Writing Letters of Comments

By Jerry L. Cross, CPA 

The two most important documents produced from a peer review, whether a significant departure from professional standards or not, are the reviewer's letter of comment (LOC) and the firm's letter of response (LOR). The LOC is a summary of the findings warranting attention by the firm, and the LOR includes a firm's plans to correct noted deficiencies.

These letters serve an important role for the Peer Review Committee. They help committee members more clearly understand what deficiencies have been noted by a reviewer and how a firm plans to correct them.

It's imperative that deficiencies are clearly outlined. The LOC for a system review is different from that of an engagement review, even though the objective of both is to provide the firm and the committee with an understanding of the deficiencies and to provide recommendations on how to remedy problems.

System Review Findings
Paragraph 77. of the Standards for Performing and Reporting on a Peer Review (PRP Standards; AICPA Peer Review Program Manual, PRP § 3100) states "A letter of comments should be issued in connection with a system review if there are matters that resulted in modification(s) to the standard form of report or if there are matters that the review team believes resulted in conditions being created in which there was more than a remote possibility that the firm would not conform with professional standards on accounting and auditing engagements. The letter should provide reasonably detailed descriptions of the findings and recommendations so that the state CPA society administering the review can evaluate whether the actions taken or planned by the reviewed firm appear appropriate in the circumstances."

Section 3400 of the AICPA Peer Review Program Manual (Guidance for Writing LOC; PRP § 3400) provides guidance on writing letters of comment, including examples of appropriate comments in various situations. The manual's information is helpful and should be used when writing your letters. The examples are good reference material; however, please remember the LOC must precisely fit your particular review. Reviews rarely have similar circumstances. Reviewers should study this section of the manual prior to writing an LOC.

The findings on a peer review will fall into one of the two categories -- design deficiency, or non-compliance with a firm's quality control system. The latter can be either a performance or documentation issue. Design deficiency comments should be written in the following manner:

• State what the system does or does not require;

• State whether engagement deficiencies were attributable to the design deficiency; and

• Describe the effect, if any, the deficiency had on the financial statements issued.

Normally, a design deficiency will not result in a letter of comment unless there are engagement deficiencies as a result of the deficiency. Instances of non-compliance with the system of quality control should:

• State what the system requires;

• State the frequency of non-compliance in general terms;

• State whether engagement deficiencies were attributable to the instances of non-compliance; and

• Describe the effect the instances of non-compliance had on the financial statements issued.

By using this method of writing system LOCs, findings may be written in three sentences.

1. "The firm's quality control policies and procedures for (name the element of quality control) does/does not require... "

2. "As a result, (describe the deficiency noted)."

3. The last sentence should state the effect the deficiency had on financial statements. It is usually the case that procedures either were or were not performed, or financial statements were or were not misleading. If the financial statements were misleading or additional procedures needed to be performed, what did the firm do, and do you agree with the actions?

Engagement Review Findings

Paragraph .83 of the Standards (PRP Standards; AICPA Peer Review Program Manual, PRP § 3100) requires a letter of comment be issued in connection with an engagement peer review when there are matters resulting in qualifications to the standard form of report. An LOC is also required when a reviewer notes other departures from professional standards that are not deemed to be significant departures, but that should be considered by the reviewed firm in evaluating quality control policies and procedures over its accounting practice. The letter should provide reasonably detailed descriptions of the findings and recommendations, so that the Peer Review Committee can evaluate whether the actions taken (or planned) by the reviewed firm appear appropriate in the circumstances.

The LOC for engagement reviews does not discuss the quality control system since those policies and procedures are not part of the review. However, findings should give enough description of deficiencies so readers will understand the problems. Another important reason for the descriptions is that reviewers can determine if there are repeat findings during subsequent reviews. Repeat findings indicate a firm is not following through with corrective actions or has not been effective.

Recommendations

System review recommendations should list the review team's suggested changes to a firm's quality control policies and procedures, allowing the firm reasonable assurance of preventing recurrences. While a finding should not be written unless professional standards are ignored, it is permissible to suggest recommendations exceeding professional standards, such as use of reporting and disclosure checklists.

Recommendations in engagement reviews should discuss how a firm should perform subsequent similar engagements, and how to improve their quality control policies and procedures. In order to recommend improvements to the quality control system, reviewers will need to discuss current systems with the firm to determine changes.