AICPA Practice Monitoring & Peer Review

CPA’s who are engaged in the practice of public accounting are required to practice in firms enrolled in an AICPA-approved “practice monitoring program” in order to be admitted (or to retain) membership in the AICPA.

This practice monitoring program is subject to a peer review once every three years and covers audits and other types of public accounting engagements for non-issuer clients.

Firms that only provide tax and consulting services and do not perform audit, review, compilation, preparation, or other attest services are exempt from the AICPA Peer Review Program.

Peer review applies to firms that perform engagements under AICPA auditing or attestation standards. 

It used to be sufficient just to know about a peer review but now you need to know what type of peer review is needed, either a system review or an engagement review. 

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Quality Management System (Risk-Based Approach)

Firms must use a risk-based approach when designing, implementing, and operating the elements of their quality management system.

The system of quality management is customized to the firm’s:

• Nature and circumstances
  
• Size
  
• Types of engagements performed
  
• Client industries
  
• Geographic locations
  

The firm concentrates on identifying and addressing quality risks that could prevent achievement of quality objectives.

• Emphasis is on what could go wrong
  
• Higher-risk areas are prioritized
  

Quality management is proactive and forward-looking, not reactive.

• Anticipates issues before they occur
  
• Adapts to changes in the firm or environment
  

It requires ongoing reassessment — the firm must continually evaluate and update its QM system.

The AICPA has identified 8 Components of a System of Quality Management (SQM).

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The exam will now test you on the 8 Components of SQM Matter!

For the CPA Audit exam—and in real-world firm operations—the 8 components of the AICPA’s System of Quality Management (SQM) matter because they work together to provide reasonable assurance that a firm:

• Complies with professional standards and legal/regulatory requirements, and
  
• Issues reports that are appropriate in the circumstances.
  

When it comes to quality at the firm, the AICPA has shifted from a checklist quality control model to a risk-based, proactive quality management model.

Here’s why each component is important and what role it plays.

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1) Governance & Leadership

Why It’s Important

This sets the tone at the top. Without leadership commitment, quality initiatives fail.

Key Importance

• Establishes a culture that prioritizes quality over profitability or growth
  
• Assigns ultimate responsibility and accountability for quality
  
• Aligns incentives and evaluations with quality objectives
  

Bottom line: Quality starts with leadership. If leadership doesn’t emphasize quality, the system weakens everywhere else.

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2) The Firm’s Risk Assessment Process

Why It’s Important

This is the engine of the system. SQM is risk-based, and this component drives that.

Key Importance

• Identifies quality objectives
  
• Identifies and assesses quality risks
  
• Designs and implements responses
  

Bottom line: Instead of reacting to problems, firms anticipate and manage risks before deficiencies occur.

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3) Relevant Ethical Requirements

Why It’s Important

Ethics underpin audit credibility and public trust.

Key Importance

• Ensures independence, integrity, and objectivity
  
• Requires independence confirmations
  
• Monitors compliance with ethical rules
  

Bottom line: Without ethical compliance, audit quality is meaningless.

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4) Acceptance & Continuance of Client Relationships and Engagements

Why It’s Important

Prevents the firm from taking on risky clients or engagements it cannot properly perform.

Key Importance

• Evaluates management integrity
  
• Assesses firm competence and resources
  
• Reduces legal and reputational risk
  

Bottom line: Some quality problems are avoided simply by saying “no” to the wrong clients.

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5) Resources

Why It’s Important

Quality work requires capable resources.

Key Importance

Covers:

• Human resources (competence, training, staffing)
  
• Technological resources (audit software, tools)
  
• Intellectual resources (methodologies, guidance)
  

Bottom line: Even strong policies fail without qualified people and proper tools.

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6) Engagement Performance

Why It’s Important

This is where quality shows up in actual engagements.

Key Importance

• Proper supervision and review
  
• Consultation on complex matters
  
• Engagement quality reviews (EQRs)
  
• Consistent application of standards
  

Bottom line: This ensures engagements are executed correctly and consistently.

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7) Information & Communication

Why It’s Important

A system fails if people don’t understand or follow it.

Key Importance

• Ensures personnel understand quality policies
  
• Promotes two-way communication
  
• Ensures relevant information reaches the right people
  

Bottom line: Quality requires clear communication across the firm.

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8) Monitoring & Remediation

Why It’s Important

This is the feedback loop that keeps the system effective.

Key Importance

• Identifies deficiencies
  
• Performs root cause analysis
  
• Implements corrective actions
  
• Drives continuous improvement
  

Bottom line: Without monitoring, firms repeat mistakes and quality deteriorates.