The Peer Review Process: Step-by-Step Guide for CA Firms

Disclaimer- Find FAQs/clarifications on the issues arising out of the Peer Review Mandate below!

The Institute of Chartered Accountants of India (ICAI) has introduced a phased Peer Review Mandate to enhance the quality of statutory audits, with implementation spread over four stages. Established in 2002, beginning from April 1, 2022, it initially applies to practice units auditing listed entities and will progressively cover other entities by April 1, 2025. Practice units must possess a valid Peer Review Certificate both when undertaking statutory audits and at the time of signing audit reports. Applicability is determined based on factors such as the number of partners, the scale of audited entities, and funds raised. 

The mandate prioritizes Public Interest Entities, including listed companies, banks, insurance firms, and similar organizations. However, exemptions are provided for co-operative banks and entities offering non-attestation services. Assurance engagements, as defined by ICAI’s framework, exclude activities such as consultancy, due diligence, or tax return preparation. New practice units operational for less than 12 months are subject to additional criteria for peer review. This initiative reinforces ICAI’s dedication to promoting audit quality and ensuring regulatory compliance.

When is the Peer Review Mandate applicable?

The mandate is implemented in four phases:

• Phase I (From April 1, 2022): Applies to firms auditing listed entities.
• Phase II (From April 1, 2023): Expands to include firms auditing unlisted public companies above a specific size.
• Phase III (From April 1, 2024): Covers audit firms for other significant public interest entities.
• Phase IV (From April 1, 2025): Includes all remaining eligible practice units.

1. Objective of Peer Review

The primary objective of ICAI's peer review is to:

• Ensure compliance with technical and professional standards.
• Improve the quality of audit and assurance services.
• Provide constructive feedback to CA firms for improvement.
• Promote consistent adherence to the Standards on Quality Control (SQC 1).

2. Applicability and Eligibility for Peer Review

Eligibility for Peer Review

Peer review is applicable to all CA firms performing attest functions (audit and assurance engagements). The applicability is based on the following categories:

Mandatory Peer Review

Firms auditing listed entities.

Firms auditing public interest entities such as:

Banks, financial institutions, and insurance companies.

Large public sector undertakings (PSUs).

Entities with significant public interest based on turnover or size.

Voluntary Peer Review CA firms not falling under mandatory criteria can opt for a voluntary peer review to improve their quality systems.

Phased Approach ICAI is progressively bringing more firms under the scope of peer review to improve auditing practices across the profession.

3. Requirements for Peer Review

For a firm to qualify for peer review, it must:

1. Perform Attest Functions: The firm must undertake engagements such as audits, reviews, and assurance assignments.
2. Implement SQC 1: The firm must have a quality control framework in place as per Standards on Quality Control 1 (SQC 1).
3. Documentation Standards:
   • Maintain proper engagement letters.
   • Document audit plans, working papers, and significant findings.
4. Adherence to Standards:
   • Comply with Auditing Standards, Code of Ethics, and Guidance Notes issued by ICAI.
5. Internal Systems:
• Have a documented internal quality control policy.
• Ensure compliance monitoring and review mechanisms.

When should a Practice Unit hold a valid Peer Review Certificate under the Peer Review Mandate?

A Practice Unit must have a valid Peer Review Certificate both before accepting a statutory audit engagement and when signing the audit report for such an assignment. However, for statutory audits that were already accepted prior to the mandatory phase of the Peer Review Mandate, the Practice Unit must ensure that the certificate is valid at the time of signing the audit report.

4. The Peer Review Process: Step-by-Step

Step 1: Selection of Practice Unit (PU)

• ICAI selects Practice Units (firms or individuals performing attest functions) for peer review.
• The selection is based on risk profiles and statutory obligations.
• Firms may also voluntarily request a peer review.

Step 2: Appointment of Peer Reviewer

• ICAI appoints an independent peer reviewer with no conflict of interest with the Practice Unit.
• The peer reviewer is a Chartered Accountant with adequate experience and has completed ICAI’s Peer Review Training.

Step 3: Preliminary Communication

• The reviewer informs the Practice Unit (PU) of the planned review and requests preliminary details, such as:
  • List of clients and types of engagements.
  • Organizational structure and quality control systems.
  • Copies of previous peer review reports, if applicable.

