SRE 2400 – Statement on Auditing Statement
Scope and objectives
The Scope of the Standard on Review Engagements (SRE) which outlines the responsibilities of a practitioner when performing a review of financial statements.
The SRE 2400 outlines the practitioner’s responsibilities when engaged to perform a review of historical financial statements, when the practitioner is not the auditor of the entity’s financial statements. The SRE also defines the form and content of the practitioner’s report on the financial statements.
However, the SRE 2400 does not address a review of an entity’s financial statements or interim financial information performed by a practitioner who is the independent auditor of the entity’s financial statements.
The SRE 2400 is to be applied, adapted as necessary, to reviews of other historical financial information. Quality control systems, policies, and procedures are the responsibility of the firm, and the SRE’s provisions regarding quality control at the level of individual review engagements are based on the assumption that the firm is subject to the Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements standard (SQC 1).
The SRE 2400 outlines the objectives of a review engagement and the procedures the practitioner should follow to meet these objectives. The practitioner’s objective is to obtain limited assurance about whether the financial statements as a whole are free from material misstatement. The practitioner performs primarily inquiry and analytical procedures to obtain sufficient appropriate evidence as the basis for a conclusion on the financial statements as a whole, expressed in accordance with the requirements of this SRE 2400.
The SRE 2400 provides further explanation of the requirements and guidance for carrying them out, although such guidance does not itself impose a requirement, it is relevant to the proper application of the requirements.
Finally, the SRE 2400 is effective for reviews of financial statements for periods beginning on or after April 1, 2016.
Ethical Requirements
The practitioner is required to have a thorough understanding of the entire SRE, including its application and other explanatory material, to properly apply its requirements. Additionally, they must comply with each requirement of the SRE unless a requirement is not relevant to the review engagement.
If the laws and regulations governing a review of financial statements differ from the requirements of the SRE 2400, conducting a review only in accordance with the laws and regulations will not automatically comply with the SRE 2400.
The practitioner is not allowed to represent compliance with the SRE in their report unless they have complied with all relevant requirements of the SRE 2400 for the review engagement.
The practitioner must also comply with relevant ethical requirements, including those pertaining to independence. The Code of Ethics issued by the ICAI (Institute of Chartered Accountants of India) establishes the fundamental principles of professional ethics practitioners must comply with, and provides a conceptual framework for applying those principles. The fundamental principles are Integrity, Objectivity, Professional competence and due care, Confidentiality, and Professional behaviour. The Code of Ethics also describes how the conceptual framework is to be applied in specific situations.
In the case of a review engagement, the practitioner must be independent of the entity whose financial statements are reviewed. The Code of Ethics describes independence as comprising both independence of mind and independence in appearance. The practitioner’s independence safeguards their ability to form a conclusion without being affected by influences that might compromise that conclusion. Independence enhances the practitioner’s ability to act with integrity, to be objective and to maintain an attitude of professional scepticism.
Professional Skepticism and Professional Judgment
The requirements for professional skepticism and professional judgment in a review engagement. The practitioner must plan and perform the review with professional skepticism, which means they must critically assess evidence and question any inconsistencies or contradictory evidence, as well as consider the sufficiency and appropriateness of evidence obtained in light of the engagement circumstances. Professional skepticism also requires the practitioner to be alert to any evidence or circumstances that may indicate possible fraud, and to maintain professional skepticism throughout the review to reduce the risks of overlooking unusual circumstances, over-generalizing, or using inappropriate assumptions.
Professional judgment is also essential in conducting a review engagement, as it involves applying relevant knowledge and experience to the facts and circumstances of the engagement. This includes making decisions about materiality and the nature, timing, and extent of procedures used to meet the requirements of the review, as well as evaluating whether the evidence obtained reduces the engagement risk to an acceptable level. Professional judgment is also necessary when considering management’s judgments in applying the entity’s financial reporting framework and when forming a conclusion on the financial statements based on the evidence obtained.
Professional judgment is evaluated based on whether it reflects a competent application of assurance and accounting principles and is appropriate in light of the facts and circumstances known to the practitioner. Professional judgment needs to be exercised throughout the engagement and appropriately documented, but it cannot be used as the justification for decisions that are not supported by the facts and circumstances of the engagement or the evidence obtained.
