904.1 An entity may request a review of its financial
statements. The following paragraph summarizes the general guidance relating to
reviews of financial statements.
- 904.2 SSARS No. 19 (AR 90) contains the performance requirements
- for a review. The accountant engaged to review financial statements should:
- Establish an understanding with the entity regarding the services to be
- performed and document the understanding through a written communication with
- management. The general requirements for engagement letters are discussed in
- section 902.
- Possess a level of knowledge of the accounting principles and practices of the
- industry in which the entity operates and a general understanding of certain
- matters related to the entity itself (AR 90.08-.13). Knowledge of the industry
- and understanding of the entity are discussed in section 902.
- Design and perform review procedures based on the accountant's understanding of
- the industry, knowledge of the client, and awareness of the risk of unknowingly
- failing to modify the review report on financial statements that are materially
- misstated (AR 90.14-.15). (See the discussion beginning at paragraph 904.3.)
- Perform appropriate inquiry, analytical, and other procedures (AR 90.16-.20).
- (See paragraph 904.6.)
- e. Read
- the financial statements and consider whether they conform with GAAP (or an
- OCBOA) based on the information the accountant acquires while performing the
- review (AR 90.19c). (See paragraph 903.5 for a discussion of the meaning of reading
- the financial statements.)
- Prepare appropriate documentation (AR 90.25-.26). (See paragraph 904.14.)
- Obtain a representation letter (AR 90.22-.24). (See paragraph 904.15.)
and Performing Review Procedures. SSARS No. 19 (AR 90.07) states that the
accountant should perform procedures designed to accumulate
- review evidence that will provide a reasonable basis for
- obtaining limited assurance that there are no material modifications that
- should be made to the financial statements in order for the statements to be in
- conformity with GAAP (or an OCBOA). That review evidence is ordinarily obtained
- through analytical procedures and inquiries
904.4 The use of analytical
procedures in a review is different than the use of analytical procedures in an
- In an audit, analytical
- procedures are used both in planning the audit and as part of the final or
- overall review stage of the audit. In addition, they are frequently, although
- not required to be, used as substantive procedures. In a review, the accountant
- is not required to perform analytical procedures when designing review
- procedures (i.e., planning the engagement) or as a final review procedure.
- Accountants are required to use analytical procedures when performing the
- review procedures as part of gathering review evidence.
904.5 The analytical
procedures, inquiries, and other procedures performed should be designed based
on the accountant's understanding of the
- industry, knowledge of the client, and
- awareness of the risk that the financial statements may be materially
- misstated, with focus placed in those areas in which the accountant believes
- there are increased risks of material misstatements. That concept of risk
- awareness is not the same in a review engagement as it is in an audit engagement.
- In an audit engagement, the auditor is required to perform procedures to assess
- risks. In a review, the work performed by the accountant is to obtain a limited
- level of assurance. Consequently, sufficient review evidence is obtained
- primarily through analytical procedures and inquiries.
and Analytical Procedures. SSARS No. 19 (AR 90.19) states
that the accountant should consider making the following inquiries:
- a. Inquiries of members of
- management having responsibility for financial and accounting matters (for
- example, the CIRA's bookkeeper, treasurer, or other equivalent governing
- individual; the managing agent, if any; and members of the board of directors)
- (1) Whether the financial statements have
- been prepared in conformity with the applicable reporting framework (i.e., GAAP
- or an OCBOA).
- (2) The entity's accounting principles and
- practices and the methods followed in applying them; procedures for recording,
- classifying, and summarizing transactions; and accumulating information for
- disclosure in the financial statements.
- (3) Unusual or complex situations that may
- have an effect on the financial statements.
- (4) Significant transactions occurring or
- recognized near the end of the reporting period.
- (5) The status of uncorrected misstatements
- identified during the prior engagement.
- (6) Matters about which questions have
- arisen in the course of applying the review procedures.
- (7) Events subsequent to the date of the
- financial statements that could have a material effect on the financial
- (8) Knowledge of any fraud or suspected
- fraud affecting the entity involving management or others where the fraud could
- have a material effect on the financial statements, for example, communications
- received from employees, former employees, or others.
- (9) Significant journal entries and other
- (10) Communications from regulatory
- b. Inquiries concerning actions taken at
- meetings of the governing board, committees of the governing board, or comparable
- meetings that may affect the financial statements.