Step 4: On-Site Review

• The reviewer visits the Practice Unit’s office to evaluate:
  • Compliance with ICAI standards.
  • Documentation related to audits, reviews, and assurance assignments.
  • Implementation of quality control policies.
• Key areas of focus:
  • Engagement letters.
  • Audit planning and risk assessments.
  • Compliance with Auditing Standards.
  • Communication with clients and reporting.

Step 5: Peer Review Report

• The reviewer prepares a report outlining:
  • Areas of compliance.
  • Observations on deficiencies or gaps.
  • Suggestions for improvement.
• Positive observations are included to highlight good practices.

Step 6: Submission to Peer Review Board (PRB)

• The report is submitted to the Peer Review Board (PRB) of ICAI.
• The PRB evaluates the findings and decides whether the Practice Unit complies with peer review requirements.

Step 7: Issuance of Peer Review Certificate

• If the Practice Unit meets the required standards, ICAI issues a Peer Review Certificate.
• Non-compliant firms are required to address deficiencies and undergo another review.

5. Documentation Required

Firms must ensure the following documents are ready for review:

1. Engagement Letters: Signed agreements with clients for all attest assignments.
2. Audit Plans and Risk Assessments: Detailed plans and risk evaluation documents for each assignment.
3. Working Papers: Properly indexed and documented working papers for all assignments.
4. Communication Records: Evidence of client communication and feedback.
5. Internal Policies: Quality control manuals and records of their implementation.

6. Key Criteria for a Successful Peer Review

1. Compliance with SQC 1: Demonstrating adherence to quality control standards is crucial.
2. Robust Documentation: Properly maintained and complete documentation of all engagements.
3. Ethical Standards: Strict compliance with ICAI’s Code of Ethics.
4. Corrective Actions: Addressing previous review findings or gaps in processes.
5. Internal Control Mechanisms: Evidence of regular internal monitoring and quality reviews.

7. Benefits of Peer Review

1. Enhanced Quality Assurance:
   • Peer review helps firms identify weaknesses and improve their systems and processes.
2. Regulatory Compliance:
   • Ensures that firms adhere to ICAI’s auditing and ethical standards.
3. Client Confidence:
   • Peer-reviewed firms are perceived as credible and trustworthy by clients.
4. Professional Growth:
   • Constructive feedback from peer reviewers helps firms refine their practices.

8. Common Challenges and How to Overcome Them

1. Incomplete Documentation:
   • Maintain a checklist of mandatory documentation for every assignment.
2. Lack of Quality Control Systems:
   • Implement a robust quality control framework aligned with SQC 1.
3. Unprepared Staff:
   • Train staff regularly on ICAI standards and peer review requirements.
4. Time Management:
• Prepare well in advance by organizing files and documentation systematically.

3. What is meant by ‘raised funds from public or banks or financial institutions of over fifty crore rupees’ in Phase III of the Peer Review Mandate?

The phrase refers to situations where an entity has obtained funds amounting to over fifty crore rupees through public offerings, loans from banks, or financial institutions. This criterion is one of the thresholds under Phase III of the mandate for determining applicability.

9. Role of Peer Review Board (PRB)

The Peer Review Board (PRB) is the statutory body of ICAI that:

• Supervises the entire peer review process.
• Empanels reviewers and allocates assignments.
• Issues peer review certificates and monitors compliance.
• Updates guidelines and policies to keep the process aligned with industry standards.

10. How to Prepare for a Peer Review

1. Understand ICAI Guidelines:
   • Familiarize yourself with ICAI’s Peer Review Manual and relevant circulars.
2. Mock Reviews:
   • Conduct internal quality checks or mock reviews to identify gaps.
3. Staff Training:
   • Regularly update staff on ICAI standards and documentation requirements.
4. Organized Records:
• Maintain a centralized repository of documentation for easy retrieval during review.

Conclusion

ICAI’s Peer Review process is a critical mechanism for maintaining audit quality and strengthening the reputation of CA firms. By adhering to its guidelines and proactively preparing for reviews, firms can ensure compliance, improve processes, and gain recognition through the prestigious Peer Review Certificate.

For more detailed information and updates, visit the official ICAI website: ICAI Peer Review Portal.

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