PEER REVIEWIntroduction, Concept &Introduction, Concept &

ReportingReporting

------By CA Mohan SanzgiriBy CA Mohan SanzgiriMg. Partner:- Sanzgiri Acharya & Mg. Partner:- Sanzgiri Acharya &

Associates CAsAssociates CAs

What is Peer Review? • Peer Review deals with examination and

review of systems and procedures to determine whether the systems and procedures are:

In existence Effective Operating continuously during the period under

review.

•NEED FOR PEER REVIEWNEED FOR PEER REVIEW•Even the best of professionals need and Even the best of professionals need and deserve the approbation of their abilities. deserve the approbation of their abilities. Confirmation is needed that the narrow path Confirmation is needed that the narrow path that they are following is the one which others that they are following is the one which others like them subject themselves to with the same like them subject themselves to with the same code of ethics and behavior with firmness of code of ethics and behavior with firmness of values which support his stance.values which support his stance.

OBJECTIVES OF PEER REVIEWTo ensure that members while performing attestation services comply with technical standards laid down by the Institute.

To ensure that such a member has in place proper system (including documentation system) for maintaining high quality of attestations services performed by him

To ensure adherence to various statutory and other regulatory requirements &

To enhance the reliance placed by the users of financial statements for economic decision making.

ORIGIN OF CONCEPT In the US in mid-seventies by AICPA, Peer Review

was acknowledged as single most important self-regulatory initiative by Securities and Exchange Commission

It is conducted once in three years Two types of reviews – Committee appointed

review and – Firm-on-Firm review. In the wake of Enron debacle, the then Chairman,

SEC Harvey L. Pit put forward a two pronged approach, including overhauling of disciplinary mechanism and quality control aspects.

Implementation of Sarbanes – Oxley Act, 2002 and the constitution of Public Companies Accounting Oversight Board have focused on installing more robust mechanism to instill confidence of the society in the accountancy profession.

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PeerPeer A person of similar standingA person of similar standingReviewReview Conduct of re-examination or Conduct of re-examination or

retrospective evaluation of the subject matterretrospective evaluation of the subject matter

As per the statement of Peer Review as issued As per the statement of Peer Review as issued by the ICAI, by the ICAI, ““A Peer Review means an examination and A Peer Review means an examination and review of the systems and procedures to review of the systems and procedures to determine whether they have been put in place determine whether they have been put in place by the practice unit for ensuring the quality of by the practice unit for ensuring the quality of attestation services as envisaged and attestation services as envisaged and implied/mandated by the Technical Standards implied/mandated by the Technical Standards and whether these were effective or not during and whether these were effective or not during the period under review”.the period under review”.

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INTENTION OF PEER REVIEW• The intention of Peer Review is to

provide value addition for further elevating the Quality of services rendered by chartered accountants.

INDIAN PERSPECTIVE • The credibility of the opinion expressed by

the auditors on the independent review of financial statements and records has been questioned quite often.

• Widening gap between expectations and performance.

• Role of Audit committees.

• Naresh Chandra Committee felt need to establish an efficient and professional body to provide transparent and expeditious quality oversight, in the interest of Investors, General public and Professionals.

INSTITUTE’S INITIATIVESINSTITUTE’S INITIATIVES Released statement on Peer Review to meet Released statement on Peer Review to meet the demands of greater transparency and the demands of greater transparency and consistency. Statement envisages consistency. Statement envisages maintenance and enhancement of quality of maintenance and enhancement of quality of attestation services and adherence to attestation services and adherence to standards issued by the institute.standards issued by the institute.

Peer review board set up in 2002 has brought Peer review board set up in 2002 has brought out Peer Review manuals providing guidance out Peer Review manuals providing guidance and insight of various aspects in view of the and insight of various aspects in view of the audit. audit.

Out of CA memberships with ICAI, approx. 60-Out of CA memberships with ICAI, approx. 60-70 % members are in practice. ICAI has 70 % members are in practice. ICAI has initiated Peer Review so as to meet the initiated Peer Review so as to meet the demand of high quality assurance, demand of high quality assurance, consistency and greater transparency consistency and greater transparency iin the n the services rendered by CAs.services rendered by CAs.

USE OF PROFESSIONAL SKILLS For a professional, life is a long series of tests.

Which the users of services put him toWhich he puts himself to.

The review begins with the assumption that professional works professionally, it ends up with an enhancement of those attributes of professionalism that serve to keep the chartered accountants in the forefront of accounting and auditing profession globally.

