By MIA Surveillance and Enforcement Team
In a move to enhance audit quality and compliance, audit firms classified as Type 3 (Order 3A) are now mandated to engage a peer reviewer during a 24-month remediation process. While a Type 3 rating is considered a failure in the practice review due to audit opinions being inadequately supported by sufficient audit evidence, with severe weaknesses identified in their audit work, the audit firm is now afforded the opportunity, under Order 3A, to seek guidance and collaborate with their peers in enhancing their audit quality and addressing the identified deficiencies. This requirement is designed to guide audit firms in addressing deficiencies identified in their first practice review, ensuring that they meet the necessary standards before the next review is conducted.
The peer reviewer’s role is to support the firm in its efforts to improve audit practices, align with ISQM and Practice Review Committee (PRC) requirements, and ultimately meet the necessary criteria for the firm’s continued operation through a robust mechanism – that is, a comprehensive and resilient framework of policies, procedures, and internal controls that enables the firm to consistently deliver high-quality audits, adapt to regulatory changes, and effectively manage operational risk.
The Peer Review Approval Process for Type 3 (Order 3A) Audit Firms
The peer review approval process for Type 3 (Order 3A) audit firms starts when the firm receives a finalised Practice Review (PR) report from the Practice Review team, highlighting deficiencies in its audit practices. Following this, the firm is required to undergo a rectification and remedial process to address these deficiencies.
The peer reviewer acts as a mentor throughout the 24-month remediation period. Below is a breakdown of the key steps involved in the peer review approval submission process.
The first step in the process is for the audit firm to identify a suitably qualified peer reviewer. In accordance with the MIA Practice Review guidelines on Peer Reviewer’s Requirements and Qualifications – the peer reviewer must be someone who has adequate knowledge and experience in audit quality management and is familiar with the MIA’s standards and regulations. It is important to note that the peer reviewer must hold a valid audit license and maintain good standing.
The peer reviewer plays a vital role in assisting the firm not by taking liability for the firm’s failures or deficiencies, but by providing professional and technical guidance to help the firm meet the required professional standards, legal and regulatory requirements to improve the firm’s system of quality management. Furthermore, the peer reviewer must be independent and impartial, with an in-depth understanding of the audit processes and quality management systems, particularly the International Standard on Quality Management (ISQM) 1 and 2, which the firm must comply with during the remediation period following the identification of weaknesses in its audit work.
For detailed requirements of the peer reviewer, please refer to https://www.at-mia.my/2024/01/03/frequently-asked-questions-faqs-on-the-peer-review-process-under-the-practice-review-committee-prcs-order-for-type-3-firms/
After identifying a suitably qualified potential candidate to serve as peer reviewer, the audit firm must submit a declaration of good standing as part of the application process for PRC approval. This declaration confirms that the peer reviewer meets the required qualifications and maintains good standing with MIA. It is the audit firm’s responsibility to ensure that the potential candidate engaged meets these standards.
In addition to the declaration, the firm must submit a completed checklist that outlines the peer reviewer’s qualifications, experience, and good standing with MIA. This checklist is an essential part of the process, as it confirms that the selected peer reviewer has the necessary credentials and expertise to guide the firm effectively through its remediation process (Note: A standard checklist will be provided to the audit firm for completion).
The firm must ensure the checklist is accurately completed, signed, and submitted to the PRC for approval. If the peer reviewer does not meet the necessary requirements or fails to provide the required documentation, the firm will need to find an alternative peer reviewer before proceeding.
While the firm is not required to wait for the final PR report to be issued before starting the remediation process, or before seeking assistance if needed to improve audit work, it is important to note that the firm has one month to submit an application for the engagement of a peer reviewer for PRC approval. It is crucial for the firm under practice review to recognise that the remediation process is continuous, and proactive steps can be taken at any time to enhance audit quality.
The submitted firm’s declaration on good standing of the peer reviewer engaged via the checklist submission will then be tabled for PRC approval.
Upon approval of the proposed peer reviewer, the 24-month monitoring and remediation process shall commence and is deemed irrevocable. In the event that a change of the peer reviewer becomes necessary due to various circumstances, the remediation period shall proceed uninterrupted. The remediation period may only be extended upon the provision of valid justification, and at the sole discretion of the PRC. Accordingly, it is crucial that the initial selection process for the peer reviewer be executed with the utmost diligence and thoroughness.
It is important to note that the peer reviewer’s role is advisory, and they are not held liable for any failures during the remediation process. The responsibility for ensuring the remediation process is completed successfully lies with the audit firm. Nevertheless, the peer reviewer plays a vital role in monitoring the progress of the firm, providing guidance, and offering recommendations for improving audit practices.
During the 24-month remediation period, the approved peer reviewer shall guide the firm’s management in remedying the deficiencies and assist in formulating a root cause analysis to mitigate the risk of future recurrence. This process involves a structured series of reviews, feedback sessions, and improvements. The peer reviewer will review the robustness of the firm’s quality system, ensuring that the necessary corrective actions have been implemented, in compliance with ISQM 1 and ISQM 2. In addition to reviewing ISQM 1 compliance, it is mandatory for the approved peer reviewer to review at least one of the recent audit engagement files and this review should take place after the audit has been completed and archived.
Throughout the remediation process, the peer reviewer will offer feedback to the firm, conduct regular reviews of its progress, and ensure that the firm is on track to meet the MIA Practice Review requirements. Regular updates can be provided to the firm on its progress, and adjustments will be made to the firm’s processes where necessary.
While the peer reviewer has no reporting obligation to the PRC, the audit firm shall be obligated to submit its first annual progress update to the PRC, outlining the remedial actions taken and the progress achieved in rectifying any identified weaknesses, no later than 12 months from the PRC’s approval of the peer reviewer.
Upon completion of the required remediation actions at the end of the 24-month period, the peer reviewer shall submit a report declaring the completion of the remediation process to the PRC. A fresh review shall subsequently be conducted by the PRD, not earlier than 24 months from the date of the peer reviewer’s approval by the PRC.
A complaint shall be lodged with the Registrar against the audit license holder who subsequently fails his or her practice review.
Conclusion: The Importance of Selecting the Right Peer Reviewer
Finding the right peer reviewer is a crucial step in the remediation process for audit firms rated Type 3 (Order 3A). The peer reviewer plays a pivotal role in ensuring that the firm addresses the deficiencies identified in the initial Practice Review report, helps guide the firm towards compliance with ISQM 1 and ISQM 2, and ensures the robustness of its audit practices.
The MIA PRC introduced the peer reviewer process in response to feedback from firms that were rated Type 3. These firms had requested assistance in their remediation journey. By leveraging the expertise of a qualified and experienced peer reviewer, audit firms can improve their audit practices and strengthen their compliance with all the applicable professional standards, legal and regulatory requirements.
Ultimately, the success of the remediation process depends on the firm’s commitment to the process and the selection of a qualified peer reviewer. It is essential that the firm takes the necessary steps to ensure that the peer reviewer is qualified, experienced, and in good standing with the MIA. By doing so, audit firms can work towards improving their quality management systems and ensuring that their audit practices meet the highest standards, benefitting both their clients and the auditing profession.