Engagement Level Quality Control
The guidelines and requirements for engagement partners who perform review engagements for clients as part of a firm’s system of quality control. Review engagements are a type of assurance engagement that involve the review of financial statements, and are conducted to provide a moderate level of assurance that the financial statements are free from material misstatement.
It emphasizes the importance of the engagement partner possessing the necessary competence in assurance skills and techniques, as well as financial reporting, that are appropriate for the engagement circumstances. These skills include applying professional skepticism and judgment, understanding information systems and internal controls, linking materiality and engagement risks to the review procedures, and documenting the review work and report effectively.
The engagement partner is responsible for taking charge of the overall quality of the review engagement and ensuring that the engagement team implements quality control procedures that are applicable to the engagement. This involves complying with the firm’s quality control policies and procedures, performing work that complies with professional standards and legal requirements, issuing an appropriate report, and enabling the engagement team to raise concerns without fear of reprisals.
The guidelines also discuss the importance of the engagement partner’s responsibility for the direction, supervision, planning, and performance of the review engagement, as well as the practitioner’s report being appropriate in the circumstances. They also specify the expected competence and capabilities of the engagement team, such as understanding professional standards, technical expertise, knowledge of relevant industries, and the ability to apply professional judgment.
The importance of complying with relevant ethical requirements throughout the engagement and communicating any information that would have caused the firm to decline the engagement if it had been available earlier. Overall, the guidelines serve as a framework for ensuring the quality of review engagements and promoting professional competence and ethical behaviour among engagement partners and their teams.
Acceptance and Continuance of Client Relationships and Review Engagements
It explains that the practitioner should consider several factors when deciding whether to accept or continue with a client relationship or review engagement. The practitioner must comply with relevant ethical requirements, including independence, and must continuously evaluate engagement continuance as conditions and changes in circumstances occur.
If the practitioner’s preliminary understanding of the engagement circumstances indicates that accepting a review engagement would not be appropriate, they may recommend another type of engagement, such as an audit engagement or a compilation engagement, depending on the circumstances. The practitioner should not accept a review engagement if they have reason to believe that relevant ethical requirements, including independence, will not be satisfied or if they have cause to doubt management’s integrity.
Additionally, SRE 2400 states that the practitioner may consider recommending a different type of engagement if there is a significant limitation on the scope of their work or if they suspect that the engaging party intends to associate their name with the financial statements in an inappropriate manner. The practitioner must also be cautious if the information needed to perform the review engagement is likely to be unavailable or unreliable, or if management or those charged with governance impose a limitation on the scope of their work that could lead to the practitioner disclaiming a conclusion on the financial statements.
Preconditions for Accepting a Review Engagement
The preconditions for accepting a review engagement by a practitioner. Prior to accepting the engagement, the practitioner is required to determine certain matters in agreement with the entity’s management. These include whether the financial reporting framework applied in the preparation of the financial statements is acceptable and whether management acknowledges and understands its responsibilities.
The financial reporting framework is the set of criteria used by the practitioner to review the financial statements. The practitioner’s determination of the acceptability of the financial reporting framework is made in the context of the intended users of the financial statements. Factors that are relevant to this determination include the nature of the entity, the purpose of the financial statements, the nature of the financial statements, and whether the applicable financial reporting framework is prescribed by law or regulation. If the financial reporting framework used is not acceptable and management will not agree to use a suitable framework, the practitioner is required to decline the engagement.
SRE 2400 also notes that deficiencies in the applicable financial reporting framework may be encountered after the engagement has been accepted. In such cases, the practitioner is required to agree on new terms of the review engagement with management to reflect the change in the applicable financial reporting framework.
In addition to the financial reporting framework, the practitioner is also required to obtain the agreement of management that it acknowledges and understands its responsibilities. These responsibilities include the preparation of the financial statements in accordance with the applicable financial reporting framework, the establishment of internal control necessary to enable the preparation of financial statements that are free from material misstatement, and providing the practitioner with access to all information of which management is aware that is relevant to the preparation of the financial statements.
If management does not acknowledge its responsibilities, the practitioner is required to explain the importance of these matters and the implications for the engagement. If management still does not acknowledge its responsibilities, the practitioner may decline the engagement unless required by law or regulation to accept it.