904.7 Analytical procedures
should assist the accountant in identifying relationships and individual items
that appear unusual. Often, the analytical procedures can identify problem
areas in the financial statements that are not always evident when the
financial statements are merely read by the accountant. The results of
analytical procedures should be used
- as a basis for making
- additional inquiries when appropriate. Together with the accountant's knowledge
- of the industry, an understanding of the entity's business, and inquiries, the
- analytical procedures provide the basis for the limited assurance given in the
- accountant's review report.
904.8 SSARS No. 19 (AR 90.17-.18) states that analytical procedures
- a. Developing expectations by identifying
- and using relationships that are expected to exist based on the understanding
- of the entity and the industry in which the entity operates.
- b. Comparing recorded amounts, or ratios
- developed from recorded amounts, to expectations.
- c. Inquiring of management regarding
- fluctuations or relationships that differ from expectations or other relevant
- information by a significant amount.
904.9 Developing Expectations. SSARS No. 19 requires the accountant to develop
and document expectations. Forming an expectation is a critical phase of the
analytical procedures process since the expectation represents the accountant's
prediction of recorded amounts or ratios developed from recorded amounts. Once
expectations are developed,
- the accountant will often find when performing
- analytical procedures that differences exist between the expectation and the
- recorded amount or ratio. If such differences are significant, they may be
- indicative of possible material misstatements and the accountant should obtain
- explanations for such differences. The following paragraphs discuss developing
904.10 Expectations are developed by identifying plausible
relationships that are reasonably expected to exist based on the accountant's
understanding of the CIRA. The accountant selects from a variety of data
sources to form expectations:
• Prior period information.
• Management's budgets or forecasts.
• Industry data.
• Non-financial data.
- • Relationships of financial statement
- amounts within the period.
904.11 When developing expectations, the accountant should
consider the following:
• Economic and competitive conditions.
• Changes in the organization.
• The type of account involved.
- • The number of expectations needed for an
904.12 Documenting Expectations. SSARS No. 19 (AR 90.26) states that the
accountant should document the analytical procedures performed, the
expectations (where significant expectations are not otherwise readily
determinable from the documentation of the work performed), and factors
considered in the development of those expectations. Peer review comments
- continue to note that
- accountants are having difficulty complying with the SSARS analytical
- procedures documentation requirements, including documenting expectations.
- Appendix 4G of PPC's Guide to Compilation and Review Engagements
- contains an optional form that may be used to comply with these documentation
904.13 Although not
specifically stated in the SSARS, the authors believe that an expectation
should be developed for each analytic. However, there does not necessarily need
- a one-to-one correlation
- between the expectations formed and the analytics performed, as one expectation
- may apply to multiple analytics. In addition, because the objective of a review
- is to provide the accountant with a reasonable basis for expressing limited
- assurance that there are no material modifications that should be made to the
- financial statements, the authors believe that expectations need only be
- developed in terms of a range (for example, assessments are expected to
- increase between 10% and 15%) and that analytics do not necessarily need to be
- developed for each financial statement item. The accounts to which accountants apply
- analytical procedures is a matter of professional judgment based on materiality
- and the accountant's knowledge of the client and the industry in which the
- client operates. The accountant should apply analytical procedures to the
- financial statements to identify and provide a reasonable basis for inquiry
- about the relationships and individual items that appear to be unusual and that
- may indicate a material misstatement. The AICPA CAR Guide assists accountants
- in understanding the requirements related to the use of analytical procedures
- in review engagements and how the use of analytical procedures should be
- documented. HOA-CX-9.2 includes common ratios that may be used when performing
- analytical procedures for CIRAs.
904.14 Appropriate Workpaper
- Paragraph 905.6 lists the
- documentation requirements for review engagements.
904.15 Use of Representation
Letters. SSARS No. 19 (AR 90.22)
requires accountants to obtain a written representation from management for all
financial statements and periods covered by the accountant's review report
- Management normally includes the officers of the CIRA and the
- managing agent, if any. The specific representations will vary depending on the
- circumstances of the engagement and nature and basis of the presentation.
- However, in connection with a review of financial statements presented in
- accordance with generally accepted accounting principles (or an OCBOA), the
- management representation letter should address the following matters:
- • Management's acknowledgment of its
- responsibility for the preparation and fair presentation of the financial
- statements in conformity with the applicable reporting framework (GAAP or an
- • Management's belief that the financial
- statements are fairly presented in conformity with the applicable reporting
- framework (GAAP or an OCBOA).
