The AICPA Peer Review Program includes different levels of peer reviews - a system peer review and an engagement peer review.
What are the differences? In short, the AIPCA says a system peer review is an on-site review required for firms performing audits and/or examinations of prospective financial statements. An engagement peer review is conduced off site, “when the CPA firm’s highest level of service is reviewing or compiling financial statements with disclosures.”
More about system reviews:
About 14,000 firms will go through a system review over the next three years, the AICPA estimates. The scope is limited to accounting and auditing practices to ensure compliance with professional standards and doesn’t extend to other areas of the practice. Required to undergo system reviews are firms that perform engagements under the Statements on Auditing Standards (SASs), Government Auditing Standards (Yellow Book) or examinations of financial statements under the Statements of Standards for Attestation Engagements (SSAEs).
The reviewer evaluates the firm’s quality controls by interviewing people at the firm, reviewing files and examining a selection of firm engagement, particularly ones considered “high-risk.” It’s important to understand that the reviewer will not evaluate every engagement, but a sample, the AICPA says.
Three types of reports are issued. One is an unmodified report, which means the quality control systems meet standards. A modified report means the firm’s controls did not provide “reasonable assurance” of meeting professional standards in some cases. The firm will receive a letter of comments, but the firm should know that the letter of comments does not necessarily mean its entire system of quality control is inadequate. The threshold for a letter is low, the AICPA says, so letters of comment are common. An adverse report means “significant deficiencies in the design of the firm's system of quality control, pervasive instances of noncompliance with the system as a whole, or both, resulting in material failures to adhere to professional standards on engagements.” Firms that receive modified or adverse reports must respond in writing to describe corrections planned.
More about engagement reviews:
The AICPA says about 14,000 firms should undergo engagement reviews over the next three years as well. These reviews involve an independent CPA firm reviewing financial statements prepared by another CPA firm to determine if these financial statements comply with professional standards. These reviews do not cover quality control procedures. Reviewers read the financial statements of the reviewed firm and the other documentation required to determine if any material modifications should made to the statements to conform with generally accepted accounting principles (GAAP).