Additional Considerations When the Wording of the Practitioner’s Report Is Prescribed by Law or Regulation
The additional considerations for practitioners when the wording of their report is prescribed by law or regulation. According to the SRE (Singapore Standard on Review Engagements) 2410, the practitioner’s report for a review engagement should comply with the requirements of the SRE. However, some laws or regulations may prescribe the layout or wording of the report in a significantly different form, which may cause users to misunderstand the assurance obtained from the review of financial statements.
In such cases, the practitioner should evaluate whether additional explanation in the report can mitigate the possible misunderstanding. If it cannot, the practitioner should not accept the review engagement unless required by law or regulation to do so. The report for a review engagement that does not comply with the SRE cannot represent compliance with the SRE. However, the practitioner is encouraged to apply the SRE to the extent possible and may include a statement in the report to avoid misunderstanding that the review is not conducted in accordance with the SRE.
Agreeing the Terms of Engagement
The terms of engagement for a review engagement performed by a practitioner. The practitioner must agree on the terms of the engagement with management or those charged with governance before performing the engagement. The agreed terms must be recorded in an engagement letter or other suitable form of written agreement. The engagement letter should include information such as the intended use and distribution of the financial statements, the financial reporting framework, the objective and scope of the review engagement, the responsibilities of the practitioner and management, and a statement that the engagement is not an audit.
In the case of a review of the financial information of a component entity of a group, the group auditor may specify additional procedures to supplement the work done for the review performed under this SRE. Recurring engagements require the practitioner to evaluate whether circumstances, including changes in the engagement acceptance considerations, require the terms of engagement to be revised and whether there is a need to remind management or those charged with governance of the existing terms of engagement.
The practitioner may decide not to send a new engagement letter or other written agreement each period for recurring engagements. However, factors such as any indication that management misunderstands the objective and scope of the review, any revised or special terms of the engagement, or a significant change in the nature or size of the entity’s business may indicate that it is appropriate to revise the terms of the engagement or to remind management and those charged with governance of the existing terms.
Acceptance of a Change in the Terms of the Review Engagement
The acceptance of a change in the terms of the review engagement by a practitioner. It explains that the practitioner should not agree to a change in the terms of the engagement if there is no reasonable justification for doing so. The request for a change may arise due to a change in circumstances affecting the need for the service, misunderstanding as to the nature of the review engagement as originally requested, or a restriction on the scope of the review engagement imposed by management or caused by other circumstances. If there is a change in circumstances that affects the entity’s requirements or a misunderstanding concerning the nature of the service originally requested, it may be considered a reasonable basis for requesting a change to the terms of the review engagement. However, a change may not be considered reasonable if it appears that the change relates to information that is incorrect, incomplete or otherwise unsatisfactory.
It also explains that if, prior to completing the review engagement, the practitioner is requested to change the engagement to an engagement for which no assurance is obtained, the practitioner shall determine whether there is reasonable justification for doing so. If the practitioner concludes that there is reasonable justification to change the review engagement to another type of engagement or related service, the work performed in the review engagement to the date of change may be relevant to the changed engagement, however, the work required to be performed and the report to be issued would be those appropriate to the revised engagement.
Lastly, It emphasizes that if the terms of engagement are changed during the course of the engagement, the practitioner and management or those charged with governance shall agree on and record the new terms of the engagement in an engagement letter or other suitable form of written agreement.
Communication with Management and Those Charged with Governance
The communication requirements for practitioners in review engagements. Review engagements are a type of engagement where the practitioner is engaged to perform limited procedures on financial statements to provide a moderate level of assurance on whether the financial statements are free of material misstatement or not.
The practitioner is required to communicate with management or those charged with governance (such as the board of directors) on a timely basis during the review engagement. The communication should include all matters that are deemed important enough to merit the attention of management or those charged with governance.
The two forms of communication that the practitioner can use during the review engagement. First, the practitioner can make inquiries during performing the procedures for the review. Second, the practitioner can engage in other forms of effective two-way communication to understand matters arising and to develop a constructive working relationship for the engagement.
The timing of communications will vary with the circumstances of the engagement. The practitioner should consider factors such as the significance and nature of the matter, and any action expected to be taken by management or those charged with governance. For example, if the practitioner encounters a significant difficulty during the review, it may be appropriate to communicate it as soon as practicable if management or those charged with governance can assist the practitioner in overcoming the difficulty.
