Effective 1 Jul 2024, the Institute’s Practice Review (PR) Framework will be revised. One of the key changes will be the introduction of Peer Review for the audit firms (AF) with Type 3 rating.
Under the revised PR Framework, there are two (2) Types of orders that can be determined by the Practice Review Committee (PRC), which are order 3A and order 3B. The AF is required to engage either a Peer Reviewer or undergo a Quality Assessment Programme (QAP) based on the PRC’s order on Type 3 firms.
Following are some of the Frequently Asked Questions (FAQs):
A. Objective of Peer Review under the PRC’s order on Type 3 firms
1. What is the objective of the Peer Review and/ or QAP Review? Will the Peer Reviewer be liable in this process?
The goal of subjecting the work of the practitioners under the PRC’s order to a review is to uphold audit quality by enabling the practitioners of Type 3 firm (the Practitioner) to improve his/her work under the supervision of suitably qualified practitioners. The reviewer serves as a mentor assisting the practitioner under review and the focus is to assess the quality of the audit process undertaken and provide recommendation on the improvements needed.
Notwithstanding the review, the responsibility of the practitioner who is under review in signing off the audit report with respect to the audit judgment and opinion issued remains unchanged. That is, the Practitioner remains solely responsible for the audit engagements that have been signed off notwithstanding that the engagement has been reviewed by the Peer Reviewer/ QAP Reviewer.
2. Benefits of being a Peer Reviewer under the Practice Review Program
B. Qualifications of Peer Reviewer:
1. Who can be engaged as a Peer Reviewer?
The practitioner under review can engage any suitably qualified practitioners as peer reviewer, subject to PRC’s approval, as long as there are no conflicts of interest or independence issues. Peer reviewers should not be appointed among practitioners who are not in good standing or currently under litigation/suspended by any relevant regulatory authority.
Note: Approval of Peer Reviewer by the PRC will have no bearing on the outcome of the peer review process and/or subsequent reviews. The PRC will arrive at an independent conclusion for all subsequent reviews without making reference to the previous practice review or peer review process.
2. Who is considered a suitably qualified Peer Reviewer?
An individual serving as a reviewer on the Quality System of the firm or Engagement Review should at a minimum:
- Be a member of the MIA in good standing;
- Be practitioners (with valid PC certification and a valid audit license) who must not fail MIA’s practice review / are not in a non-suspended status/are free of restrictions from regulatory or governmental bodies on the practitioner’s ability to practice;
- Be currently active in public practice in the accounting or auditing function with current practice experience by performing or supervising accounting or auditing engagements in the audit firm or carrying out a quality control function in the firm, with reports dated within the last 18 months;
- Shall not be associated with a firm that has received a report with a practice review rating of Type 3 or Type 4 or a firm that is currently in the process of complaint;
- Not currently be in the process of practice review and/or have received the notification that practice review will be conducted in the next 12 months;
- Possess current knowledge of professional standards and experience related to the kind of practice and industries of the engagements to be reviewed;
- Have spent the last 5 years practicing in the accounting or auditing function;
- Complete at least 10 out of 20 structured CPE hours peach year which must be related to International Standards on Quality Management (ISQM 1), approved auditing standards, approved accounting standards and/or professional ethics;
- Meet specific additional qualifications if he/she plans to review engagements that must be selected during a peer review.
3. Does the Practitioner need to seek approval from MIA for the Peer Reviewer selected?
Yes, the Practitioner needs to seek prior approval from MIA for the peer reviewer selected. The approval process focuses on avoiding the practitioner under review engaging practitioners that are not in good standing or currently under litigation and/or suspended by any relevant regulatory authority.
Note: No approval is required from MIA ON THE SELECTED PEER REVIEWER where the practitioner under review is required to complete the QAP Program, under the PRC’s order.
4. Can a Practitioner decline to be appointed as Peer Reviewer if he/she is not comfortable with the work of the Practitioner who has failed his/her practice review?
Peer reviewers should first assess whether he/she is in the position to act as the practitioner’s mentor to improve audit quality. If the peer reviewer deems himself/herself to not have such capacity, specific industry knowledge and/or faces independence issues in performing this task, he/she should not accept the appointment.
5. Is the Peer Reviewer to be compensated?
Any compensation (if any) made to a peer reviewer will depend on the private arrangement between the Practitioner and the Peer Reviewer.
6. Are there any guidelines on the number of hours to be set for reviewing an engagement file or fees to bill a Practitioner?
No, the hours incurred and the fees billable should depend on the complexity of the review and rectification process.
7. Does the compensation arrangement need to be reported to the Practice Review Department (PRD)?
No, the compensation arrangement need not be reported to PRD. For clarity, the appointment of a peer reviewer should be confirmed in an engagement letter that should cover matters such as those pertaining to the scope of engagement, remuneration, confidentiality, responsibility and professional conduct.
8. Do I need to change the peer reviewer if, subsequent to PRC’s approval and during the Practitioner’s peer review period, the Peer reviewer failed his/her Practice Review?
The Practitioner has to assess the suitability of the peer reviewer upfront and upon obtaining new knowledge. As a matter of policy, PRC will allow the peer reviewer to continue as peer reviewer for the Practitioner. However, the peer reviewer who fails his/her Practice Review will not be allowed to be appointed as a peer reviewer subsequently.
