What Engagement Reviewers Cite: Findings vs Deficiencies in Peer Review

An engagement review reads a handful of your compilation, review and preparation files against a checklist. The AICPA Standards for Performing and Reporting on Peer Reviews tell the reviewer which kinds of noncompliance rank as a finding and which rank as a deficiency. That list is the most direct public statement of what reviewers cite. This post reproduces its structure, explains the ranking, and adds the AICPA's own analysis of preparation engagement matters. For the review mechanics, see system review vs engagement review; for what follows a deficiency, see ratings and corrective actions.

The source is Appendix A of PR-C section 220, "Examples of Noncompliance With Applicable Professional Standards," in the standards as updated through Peer Review Standards Update No. 3. The appendix is not all-inclusive, and the reviewer decides whether a given instance is a matter, a finding or a deficiency.

How the ranking works

The reviewer starts with checklist questions answered "no." An unresolved "no" is a matter for further consideration (MFC). If the reviewer concludes the engagement was not performed or reported on in conformity with the standards, the matter becomes a finding for further consideration (FFC). If the engagement was nonconforming in all material respects, it is a deficiency, and the report rating becomes pass with deficiencies or fail.

Appendix A sorts its examples into two lists: matters that lead to a finding and matters that lead to a deficiency. Findings draw implementation plans, which the standards limit to an allowed list. Deficiencies draw corrective actions, which can include an outside review of your engagements.

Matters that rank as findings

The first list covers errors in form and in secondary disclosures.

Reports

• Omitted phrases, or phrases not in conformity with the standards for the report issued.
• A compilation report missing the paragraph on omitted supplemental information.
• Financial statement titles and terminology that do not follow the standards.
• Failure to explain the degree of responsibility the accountant takes for supplementary information.

Presentation and disclosure

• Supplementary information not clearly segregated or marked as supplementary.
• Compiled statements on a special purpose framework that carry titles normally associated with GAAP statements when the framework is not clearly identified.
• Failure to disclose the advertising cost accounting policy, or omission of the method of income recognition.
• Misclassification of items on the statement of cash flows.
• Omitted or inadequate disclosures on accounts or transactions: accounting policies, inventory, valuation allowances, long-term debt, related-party transactions, concentrations of credit risk.
• Financial statement titles inconsistent with the accountant's report.

Documentation

• An engagement letter that exists but fails to address the requirements of the applicable standards.

The last item matters for every small firm. A letter that exists but omits required content is a finding even when the work itself is sound. Our audit engagement letter guide and the compilation, review and preparation guides list the required elements for each service.

Matters that rank as deficiencies

The second list covers errors that change what a reader would conclude.

Reports

• Issuing a review report when the accountant is not independent.
• Failing to disclose the lack of independence in a compilation report, or listing only some of the reasons when several exist.
• Inappropriate references to GAAP in a report on statements prepared on a special purpose framework.
• Failure to modify a report for a scope limitation or a significant departure from the basis of accounting.
• Failure to adopt current applicable professional standards, or a report that lacks the critical elements of the current standards.
• Omitting the periods covered when they cannot be determined from the statements.
• A review report on statements that omit GAAP-required disclosures without appropriate modification.
• A compilation that fails to disclose omission of substantially all disclosures, or of the statement of cash flows.
• For a preparation engagement, failure to issue a disclaimer report when the accountant cannot include the statement "no assurance is provided" on each page.

Financial statement measurement

• Marketable securities presented at cost rather than fair value with a material effect on the balance sheet.
• Material balances included that do not fit the basis of accounting, or required material balances left out: accruals, amortization of a significant intangible, provision for doubtful accounts, deferred income taxes.
• Improper accounting for a transaction, such as recording a capital lease as an operating lease.
• An inappropriate revenue recognition method.

Presentation and disclosure

• Disclosing the omission of substantially all disclosures in a compilation when the statements in fact include them.
• Misclassified balances and omitted significant disclosures.
• Compiled statements that omit substantially all disclosures and use a special purpose framework where the basis of accounting is not readily determinable from the report.
• For a preparation engagement, omitting the description of the financial reporting framework when the statements use a special purpose framework.
• For a preparation engagement, failure to disclose the omission of substantially all disclosures, or failure to disclose a material misstatement when the accountant prepares statements with a known departure from the framework.
• Departures from the formats prescribed by industry accounting and audit guides.
• Omitted disclosures of significant accounting policies, significant related-party transactions, or the cumulative effect of a change in accounting principle.
• A statement of cash flows not segregated into operating, investing and financing.

Notice what separates the lists. A missing paragraph on supplementary information is a finding. A missing disclosure that changes the reader's understanding of the entity is a deficiency. The same omission, say related-party disclosures, appears in both lists at different scales: "omitted or inadequate disclosures" is a finding, "failure to disclose significant related-party transactions" is a deficiency.

What the AICPA found in preparation engagements

The AICPA analyzed more than 300 MFCs from 2017 and 2018 that pertained to preparation engagements under AR-C section 70. It grouped the problems into four areas: engagement letters, assurance disclaimers, special purpose frameworks, and omission of disclosures. Appendix A shows why those four areas matter. The disclaimer, the framework description and the disclosure of omitted disclosures sit on the deficiency list for preparation engagements, and the engagement letter item sits on the finding list.

Licensing is a finding on its own

The reviewer verifies the firm license in the state of domicile and individual licenses for the people on the selected engagements. A firm that lacks a required license at any point from the start of the peer review year through the issuance dates of the reviewed engagements produces an FFC. An individual who signs a report without the required license makes that engagement nonconforming. Licensing is a check you pass or fail on paperwork alone.

A pre-issuance checklist built from the lists

Turn the appendix into a reviewer's-eye check before you release any compilation, review or preparation:

1. Does the report match the standard's current wording, with the periods covered and every required paragraph?
2. Does the independence status in the report match the independence conclusion in the file, including every reason for any lack of independence?
3. Do the statement titles match the report and the framework?
4. Is each supplementary schedule segregated and marked, with the degree of responsibility stated?
5. For special purpose frameworks, is the framework named on the face of the statements or in a note, and does the report avoid GAAP language?
6. Are disclosures complete for the framework, including policies, related parties, debt, concentrations and income recognition?
7. Is the cash flow statement classified into operating, investing and financing?
8. Does the engagement letter cover every element the standard requires?
9. Are firm and individual licenses current for every state in which you issue reports?

Run the same checklist on any file that outside support helped assemble. The partner reviews it, and the checklist confirms the report and disclosures say what the file supports.

Sources

• AICPA, Standards for Performing and Reporting on Peer Reviews (updated through Peer Review Standards Update No. 3): PR-C section 220 and Appendix A, https://www.aicpa-cima.com/resources/download/clarified-aicpa-standards-for-performing-and-reporting-on-peer-reviews
• AICPA, Preparation engagements: Avoid these common mistakes, https://www.aicpa-cima.com/resources/download/preparation-engagements-avoid-these-common-mistakes

CORAA prepares ready-to-review audit files for US CPA firms from client accounting records; the firm keeps the client relationship, the review and the signature. See /us.

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error