However, it also notes that law or regulation may restrict the practitioner’s communication of certain matters with those charged with governance. For example, law or regulation may prohibit a communication that might prejudice an investigation by an appropriate authority into an actual or suspected illegal act. In some cases, potential conflicts between the practitioner’s obligations of confidentiality and obligations to communicate may be complex. In such cases, the practitioner may consider obtaining legal advice.
It provides a list of matters that the practitioner may need to communicate to management or those charged with governance. These matters include the practitioner’s responsibilities in the review engagement, significant findings from the review (such as the practitioner’s views about significant qualitative aspects of the entity’s accounting practices, including accounting policies, accounting estimates, and financial statement disclosures), matters arising that may lead to modification of the practitioner’s conclusion, and significant difficulties encountered during the review (such as unavailability of expected information, unexpected inability to obtain evidence, or restrictions imposed by management).
It also notes that in some entities, different persons are responsible for the management and governance of the entity. In these circumstances, management may have the responsibility to communicate matters of governance interest to those charged with governance. However, communication by management with those charged with governance of matters that the practitioner is required to communicate does not relieve the practitioner of the responsibility to also communicate them to those charged with governance.
Finally, it notes that in some cases, the practitioner may be required by law or regulation to communicate with third parties, such as regulatory bodies. The practitioner may need the prior consent of management or those charged with governance before doing so, unless required by law or regulation to provide a third party with a copy of the practitioner’s written communications with those charged with governance.
Performing the Engagement
The process of performing a review of financial statements, specifically in relation to materiality and the practitioner’s understanding of the entity and its environment.
Materiality is a concept that refers to the significance of a misstatement in the financial statements, based on its size or nature, and its potential impact on the economic decisions of users of the financial statements. The practitioner must determine materiality for the financial statements, considering the applicable financial reporting framework, and use this materiality in designing procedures and evaluating the results obtained from those procedures.
The materiality is a matter of professional judgment and is influenced by the practitioner’s perception of the needs of the intended users of the financial statements. The judgment of what is material in relation to the financial statements is the same regardless of the level of assurance obtained by the practitioner.
The determination of materiality may need to be revised during the engagement because of new information or a change in circumstances that occurred during the review.
The practitioner must obtain an understanding of the entity and its environment, and the applicable financial reporting framework, to identify areas in the financial statements where material misstatements are likely to arise and to design procedures to address those areas. The practitioner’s understanding is a continual dynamic process of gathering, updating, and analysing information throughout the review engagement. It is obtained and applied on an iterative basis throughout the engagement and is updated as changes in conditions and circumstances occur.
The practitioner’s understanding includes knowledge obtained from prior engagements performed by the practitioner in relation to the entity’s financial statements and other financial information. The understanding establishes a frame of reference within which the practitioner plans and performs the review engagement and exercises professional judgment throughout the engagement.
It should include information on the entity’s business, industry, and economic environment, as well as the entity’s internal control system and the risks of material misstatement in the financial statements. The practitioner may also consider other factors such as whether the entity is part of a group of entities or whether the financial reporting framework is complex.
Designing and Performing Procedures
The procedures that a practitioner (such as an auditor or reviewer) should design and perform to obtain sufficient appropriate evidence to support their conclusion on the financial statements as a whole. The practitioner should consider the requirements of the applicable laws and regulations, as well as the specific circumstances of the engagement.
In particular, the practitioner should identify any significant or unusual transactions that may require specific attention in the review and inquire about them with management and others within the entity, as appropriate. The practitioner should also seek information about the entity’s accounting estimates, related party transactions, significant changes to the entity’s business activities or operations, and potential fraud or non-compliance with laws and regulations.
It emphasizes the importance of applying professional scepticism in evaluating management’s responses and corroborating evidence obtained through inquiry. The practitioner should also use the inquiry procedures to update their understanding of the entity and identify areas where material misstatements are likely to arise.
Overall, it provides guidance on how to design and perform procedures to obtain sufficient appropriate evidence to support the practitioner’s conclusion on the financial statements, while considering the specific circumstances of the engagement and applying professional scepticism.
Procedures to Address Specific Circumstances
The procedures of a practitioner (i.e., an accountant or auditor) must follow when conducting a review of an entity’s financial statements. The procedures are aimed at addressing specific circumstances that may arise during the review process.