Please refer to FAQs – B. Point (2) above for the qualifications of a practice reviewer.
9. What should be covered in the Peer Reviewer’s appointment letter?
The appointment letter should cover matters pertaining to scope of engagements, remuneration, confidentiality, responsibilities and professional conduct etc. There should also be a signed declaration of independence between the Peer Reviewer and the Practitioner.
10. Are there any checklists or manuals that (a) the Peer Reviewer needs to refer to; or (b) will guide the peer reviewer during the peer review process?
There are no checklists and/or manuals that the peer reviewer needs to refer to or that will guide the peer reviewer during the peer review process. It is at the discretion of the peer reviewer to conduct the peer review as he/she deems fit so as to meet the objective of providing guidance to the Practitioner to improve the quality of his audit process.
The peer reviewer should also request for the complete set of findings report issued by PRC and a copy of the remediation plan drawn up by the Type 3 firm to address the audit deficiencies noted in the PRC’s order letter. The peer reviewer should assist the practitioner in implementing the action plans as stated in his remedial action plan (RAP). The Practitioner and the peer reviewer should also bear in mind that the audit should be conducted in accordance with all applicable professional standards and legal and regulatory requirements.
11. What is the scope of review for a peer reviewer?
The peer review should be performed on the entire audit engagement and not just the review of selected working papers. The peer reviewer should request the Practitioner to submit the whole of the audit files, including the permanent audit file for peer review. Key audit issues should be discussed with the Practitioner to determine whether the Practitioner has taken appropriate steps to address the key audit issues and significant risk areas.
Further, the peer review is expected to ensure the firms being reviewed have a robust system of quality management and deficiencies identified during the practice review are rectified accordingly.
12. What if the Practitioner has not given the peer reviewer adequate time to review the file? Is a minimum time frame stipulated?
The completion of the peer review process should be within 24 months from the practice review (herein referred to as “issuance of final practice review report”).
The Practitioner should start planning once notified of the order and allow sufficient time for the peer reviewer to review the file, bearing in mind the intended sign-off date, end of peer review period and the peer reviewer’s workload. This is to ensure that the peer reviewer has adequate time to mentor the Practitioner. The date of commencement of the peer review process and the completion date shall be clearly documented in the appointment letter.
13. Does a report arising from the peer review need to be prepared?
Yes, a report should be prepared so that the Practitioner can provide documentary evidence that the peer review process had taken place and was completed within 24 months from the finalisation of practice review. The report also serves as documentary evidence to demonstrate compliance with the peer review order issued by the PRC. The format of the peer review report should at the minimum contain the following information:
- A cover letter and confirmation of completion of the peer review process by the peer reviewer;
- Timeline of the peer review process;
- Implementation date, together with the respective remedial action plan for findings as identified in the practice review;
- List of the audit engagements that have been selected for peer review and the results of the review; and
- The results of the review of the ISQMs.
14. Should the peer reviewer report to PRD in the peer review process?
No. The PR reviewers will review the peer review reports to assess the effectiveness of the peer review process and Practitioner’s compliance with the PRC’s order during the subsequent review. However, PRC reserves the right to request for the peer review report and all the relevant supporting documents.
15. Will any disciplinary action be taken against the practitioner for non-compliance with the peer review order?
PRC takes a stern view if a Practitioner does not comply with PRC’s order of appointing a peer reviewer and/ or completing the peer review process prior to the subsequent review. Non-compliance with the peer review may result in disciplinary and/or enforcement action.
16. What if the Practitioner forgets to write in to PRD and submit the list of audit files that have been subjected to peer review?
It is the Practitioner’s responsibility to ensure that he/she informs PRD on his/her compliance with his/her peer review order, and to provide the list of audit files that have been subjected to peer review and the names of the peer reviewers. Non-compliance with the peer review orders may result in disciplinary and/or enforcement action.
C. Selection of Audit Engagement files for Peer Review:
1. How many audit engagements should be selected for the peer review process?
There are different orders that can be issued by the PRC depending on the severity of findings during the practice review. The PRC may order that certain audit engagements signed off by the Practitioner within a specified review period be subject to peer review. In most cases, the number of audit engagements subject to peer review within a specified review period will be stated in the order issued by the PRC.
2. Are there any criteria for the selection of the audit engagements, if not expressly stated in the order issued by the PRC?
The Practitioner should bear in mind that the objective of the peer review is to provide an opportunity for him/her to improve on his/her audit process under the guidance of another suitably qualified practitioner. For this purpose, the audit engagements selected should at the minimum consist of the findings as identified in the practice review report. Other considerations for file selections should be the audit fees, the size and complexity of the engagements, and the nature and operations of the auditees.
3. What actions should be taken if the practitioner under review no longer has any audit clients or if the practitioner is unable to comply with the number of audit engagements to be subjected to peer review due to the firm’s downsizing or ceasing its operations? What should the practitioner do if he/she knows that he/she is not able to comply with the PRC order prior to the expiry of his/her 24-month rectification period?
The Practitioner is required to inform PRD immediately on the changes with the submission of relevant and sufficient evidence (e.g. confirmations from SSM on the cessation of firm) to apply for exemptions that can only be granted by PRC.