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PEER REVIEW PROCESSEmpanelment Of Reviewers • A panel of reviewers is maintained by the

Peer Review Board, satisfying the qualification requirements laid down in the Statement i.e.,

a.an individual should be a member of the Institute;

b.possess at least 15 years experience of audit; and

c.be currently active in the practice of accounting and auditing.

• Peer Review Board shall have autonomy in its functioning and will be an independent body. Members of the Board represent 6 Council Members, nominees of CAG, Dept of Co. Affairs, Industry and persons of eminence and reputation from different strata of society, like Judiciary, Educational, Banking Sectors assists as special Invitees.

Selection Of A Practice Unit (PU)• At each stage, certain practice units satisfying the criteria

are selected on random sample basis. Practice units falling under Stage I would be subjected to peer review at least once in three years. While PU’s under the Stage II & III may not.

STAGES OF THE

PRACTICE UNITS

INCLUDE THE FOLLOWING:- Not covered under Stage I and II ----- subject to the above limits (turnover and paid-up capital)

w.e.f. 01/04/05

III

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Rs. 20 crores & above

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Between Rs. 2

crores to Rs. 5 crores

i.Statutory audits of branches of public and private sector institutions (Banks, etc.) (Regional, Rural, Co-op.)

i.Non Banking Financial Companies (listed) & not in Stage I above.

i.Companies (Private Sector)

w.e.f. 01/04/04

II

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Rs. 50 crores & above

Rs. 50 crores & above

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Rs. 5 crores & above

Rs. 5 crores & above

i.Central statutory audit of public companies & institutions.

i.Central statutory audits of public sector undertakings and central co-op. soc.

i.Audit of companies (Private Sector)

w.e.f. 01/04/03

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Annual turnover

Paid-up capital

Type of companiesDate of implementa

tion

Stages

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THE THREE MAIN STAGES INVOLVED IN THE PEER REVIEW PROCESS:- Planning, Execution, Reporting.

Intimation to the Practice Unit (Planning)

• An intimation in writing is sent by the Board to the Practice Unit informing of its selection for peer review along with the following documents:-

– A copy of the Statement on Peer Review.– A panel of three reviewers suggested by

the Board or Sub-Committee constituted by it for this purpose.

– A copy of the questionnaire.

PLANNING FLOWCHART

(AS ATTACHED)

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15Selection of Sample Attestation ServicesEngagements and Communication to Practice Units (Planning) • The reviewer, on the basis of the information

given in the questionnaire or after seeking such other information selects a sample of attestation services engagements on random basis. After the selection, the reviewer sends a written intimation to the practice unit about the sample selected, two weeks in advance, from the date the reviewer intends to begin the review. The intimation contains a request for ready availability of the relevant records required.

PART C:-Performance of Attestation Engagements:-•Audit Record Administration

•Review & Evaluation of Systems of Internal Control

•Substantive Tests

•Financial Statement Presentation

•Audit Conclusions & Reporting

PART A:-Profile of the PracticeUnitPART B:-General Control:-•Independence

•Maintenance of Professional Skills & Standards

•Outside Consultation

•Staff Supervision & Development

•Office Administration

QUESTIONNAIRE16

17Request for Peer Reviewer An auditee concern may also request the Board for the conduct of peer review of its auditor i.e. Practice unit.

Selection of Attestation Engagements (Execution)

• The number of attestation service engagements to be reviewed depends upon, inter alia, the number of practicing members involved, degree of reliance to be placed on general controls and total number of engagements undertaken by the practice unit during the period under review.

Method of Review (Execution) Reviewer may adopt either

•compliance approach or, •substantive approach or,•a combination of both.

COMPLIANCE AND SUBSTANTIVE APPROACHCOMPLIANCE AND SUBSTANTIVE APPROACH The reviewer may adopt the compliance approach The reviewer may adopt the compliance approach that helps in determining the nature, timing and that helps in determining the nature, timing and extent of the substantive review procedures to be extent of the substantive review procedures to be applied in review. applied in review.

The compliance approach may not be warranted if The compliance approach may not be warranted if the size of the firm is small or medium or the kind of the size of the firm is small or medium or the kind of attestation services rendered by the practice unit.attestation services rendered by the practice unit.

The substantive approach involves application of The substantive approach involves application of such review that provide the reviewer evidence as to such review that provide the reviewer evidence as to the appropriateness of the factors on which the the appropriateness of the factors on which the review is required to be focused on. review is required to be focused on.

