Requirements
Since a review engagement is intended to provide only limited assurance, how will practitioners know when they have enough evidence to support a conclusion? First, let’s look at the conclusion itself, which in its unmodified form states: “Based on our review, nothing has come to our attention that causes us to believe that these financial statements do not present fairly, in all material respects …”
Someone with no understanding of the standard might think a practitioner could express that conclusion having done nothing – that is, nothing was found but nothing was done. This is the antithesis of what the standard requires, namely that:
- Every practitioner performing a review must comply with ethical requirements at least as demanding as those in the Code of Ethics for Professional Accountants issued by the International Ethics Standards Board for Accountants, and the practitioner’s firm must apply quality control standards at least as demanding as those required by ISQC 1.
- The practitioner must develop an understanding of the entity and the applicable financial reporting framework, at least in areas required by the standard sufficient to identify areas where material misstatements are likely to exist.
- The practitioner must perform inquiry and analytical procedures on every item material to the financial statements, focusing on those where material misstatements are likely to arise.
The engagement partner must have competence in assurance skills and techniques and financial reporting appropriate to the engagement circumstances. As a result, the engagement partner will have a solid base of knowledge and understanding on which to base the review procedures to ensure they are effective and produce sufficient appropriate evidence to draw a conclusion. This adds significant weight to the conclusion and adds a meaningful level of assurance.
Review engagement procedures
The standard requires a practitioner to design inquiry and analytical procedures to address all material items in the financial statements and to focus on areas where material misstatements are likely to occur. There are also conditional requirements a practitioner must be aware of regarding related parties, going concern, fraud and non-compliance with laws or regulations. The depth of inquiry and analytics is that required by a skilled practitioner with an understanding of the entity. The procedures must generate sufficient appropriate evidence to form the conclusion required by the report. The standard is designed so that if the practitioner does not become aware of a possible material misstatement, then performing inquiry, analytics and procedures addressing specified circumstances may be sufficient. There is no requirement to do more work.
Note, however, that the practitioner can perform procedures other than inquiries and analytics – for example, observation or confirmation – at any point in the engagement. This is a matter of professional judgement. Performing these procedures does not turn the engagement into an audit, which is based on a different structure altogether – one of risk assessment, response to risks identified and more comprehensive specified procedures. The objective of a review engagement, however, is to provide limited assurance on the financial statements as a whole.
Additional review procedures and reporting
It may be that, in the practitioner’s professional judgement, inquiries and analytical procedures either do not provide sufficient evidence to conclude on the financial statements, or something has come to the attention of the practitioner that would indicate the financial statements may be materially misstated.
In these instances, additional procedures must be performed to resolve the issue. Again, professional judgement in selecting these procedures is critical.
The additional procedures will result in the practitioner either:
- concluding that the matter is not likely to cause the financial statements to be materially misstated
- concluding that the matter does cause the financial statements as a whole to be materially misstated, in which case the misstatement must be referred to in the practitioner’s report
- being unable to draw a conclusion about the likelihood of a material misstatement, in which case a scope limitation must be referred to in the practitioner’s report.
A review engagement is an important service that provides a meaningful level of assurance, increases the credibility of financial statements and helps meet the needs of a changing market. ISRE 2400 (Revised) is designed to be a globally accepted benchmark for undertaking such engagements. If you read it, you will understand why.
Copyright © December 2012 by the International Federation of Accountants (IFAC). All rights reserved. Used with permission of IFAC. Contact permissions@ifac.org for permission to reproduce, store or transmit this document.
