included in consolidated income
be accounted for as a temporary difference.
Fair Value Measurement
Since the issuance of FAS No. 157, there have been many matters
identified associated with these new requirements. Some
companies have failed to disclose the fair value of investments
by levels 1, 2, and 3 as required by FASB 820-10-50.
FASB 820:
• Defines fair value
• Establishes a framework for measuring fair value
• Requires certain disclosure about fair value measurements
FASB 820-10-50-2 requires disclosure of the level within the
hierarchy of fair value measurements using:
• Quoted Prices (Level 1)
• Significant other observable inputs (Level 2)
• Significant unobservable inputs (Level 3)
Accounting for Uncertainty in Income
Taxes
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
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Gross unrecognized tax benefits beginning of year
(Decrease) Increase in tax positions for prior years
Increase in tax positions for current year
Settlements with taxing authorities
Lapse in statute of limitations
Gross unrecognized tax benefits end of year
Recognized interest and penalties for unrecognized tax
benefits
File income tax returns in the US and in various state,
local and foreign jurisdictions.
Statement of Cash Flows
Some companies fail to properly identify certain
cash flow items as operating, investing, or
financing activities. FASB 230-10-45 provides
examples of these activities as follows:
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Cash
Cash
Cash
Cash
Cash
Cash
Inflows from Operating Activities
Outflows from Operating Activites
Inflows from Investing Activites
Outflows from Investing Activities
Inflows from Financing Activities
Outflows from Financing Activities
Cash Inflows from Operating Activities
• Sales of goods or services
 Receipts from collection
 Sale of accounts
 Short and long-term notes receivable from customers
(Includes certain loans and other debt and equity instruments or
other entities that are acquired specifically for resale.)
• Cash receipts from returns on loans, other debt
instruments of other entities, and equity securities –
interest and dividends.
• All other cash receipts
 Amounts received to settle lawsuits
 Proceeds of insurance settlements (except for settlements
related to investing or financing activities i.e. destruction of
a building/refunds from suppliers
Cash Outflows from Operating
Activities
• Payments to acquire materials for manufacture or
goods for resale, including principle payments on
accounts and both short and long term notes payable
to suppliers for those materials/goods.
• Payments to other suppliers and employees for other
goods or services
• Payments to governments for taxes, duties, fines, and
other fees or penalties
• Payments to lenders and other creditors for interest
• Payments to settle an asset retirement obligation
• Payments to settle lawsuits, contributions to charities,
and cash refunds to customers
Cash Inflows from Investing Activities
• Collections or sales of loans made by the entity
and of other entities’ debt instruments
• Sales of equity instruments or other entities
and from returns of investment in those
instruments
• Sales of property, plant, and equipment and
other productive assets
• Sales of loans that were not specifically
acquired for resale
Cash Outflows from Investing Activities
• Loans made by the entity and payments to acquire debt
instruments of other entities
• Payments to acquire equity instruments of other entities
• Purchase to acquire property, plant, and equipment and
other productive assets, including interest capitalized as part
of the cost of those assets (advance payments, down
payment, or other amounts paid at the time of purchase)
However, incurring directly related debt to the seller is a
financing transaction, and subsequent payments of principal
on that debt thus are financing cash outflows.
Cash Inflows from Financing Activities
• Issuing equity instruments
• Issuing bonds, mortgages, notes, and from other
short and long-term borrowing
• Contributions and investment income that by
donor stipulation are restricted for the purposes of
acquiring, constructing, or improving property,
plant, equipment, or other long-lived assets or
establishing or increasing a permanent endowment
• Proceeds received from derivative instruments that
include financing elements at inception
Cash Outflows from Financing
Activities
• Payments of dividends or other distributions to owners,
including outlays to reacquire the entity’s equity
instruments
• Repayments of amounts borrowed
• Principal payments to creditors who have extended
long-term credit
• Seller financed debt directly related to a purchase of
property, plant, and equipment or other productive
assets are financing outflows
• Payments for debt issue costs
Risks and Uncertainties
A common peer review matter related to
accounting is disclosures of Risks and
Uncertainties. Some companies fail to properly
disclose the use of estimates.
FASB 275-10-50:
• Nature of operations
• Use of estimates in the preparation of financial
statements
• Certain significant estimates
• Current vulnerability due to certain
concentrations
Compilation Services
•Compilation Performance Requirements
•Income Tax Basis Financial Statements
•Reporting on the Financial Statements –
Basic Report Elements
•Understanding the Entity
•Form of a Standard Compilation Report
Compilation Performance
Requirements
Peer review matters identified in compilation
engagements is related to the basic
performance requirements
• Balance sheet including “current liabilities”
without appropriate caption or description
• Income statement notes the wrong periods
These matters can be avoided by ensuring a
thorough review of the financial statements
and report therein prior to submission.
The accountant should read the financial
statements and consider whether such
financial statements are appropriate and
free from obvious material errors that occur
in preparation
• Arithmetical or clerical mistakes
• Mistakes of the application of accounting
principles
• Inadequate disclosure
Preparation of Financial Statements
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Are headings appropriate?
Are major sections properly captioned?
Are accounts grouped in appropriate captions?
On the basis of transactions, are such transactions
properly classified?