EXECUTION FLOWCHART (AS ATTACHED)

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21Cost Of Peer ReviewCost Of Peer ReviewNotification No.: PRB/Notfn./001/02-03, issued on: March Notification No.: PRB/Notfn./001/02-03, issued on: March 18,200818,2008cost of Peer Review, including honorarium and cost of Peer Review, including honorarium and TA/DA for reviewer and his qualified assistant, TA/DA for reviewer and his qualified assistant, shall be as under:shall be as under:

Normally the review should be over in 2 days’ Normally the review should be over in 2 days’ time. However, if the work is likely to exceed time. However, if the work is likely to exceed beyond two days, cost @ Rs. 3750/- per day beyond two days, cost @ Rs. 3750/- per day subject to maximum limit prescribed above shall subject to maximum limit prescribed above shall be payable. Service tax should be included in be payable. Service tax should be included in the cost of peer review.the cost of peer review.

Rs. 30000/-Rs. 22500/-Above Rs. 50 Lacs p.a.Rs. 22500/-Rs. 15000/-Between Rs. 10 lacs to 50 Lacs p.a.Rs. 15000/-Rs. 7500/-Less than Rs. 10 lacs per annum

Maximum Limit

CostTotal Revenue form Attestation service clients of practice unit

Rs. 30000/-Rs. 22500/-Above Rs. 50 Lacs p.a.Rs. 22500/-Rs. 15000/-Between Rs. 10 lacs to 50 Lacs p.a.Rs. 15000/-Rs. 7500/-Less than Rs. 10 lacs per annum

Maximum Limit

CostTotal Revenue form Attestation service clients of practice unit

AAS-3 DOCUMENTATION(SA-230) (EXECUTION)• “The Auditor should document matters which

are important in providing the audit evidence that the was carried out in accordance with the Basic Principles – AAS 1(SA 200)”

• The main reason for Documentation is the Onus of Court proceedings against an auditor is on him to prove that he was not Professionally negligent in performance of his duties.

• Documentation is the proof to the outsiders that he planned and performed an effective audit.

Minimum Maintenance Of Records/Documentation :

• AAS -3 requires maintenance of mandatory documentation.

• The records maintained by the Practice units fall into Two categories :

• Mandatory Records• Recommendatory Records• The Practice unit should maintain following

Documents:• Profile of the Practice Unit:

It should contain the relevant documents that corroborate the information provided by the practice unit in response to the questionnaire.

• It can be Divided as follows :-– Information related to Partners and

constitution of Firm– Staff– Articled Clerk

Lists of ClientsEvery Practice unit should maintain a register containing following information ;

Kind of Services rendered by the clientContact DetailsBrief Profile of the Client

The reviewer should also examine the register of the client, this can help the reviewer in modifying the initial sample selected in the peer review.Manual of Policies and Procedures.A manual of policies and procedure should be maintained by the Practice Units.The manual should incorporate polices related to:

Acceptance of an engagementSkills and competence for a particular type of engagementThe manner of assignment and delegation of Authority and responsibility for different kinds of engagement.The procedure for consultationPolicy for retention of clientsGuidelines for monitoring the engagementPolicies regarding direction and supervision of the engagement.

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• Mandatory Documentation.:– Working papers should record the

audit plan,nature,timing and extent of auditing procedures and conclusions drawn thereon. It should be designed and properly organized.

– The auditor should adopt reasonable procedures for custody and confidentiality of his working papers and should retain them for a period of time sufficient to satisfy any pertinent legal or Professional requirements of record retention.

• Review of Working Papers :The purpose of the review is to correlate the working papers with the financial statements, assess whether adequate evidence has been obtained, determine whether significant matters or problems have been properly considered and resolved.

• Reviewers Working Paper :The reviewer is required to keep these working papers for a period, as prescribed by the Board or until when the practice unit appeals against the review before the Peer Review Board.

REVIEW PROCEDURES (Execution)

• Staff Supervision and Development– Orientation for new appointees.– System of Scheduling & Staffing.– Monitoring personnel training & development

• Training and Office Administration– Scheduling related to Skill & Competence– Review of work and guidance– Monitoring progress of engagement

• Elements considered while designing the training programme

REPORTING AND

REVIEWING:-

REPORTING FLOWCHART (AS ATTACHED)

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Departures from acceptable accounting principlesInadequate disclosuresMaterial future event uncertainties

Specific Circumstances to be mentioned in report

PU to comply with reporting standards prescribed under law.Complying with applicable form and content requirements under statute, regulation or contract.Comply with ICAI’s Statement on Qualifications in Auditor’s report.

Compliance

Must contain adequate evidence to support audit opinion. Working Papers

Reviewer to determine level of supervision of engagement under review:- 1)Complexity of subject matter, 2)Qualifications of audit team3)Extent of consultation available and used,4)Degree of authority delegated to assistants,5)Performance of audit team,6)Risks inherent in the engagement.