- • Management's acknowledgment of its
- responsibility for designing, implementing, and maintaining internal control
- relevant to the preparation and fair presentation of the financial statements.
- • Management's acknowledgment of its
- responsibility to prevent and detect fraud.
- • Knowledge of any fraud or suspected fraud
- affecting the entity involving management or others where the fraud could have
- a material effect on the financial statements, including any communications
- received from employees, former employees, or others.
- • Management's acknowledgment of full and
- truthful responses to all inquiries.
- • The completeness of information provided
- by management.
• Information concerning subsequent events.
- Accountants should also consider obtaining additional
- representations in certain areas, as discussed in paragraph 806.5.
- If the client refuses to provide a representation letter, SSARS No. 19 states
- that the review will be incomplete and that there will not be an adequate basis
- for issuing a review report. The SSARS notes that, in this case, the accountant
- should consider whether or not it would be appropriate to instead issue a
- compilation report. SSARS No. 19 (AR 80.59) notes that a step-down to a
- compilation report for the client's refusal to provide a signed representation
- letter ordinarily is not appropriate. Even though a compilation report offers
- no assurance, the accountant should not be associated with statements that may
- be misleading and, thus, should resign from the engagement.
904.17 According to SSARS
No. 19 (AR 90.22), representation letters should include all periods covered by
the accountant's report. In other words,
- if comparative financial
- statements are being reported on, the representations obtained at the
- completion of the most recent review should address all periods being reported
- on. If management changed during or after the period or periods being reported
- on, the current management may be hesitant to provide this assurance. The
- accountant may point out that the first paragraph of the letter limits the
- confirmant's response to his or her best knowledge and belief. SSARS No. 19
- requires the accountant to obtain representations for all periods covered by
- the review report from the current management.
904.18 The representation letter should be dated
as of the date that the letter is presented and signed by the client. In no
event should the letter be presented and signed prior to the date of the
accountant's review report. 7
- The SSARS make it clear
- that the review report should be dated as of the date of completion of the
- accountant's review procedures, and that the review procedures include
- obtaining written representations from management. However, the accountant need
- not be in physical receipt of the management representation letter as of the
- date of the accountant's review report provided that management has
- acknowledged that they will sign the representation letter without
- modification. The accountant should be in receipt of the letter prior to
- releasing the accountant's report.
904.19 There are
circumstances in which accountants should consider obtaining updating
representation letters from management. For instance, significant time may
lapse between when the accountant obtains a management representation letter
after completion of the review procedures and when the accountant issues his or
- or a material subsequent event may occur after the
- representation letter is obtained but prior to issuance of the report. In
- addition, if a predecessor accountant is asked by a former client to reissue
- his or her report on a comparative basis with reviewed financial statements of
- a subsequent period, the predecessor accountant should obtain an updated
- representation letter before reissuing a report on financial statements of a
- prior period. The requirements for updating representation letters and an
- illustrative example are included in PPC's Guide to Compilation and Review
- An illustrative management representation letter adapted from SSARS No. 19 (AR
- 90.71) and modified for a CIRA is presented at HOA-CR-9. Representation letters
- should be tailored to fit individual client circumstances. The example representation
- letters in SSARS No. 19 and at HOA-CR-9 of this Guide are for
- illustrative purposes only and should be modified to meet the circumstances of
- the engagement.
and Practice Aids
904.21 Exhibit 9-2 lists the checklists and practice aids developed
by the authors for a typical review engagement for a nonprofit organization.
- or Practice Aid
- of Checklist or Practice Aid
- 1. Engagement Planning and
- Acceptance Procedures
- Engagement Acceptance Form
- Illustrative Engagement Letter—Review
- Client Information Form
- 2. Financial Statement
- Preparation and Review Procedures
- Trial Balance Preparation Checklist
- Inquiry and Analytical Procedures Program
- Review Procedures, Review, and Approval Form
- Review Reporting Checklist
- Illustrative Representation Letter—Review
- CIRA Disclosure Checklist
- 3. Administrative and Review
- Checklist for a Step-down Engagement (Audit to Review or Compilation/Review
- to Compilation)
- Accounting and Engagement Issues