Are there arithmetical errors?
Are there clerical mistakes / typographical errors?
Are the appropriate periods under the arrangement
compiled and presented?
Are there mistakes in the application of accounting
principles?
Are required financial statement disclosures
omitted?
Income Tax Basis Financial Statements
Peer review matters identified in compilation
engagements relate to the OCBOA
financials.
There have been several cases where a firm
had GAAP basis financial statements titles
on income tax basis financial statements.
Reporting on the Financial StatementsBasic Report Elements
Address all periods presented in the compilation
report
Accountant may be engaged to compile or
review:
• Complete set of financial statements
• Individual financial statement
The financial statements may be annually, or for
a shorter or longer period, depending on the
management’s needs.
Understanding the Entity:
Engagement Letters
• Missing or lacking signatures
• Required wording that the engagement could not be
relied upon to disclose errors, fraud, or illegal acts
• Required wording that the accountant would inform the
appropriate level of management if any matters came to
his or her attention unless clearly inconsequential
The accountant should ensure the engagement letter
includes:
• Objectives of the engagement
• Management’s responsibilities
• Accountant’s responsibilities
• Limitations of the engagement
Form of a Standard Compilation Report
Peer review matter is related to firms issuing
tax basis financial statements and the
compilation report was not modified to
reflect the GAAP departure.
During the course of compiling the
statements, an accountant may become
aware of a departure from the applicable
financial reporting framework that is
material to the financial statements
The departure should be disclosed in a
separate paragraph of the report including
disclosure of the effects of the departure on
the financial statements.
The accountant is not required to determine
the effects of the departure, provided that
the accountant states in the report that
such determination has not been made.
Review Services
Performing Analytical Procedures:
Failure to Document Expectations and
Compare Results
• Compare with carefully prepared budgets and
forecasts
• Maintaining manufacturing or production
budgets
• Published industry data can provide a rich
source of information for analytical procedures
Drawback to Use of Budgets
• Management may be motivated to manipulate
financial results to meet budgets or forecasts
• Forecasts may be used more for motivational
purposes than realistic expectations
• The industry ratios may not be meaningful or
may need to be adjusted
Generate Nonfinancial Data to Make
Comparisons with Recorded Amounts
• Production in Units
• Direct Labor Hours
• Number of Sales Calls
• Size of Sales Staff
• Square Feet of Selling Space
Because they are generated and maintained outside the accounting department,
comparisons involving such data can offer an independent check on the
reasonableness of related financial information, sometimes referred to as
Reasonable Tests
Management Representations:
The Representation Letter
• A management representation letter is required in a review
engagement
• Comparative financial statements were issued but the
representation letter only covered the current year
• The representation letter did not include the statement about
management’s responsibility to detect and prevent fraud
• Written representations are required from management for all
financial statements and periods covered by the review report
• The review should address all periods being reported even if the
current management was not in place during the previous year(s)
reported
Basic Elements of a Review Report
The standard review report should
• Identify the financial statements reviewed in
the opening paragraph
• Describe management’s responsibility for the
financial statements in a second paragraph
• Describe the accountant’s responsibility in a
third paragraph
• Describe the results of the engagement in the
fourth (final) paragraph
Basic Elements of a Review Report
Continued
• Title
• Addressee
• Introductory Paragraph
• Management’s Responsibility
• Accountant’s Responsibility
• Results of Engagement
• Signature of the Accountant
• Date of the Accountant’s Report
Understanding the Entity:
Engagement Letter
• The required wording that the engagement
could not be relied upon to disclose errors,
fraud, or illegal acts was missing
• The required wording that the accountant
would inform the appropriate level of
management if any matters came to his or
her attention unless clearly inconsequential
Accountant should ensure the engagement
letter includes
• Objectives of the engagement
• Management’s responsibilities
• Accountant’s responsibilities
• Limitations of the engagement
Engagement Letter should address the
following:
• Limited assurance
• Management is responsible for
 Preparation and fair presentation of the
financial statements
 Designing, implementing, and maintaining
internal control
 Prevention and detection of fraud
 Identifying and ensuring the entity complies
with laws and regulations
Engagement Letter should address the
following:
• Management will provide the accountant a letter that confirms
certain representations made during the review
• Statements on Standards for Accounting and Review Services
(SSARSs) issued by the AICPA
• Applying analytical procedures to management’s financial data and
making inquiries of company management
• Review is less in scope than an audit
• Engagement cannot be relied upon to disclose errors, fraud, or
illegal acts
• Accountant will inform the appropriate level of management of any
material errors and evidence or information that comes to their
attention during the review of fraud or illegal act
The engagement letter should address the
following if applicable:
• Material departures from the financial
reporting framework
• Reference to supplementary information
Reporting on Comparative Financial
Statements
The peer review matters identified in review
engagements relates to referencing all
periods reviewed and to supplemental
information provided in the accountant’s
review report
Audit and Attest
•Communication with Those Charged
with Governance
•Planning and Supervision
•Communicating Internal Control
•Audit Documentation
•Analytical Procedures
Communication with Those Charged
with Governance
Planning and Supervision
Communicating Internal Control
Matters Identified in an Audit
Audit Documentation
Analytical Procedures