By CPAmerica A&A Technical Consultant Thomas A. Ratcliffe, Ph.D., CPA
Sometimes it’s obvious that practitioners face greater challenges in complying with review engagement technical literature than when complying with compilation and audit engagement technical literature requirements.
The increased challenge of review engagements may result from the following differences:
- Compilations are not assurance engagements.
- Audits are high-level assurance engagements
- But review engagements target limited assurance.
Differing interpretations as to the evidence that needs to be obtained to reach the limited level of assurance could lead practitioners to reach different conclusions about how much work needs to be done to satisfy the technical literature requirements. Even so, it’s important for them to ensure that those requirements are satisfied.
To properly comply with review engagement technical literature requirements in AR Section 90, Review of Financial Statements, the objective is for practitioners to obtain limited assurance that no material modifications should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework. To fulfill this objective, practitioners need to accumulate review evidence that will provide a reasonable basis for obtaining limited assurance that no material modifications should be made to the financial statements.
Addressing Risk Awareness. Based on practitioner knowledge of the industry in which the reporting entity operates, and the knowledge of the reporting entity itself, review engagement procedures need to focus on areas that have an enhanced likelihood of resulting in misstatement of financial statements.
For example, during the inquiry process, it may be ascertained that the reporting entity has not reconciled cash amounts for several months. As such, a greater risk that cash accounts are misstated could exist. Therefore, review engagement procedures may include a focus that would address this awareness of the risk of material misstatement.
Accumulating Review Evidence. Evidence always has been obtained in review engagements through performing and evaluating the results of analytical procedures and evaluating answers provided through the inquiry process. Practitioners are required to accumulate the evidence that is needed to obtain the limited level of assurance that is the goal of performing a review engagement.
Tailoring Review Procedures. In review engagements, practitioners are required to tailor review engagement procedures based on their understanding of the industry in which the client operates and their knowledge of the reporting entity. Using the risk awareness concept discussed earlier, review engagement procedures need to be tailored to address circumstances in which the heightened awareness indicates the potential for financial statements to be materially misstated.
Some financial statement areas often resulting in a need to tailor review procedures include, but are not limited to, things like considering discontinued operations, along with whether certain assets (e.g., goodwill, other intangible assets, long-lived assets, etc.) need to be considered for impairment. Even further, exit costs need to be addressed, and potentially even the going-concern issue could come into play in that certain businesses just might need to be liquidated.
Performing Review Engagement Analytics. Analytical procedures involve comparisons of expectations developed by practitioners to recorded amounts or ratios developed from recorded amounts. Practitioners develop these expectations by identifying plausible relationships that reasonably are expected to exist based on their understanding of the industry in which clients operate and their knowledge of the clients having their financial statements reviewed.
It’s important to understand that analytical procedures cannot be performed appropriately without practitioners developing expectations associated with the results of the procedures.
As an example, a fluctuation analysis is one type of analytical procedure that often is used in review engagements. However, simply comparing recorded amounts in the current period with amounts from the prior period would not constitute the appropriate performance of this type of analytical procedure unless it is concluded that current-period amounts are expected to be the same as prior-period amounts.
Practitioners are aware that review engagements are both attest engagements and assurance engagements. To that end, they cannot perform review engagements appropriately by just mechanically performing a canned set of review engagement procedures.
The key is to understand the financial statement areas most susceptible to risk of material misstatement, tailor review procedures to focus on those risks and accumulate enough evidence to obtain the requisite level of limited assurance to support the review report.