Level of Supervision

Report should contain a clear written expression of opinion on the financial information. Form and content of report should comply with the expectation.PU should have policies and procedures to provide reasonable assurance that the reports issued are supported by conclusions reached at each stage of audit.

Quality of Reporting

REPORTS AT VARIOUS STAGES

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PRELIMINARY REPORT• After on-site review, reviewer may

communicate with PU and seek clarifications and consider sending a preliminary report if replies not found satisfactory.

• After on-site review, in case of deficiencies in systems and procedures or non-compliances the reviewer to issue preliminary report to PU immediately.

INTERIM REPORT• Reviewer to issue Interim Report with a

copy to the PU, if not satisfied with reply of the PU and deficiencies are of such serious nature that they do not ensure quality of attestation services performed by the PU-weakness in compliance with technical standards and/ or in Internal Quality Control systems.

• Report to clearly indicate “Interim Report’

FINAL REPORTFinal Report should incorporate the findings as discussed with the PU.Reviewer may issue

•A clean report, if he is of the opinion that PU is conducting its affairs

in a manner that ensures quality of services rendered by it.

•A qualified report

A qualified report may be issued in case of •Non compliance with technical

standards •QC system design deficiency•Non compliance with QC policies and

procedures.•Non existence of adequate staff

training programmes•System of QC•QC standards for attestation services

Qualification shall mentiondissatisfaction about the weaknesses in

application of Technical Standards

Recommendation to PUInstructions to Reviewer

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ACCOUNTING STANDARDS (AS) • AS 1 Disclosure of Accounting Policies• AS 2 Valuation of Inventories• AS 3 Cash Flow Statements• AS 4 Contingencies and Events

Occurring after the Balance Sheet Date• AS 5 Net Profit or Loss for the period,

Prior Period Items and Changes in Accounting Policies

• AS 6 Depreciation Accounting• AS 7 Construction Contracts

(revised 2002)• AS 8 Accounting for Research and

Development (withdrawn)• AS 9 Revenue Recognition• AS 10 Accounting for Fixed Assets• AS 11 The Effects of Changes in Foreign

Exchange Rates (revised 2003)• AS 12 Accounting for Government Grants• AS 13 Accounting for Investments• AS 14 Accounting for Amalgamations• AS 15 (revised 2005) Accounting for

Retirement Benefits in the Financial Statement of Employers

• AS 16 Borrowing Costs• AS 17 Segment Reporting• AS 18 Related Party Disclosures• AS 19 Leases• AS 20 Earnings Per Share• AS 21 Consolidated Financial

Statements• AS 22 Accounting for Taxes on Income.• AS 23 Accounting for Investments in

Associates in Consolidated Financial Statements

• AS 24 Discontinuing Operations• AS 25 Interim Financial Reporting• AS 26 Intangible Assets• AS 27 Financial Reporting of Interests in

Joint Ventures• AS 28 Impairment of Assets• AS 29 Provisions, Contingent` Liabilities

and Contingent Assets• AS 30 Financial Instruments:

Recognition and Measurement • AS 31 Financial Instruments:

Presentation Accounting Standard • AS 32 Financial Instruments:

Disclosures 

STANDARDS OF AUDITING (SA)• SA 200 Basic Principles Governing an Audit• SA 200A Objectives and Scope of the Audit of

Financial Statements• SA 210 Terms of Audit Engagement • SA 220 Quality Control for Audit Work • SA 230 Audit Documentation (Revised)• SA 240 The Auditor’s Responsibilities Relating to

Fraud in an Audit of Financial Statements  (Revised)

• SA 250 Consideration of Laws and Regulations in an Audit of Financial Statements  (Revised)

• SA 260 Communication with Those Charged withGovernance (Revised)

• SA 299 Responsibility of Joint Auditors • SA 300  Planning an Audit of Financial

Statements (Revised)• SA 310 Knowledge of the Business• SA 315 Understanding the Entity & its

environment and Assessing the Risk of Material Misstatement (Newly issued)*

• SA 320 Audit Materiality • SA 330 The Auditor’s Responses to Assessed

Risks (Newly issued)*• SA 402 Audit Considerations Relating to Entities

Using Service Organizations• SA 500 Audit Evidence• SA 501 Audit Evidence-Additional consideration

for specific items• SA 505 External Confirmations• SA 510 Initial Audit Engagements – Opening

Balances

• SA 520 Analytical Procedures • SA 530 Audit Sampling  (Revised) • SA 540 Auditing Accounting Estimates, Including

Fair Value Accounting Estimates and Related Disclosures  (Revised)

