OVERVIEW
Objective
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To illustrate the work carried out, matters reported on and opinions provided in review assignments.PROCEDURES
REVIEW ASSIGNMENT AND
REPORTS
REPORTS
¾ Objective
¾ General principles
¾ Terms of engagement
¾ Procedures and evidence
¾ Basic elements ¾ Guidance on wording ¾ Modifications
¾ Financial references
1
PROCEDURES
1.1
Objective
To enable an auditor to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to the auditor’s
attention that causes the auditor to believe that the financial statements are not prepared, in all material respects, in accordance with an identified financial reporting framework
(negative form of report, limited assurance).
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The standards and guidance provided by ISRE 2400 Engagements to Review FinancialStatements may also be relevant to the review of other financial and non-financial
information.
1.2
General principles
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Comply with “Code of Ethics for Professional Accountants”¾
Review in accordance with ISAs¾
Exercise professional scepticism¾
Obtain sufficient appropriate evidence primarily through inquiry and analytical procedures.1.3
Terms of engagement
1.3.1
Matters included
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Objective of the service being provided (e.g. as above)¾
Management’s responsibility for financial statements.¾
Scope of review, including reference to this ISA.¾
Unrestricted access to whatever records, documentation and other information requested in connection with the review.¾
A sample of the report expected to be provided.¾
Engagement cannot be relied upon to disclose errors, illegal acts or other irregularities (e.g. fraud) that may exist.Example 1
Suggest THREE further matters that might be included in an engagement letter for a review engagement.
Solution
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1.4
Procedures and evidence
1.4.1
Matters to consider
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Knowledge acquired by carrying out audits or reviews of financial statements for prior periods.¾
Auditor’s knowledge of business (including accounting principles/industry practices).¾
Entity’s accounting and control system.¾
Extent to which a particular item is affected by management judgment.¾
Materiality of transactions and account balances.1.4.2
Procedures (overview)
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Obtain an understanding of the business and how (for example) the financial statements are produced.¾
Inquire concerning: accounting principles and practices accounting systems
material financial statements assertions.
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Analytical procedures Comparison of financial statements with prior periods and anticipated results and financial position
Study of relationships of elements of financial statements that would be expected to conform to a predictable pattern based.
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Read financial statements to consider whether they appear to conform to the basis of accounting indicated.¾
Obtain reports from other auditors, if any.¾
Inquire of persons having responsibility for financial and accounting matters: Whether all transactions have been recorded;
Whether financial statements prepared in accordance with basis of accounting indicated;
Changes in business activities and accounting principles and practices.
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Obtain written management representations where appropriate.¾
Inquire about subsequent events.Example 2
Suggest the procedures required to carry out a review (under ISRE 2400) of the receivables section of a set of financial statements.
Solution
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2
REPORTS
2.1
Basic elements
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Title¾
Addressee – who it is prepared for and who is entitled to rely on it¾
Opening or introductory paragraph¾
Scope paragraph (work performed and findings) applicable auditing standards review is limited primarily to inquiries and analytical procedures audit not performed, procedures provide less assurance than an audit
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A statement of negative assurance¾
Date of report¾
Auditor’s address¾
Auditor’s signature2.2
Guidance on wording
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“We certify …” should be avoided – because it implies total accuracy. Similarly the words “correct” and “accurate” should not be used for matters of judgement.¾
“True and fair” should only be used for financial information which has been prepared in accordance with an applicable reporting framework.¾
Any link to the statutory audit should be avoided.¾
Positive opinions (reasonable levels of assurance) must not be given on matters which are inherently uncertain (e.g. solvency).REVIEW REPORT TO ...
We have reviewed the accompanying statement of financial position of ABC Company at December 31, 20X1, and the related statements of comprehensive income and cash flows for the year then ended.
These financial statements are the responsibility of the Company’s management. Our responsibility is to issue a report on these financial statements based on our review. We conducted our review in accordance with the International Standard on Review Engagements 2400 Engagements to Review Financial Statements. This Standard requires that we plan and perform the review to obtain moderate assurance as to whether the financial statements are free of material misstatement. A review is limited primarily to inquiries of company personnel and analytical procedures applied to financial data and thus provides less assurance than an audit. We have not performed an audit and, accordingly, we do not express an audit opinion.
Based on our review, nothing has come to our attention that causes us to believe that the accompanying financial statements do not give a true and fair view (or are not presented fairly, in all material respects) in accordance with International Financial Reporting Standards.
2.3
Modifications
2.3.1
Requested by client or others
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Professional accounts do not modify the form of their report unless appropriate to the work undertaken. If a client or third party requests a different form of report to that for which the engagement was undertaken, the terms of engagement should be revised (or the engagement declined).2.3.2
To report
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As with statutory audits, the review report may be modified.¾
Where matters come to the auditor’s attention that impair a true and fair view, describe the matters concerned and either: express a qualification of negative assurance; or
give an adverse statement that the financial statements do not show a true and fair view where the mater is both material and pervasive.
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Where there is a material scope limitation, describe the limitation and: express a qualification of negative assurance; or provide no statement of assurance where the limitation is significant and pervasive.
Qualification extract for a departure from International Financial Reporting Standards We have reviewed the accompanying ………
Management has informed us that inventory has been stated at its cost which is in excess of its net realizable value. Management’s computation, which we have reviewed, shows that inventory, if valued at the lower of cost and net realizable value as required by International Accounting Standard, IAS 2 Inventory, would have been decreased by $56,000, and net income and shareholders’ equity would have been decreased by $56,000.
2.4
Financial references
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Professional accountants may be asked (e.g. by banks, insurance companies, letting agents) to provide references on a client’s financial status, e.g.: present financial position
ability to pay debts as they fall due ability to service (or repay) a loan.
As such references are not expected to require any work or investigation they do not constitute review reports.
FOCUS
You should now be able to:
EXAMPLE SOLUTION
Solution 1 — Other matters for inclusion in engagement letter
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Management’s responsibility for determining whether the scope of the professional accountant’s work is sufficient for management’s purposes.¾
An appropriate liability cap or other matters relevant to limiting or excluding the professional accountant’s liability (e.g. prohibiting disclosure of the professional accountant’s report with written consent).¾
Timetable – commencement and completion.¾
Staffing – partner and manager.Solution 2 — Review of receivables
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Inquire about the accounting policies for initially recording trade receivables and determine whether any allowances are given on such transactions.¾
Obtain a schedule of receivables and determine whether the total agrees with the trial balance.¾
Obtain and consider explanations of significant variations in account balances from previous periods or from those anticipated.¾
Obtain an aged analysis of the trade receivables. Inquire about the reason for unusually large accounts, credit balances on accounts or any other unusual balances and inquire about the collectibility of receivables.¾
Discuss with management the classification of receivables, including non-current balances, net credit balances and amounts due from shareholders, directors and other related parties in the financial statements.¾
Inquire about the method for identifying “slow payment” accounts and setting allowances for doubtful accounts and consider it for reasonableness.¾
Inquire whether receivables have been pledged, factored or discounted.¾
Inquire about procedures applied to ensure that a proper cut-off of sales transactions and sales returns has been achieved.¾
Inquire whether accounts represent goods shipped on consignment and, if so, whether adjustments have been made to reverse these transactions and include the goods in inventory.