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Small audit shops can pass peer review just as easily as a large shop. Even if you don’t fully comply with audit standards now, chances are that with very little effort and a few minor changes you can be in full compliance. The author of this article worked as a single auditor and later as a two-person audit shop in Independence, Missouri and was able to receive an unqualified peer review opinion for that audit operation.
The first step is to overcome the mindset that small audit shops have to operate similar to large audit shops in order to meet audit standards. Often our fear that a small audit shop cannot pass peer review is because we compare small-shop operations to large-shop operations rather than to audit standards. As auditors we wouldn’t expect a small local business to have the same type of internal control structure and operating procedures as those utilized by a Fortune 500 company. The same reasoning applies to audits conducted by small audit shops and is supported by careful reading of Government Auditing Standards (GAS).
GAS Section 3.33 states the purpose of peer review is to “…determine whether the organization’s internal quality control system is in place and operating effectively to provide reasonable assurance that established policies and procedures and applicable auditing standards are being followed.” Therefore, a peer review does not compare our auditing against how other audit shops operate, but rather against the Standards. GAS Section 3.32 states that “…the nature and extent of an organization’s internal quality control system depend on a number of factors, such as its size, the degree of operating autonomy allowed its personnel and its audit offices, the nature of its work, its organizational structure, and appropriate cost-benefit considerations. Thus, the systems established by individual organizations will vary, as will the extent of their documentation.” The bottom line is that small audit shops should be judged based upon their adherence to applicable audit standards and not on whether they operate similar to a large audit shop. Finally, consider GAS Section 3.35 which states that “external quality control review procedures should be tailored to the size and nature of an organization’s audit work. For example, an organization that performs only a few audits may be more effectively reviewed by emphasizing a review of the quality of those audits rather than the organization’s internal quality control policies and procedures.” The standards provide sufficient latitude in applying audit standards and internal quality control systems to allow for compliance by small audit shops.
The second step is overcoming the notion that the standards require too much from a small shop and that peer review results for a small shop won’t be positive. These assumptions are entirely wrong! Overcome your apprehension by reading through the audit standards page-by-page and see how they apply to your audit operations. Pay particular attention to the great degree of flexibility that the standards allow. For example, Section 6.19 describes written audit plans in a manner that any small audit shop can easily comply by preparing a one or two-page document instead of the 20 to 30-page audit programs characteristic of large audit shops. Many other requirements in the standards are worded such that a simpler method of compliance can be used by small audit shops than customarily used by large audit shops. Remember that the standards are applied based upon audit objectives and a 500-hour small-shop audit can comply just as easily as a 2000-hour large-shop audit on the same topic.
The third step is to conduct a self-assessment and see where you stand. Most likely, you are closer than you think! Use the checklists and forms included in the ALGA Quality Control Review Guide. This will help you identify areas that need 'tweaking' before compliance can be fully obtained. For those areas where improvements are needed, remember to think in terms of “what must be done to comply with standards” and not “how do large audit shops operate.” If you need to make changes in your operation, implement them and wait to schedule a peer review (even the “big boys” have done this).
Several other things can help you prepare for a peer review. If you don’t have one, then prepare an audit manual with appropriate policies and procedures that relate to your small-size operation. This need be only a few pages – enough to show what you do to document compliance with audit standards in general and on an audit-by-audit basis. Participate on a peer review team so you can become familiar with the procedures and methodology for conducting a peer review as well as to identify what others do to meet auditing standards.
When you are finally ready to schedule a peer review, there are some ways to make the process easier and obtain fair results. Arrange for the peer review team to consist of members from small shops or those who have worked in small shops – these are your peers. At the beginning of your peer review, provide team members with an overview of how you meet the standards. Be sure to stress pertinent verbiage from the standards, especially those parts that allow flexibility and are couched in terms like “…as applicable to the audit objectives.” Above all, remind them that they are evaluating your compliance with audit standards and not whether you conduct audits and produce documentation in the same manner as other audit shops. Finally, don’t let the peer review team intimidate you. If they cite an exception and you disagree, then ask them to show by reference to the standards why your policies, procedures and/ or audit work do not meet standards – don’t let them base exceptions on practices used by other or larger audit shops. Then, if necessary, use GAS citations to support your position of compliance.
Brent Nelson is City Auditor of Olathe, Kansas
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Peer Review