• SA 550 Related Parties • SA 560 Subsequent Events  (Revised)• SA 570 Going Concern  (Revised)• SA 580 Written Representations  (Revised)• SA 600 Using the Work of Another Auditor • SA 610 Relying Upon the Work of an Internal Auditor • SA 620 Using the Work of an Expert • SA 700 The Auditor's Report on Financial

Statement• SA 705 Modification to the opinion in the

Independent Auditor’s Report• SA 706 Emphasis of matter Paragraphs and Other

Matters in the Independent Auditor’s Report• SA 710 Comparatives • SA 720 The Auditor’s Responsibility in relation to

Other information in documents containing audited financial statements

• SRE 2400 Engagements to Review Financial Statements

• SAE 3400 The Examination of Prospective Financial Information

• SRS 4400 Engagements to Perform Agreed- upon Procedures Regarding Financial Information

• SRS 4410 Engagements to Compile Financial Information

TIME BUDGET • Time is of vital importance in all audit work.

The partner must control it firmly, as assistants are liable to take up more time than originally scheduled. Many precious man-hours are lost if a busily occupied senior staff member fails to note that an assistant is wasting time on non-essentials. Again, a senior may lose control by failing to compare the schedule with the complete item of work.

• Implementation of time management would be advisable.

Illustrative Time Schedule of Peer Review Process

(As attached)

35 Confidentiality • Reviewer is not supposed to keep any

paper(s) – original or photocopy, of practice unit. He can retain only his working papers.

• Reviewer is bound by the code of ethics and ‘Secrecy Provision’ enshrined in the Statement of Peer Review.

• The Reviewer, his assistant, if any, has to sign statement of confidentiality, before commencing the review. All Board Members and officers staff assisting the Board are also subject to similar Statement of Confidentiality.

Certificate of Peer Review• On the basis of the report submitted by

the Reviewer, the Board shall issue a Certificate to the Practice Unit.

PROFESSIONAL OPPORTUNITIES PROVIDED BY THE PROCESS OF PEER REVIEW •Updation of knowledge and consequently expansion of horizon.Incentive for implementation of the best professional practices by a PU since one’s internal policies and procedures are subject to an independent review.•Enhancement in the quality of members since such a process greatly increases the awareness about the implementation of technical Standards both on the part of the Reviewer and Reviewee.Facilitates networking and affiliation for small and medium PUs.•Continuously reinforce the credibility of the profession and thereby enhance the standing of individual members in the eyes of the society at large.•Certificate of Peer Review would serve as a quality assurance certificate and may invite preferences from regulatory and other authorities while assigning professional work to CAs. Develop competence in the emerging fields (DTC, IFRS, GST, etc.) and offer value added services

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In the next meeting to held in every quarter

Board to consider and give the recommendation to PU and give instructions for follow-up/further reviewas the case may be.

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Day- 95Within 10 daysReviewer to submit Final/Interim report as the case may be to the Peer Review Board

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Day 85Within 10 daysPU to submit representation to reviewer10.

Day 75Within 5 days after completionof review.

Reviewer to send the preliminary report toPU for comments.

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Day –70Within 70 days from date of notification to PU

Reviewer to carry out the review by visiting the office of PU after fixing the date as per the mutual consent.

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Day 475 days advance notice before visit of reviewer to

PU's office.

PU to be notified about the sample selected by the reviewer

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Day 42Within 7 daysReviewer to decide on the initial sample from the client list of the PU

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Day 35Within 5 daysPU to provide the additional information asked by the reviewer

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Day 30Within 5 daysReviewer to call for any other information if required after evaluation of the Questionnaire sent by the PU.

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Within 25 days PU to complete the Questionnaire and send to reviewer.

Day 25Reviewer should receive the communication within

2 weeks

Board to notify the reviewer as per the choice given by PU3.

Day 11Within 10 daysPU to give the choice of the reviewer2.

Day 1Day-1Peer Review Board notifies the selection of PU for Review. The Questionnaire and a Panel of three reviewers to be sent to PU

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CUMULATIVE DAYS

TIMESCHEDULE

REVIEW PROCESSSR. NO.

CONCLUSION:-

The Reviewers are also advised that the job of a reviewer was not to act as a police inspector but to act as a friend, philosopher and guide and suggest ways and means to improve the quality of services rendered by a professional in his actual day to day work. Under no circumstances, the reviewer shall sit on the professional judgement of his fellow brother, but shall only review the systems and procedures prevailing in a practice unit.

Feedback received says that Peer Review has been a mutually beneficial exercise.

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Thank YouSANZGIRI ACHARYA &

ASSOCIATES