One circumstance the practitioner must be alert for is the existence of related party relationships or transactions that management has not previously identified or disclosed. If the practitioner identifies such transactions, they must inquire of management about the nature of those transactions, whether related parties could be involved, and the business rationale (or lack thereof) of those transactions.
Another circumstance is the occurrence or suspicion of fraud or non-compliance with laws or regulations. If the practitioner becomes aware of such an indication, they must communicate the matter to the appropriate level of senior management or those charged with governance, request management’s assessment of the effect(s) on the financial statements, consider the effect of management’s assessment on the practitioner’s conclusion on the financial statements and report, and determine whether there is a responsibility to report the occurrence or suspicion of fraud or illegal acts to a party outside the entity.
The practitioner must also consider the entity’s ability to continue as a going concern, meaning that it can continue to operate for the foreseeable future. The practitioner must cover the same period as management in considering the entity’s ability to continue as a going concern. If the practitioner becomes aware of events or conditions that may cast significant doubt about the entity’s ability to continue as a going concern, they must inquire of management about plans for future actions affecting the entity’s ability to continue as a going concern and evaluate the results of those inquiries.
Lastly, it discusses the use of work performed by others. If the practitioner uses work performed by other practitioners or individuals/organizations possessing expertise in a field other than accounting or assurance, the practitioner must assess the appropriateness and sufficiency of that work.
Reconciling the Financial Statements to the Underlying Accounting Records
The requirements of a practitioner in reconciling financial statements to the underlying accounting records. According to the text, the practitioner must obtain evidence that the financial statements are consistent with, or reconciled to, the entity’s accounting records.
To do this, the practitioner typically traces the amounts and balances in the financial statements to the relevant accounting records such as the general ledger. They may also use a summary record or schedule that shows the agreement or reconciliation of the financial statement amounts with the underlying accounting records, such as a trial balance.
Overall, the goal is to ensure that the financial statements are accurate and reliable and can be traced back to the underlying accounting records.
Additional Procedures When the Practitioner Becomes Aware that the Financial Statements May Be Materially Misstated
The additional procedures that a practitioner must perform if they become aware of a matter(s) that could result in the financial statements being materially misstated. The practitioner must design and perform additional procedures to enable them to determine if a material misstatement exists or not. The nature, timing, and extent of these additional procedures will depend on the specific circumstances and require the practitioner’s professional judgment.
The practitioner’s judgment on the need for additional procedures will be guided by various factors, including information obtained from the evaluation of the results of procedures already performed, updated understanding of the entity and its environment, and the persuasiveness of evidence needed to address the matter causing the potential misstatement.
The additional procedures that the practitioner must perform may include additional inquiry or analytical procedures, or other types of procedures, such as substantive tests of details or external confirmations.
It also includes an example of the practitioner’s evaluation of the need for additional procedures, and the practitioner’s response when they believe additional procedures are necessary. In the example, the practitioner’s analysis of accounts receivable reveals a material amount of past due accounts receivable, for which there is no allowance for bad or doubtful debts. This leads the practitioner to inquire of management whether there are uncollectible accounts receivable that would need to be shown as being impaired. Depending on management’s response, the practitioner may conclude that no further procedures are required, determine that the financial statements are materially misstated, or continue to believe that the accounts receivable balance is likely to be materially misstated and perform additional procedures until they can reach a conclusion.
Subsequent Events
The practitioner’s responsibilities regarding subsequent events, which are events that occur between the date of the financial statements and the date of the practitioner’s report. If the practitioner becomes aware of such events that require adjustment of or disclosure in the financial statements, they must request management to correct those misstatements.
It also states that the practitioner has no obligation to perform any procedures regarding the financial statements after the date of the practitioner’s report. However, if a fact becomes known to the practitioner between the date of the report and the date the financial statements are issued that may have caused the practitioner to amend the report, the practitioner must discuss the matter with management or those charged with governance, determine whether the financial statements need amendment, and if so, inquire how management intends to address the matter in the financial statements.
If management does not amend the financial statements in circumstances where the practitioner believes they need to be amended, and the practitioner’s report has already been provided to the entity, the practitioner must notify management and those charged with governance not to issue the financial statements to third parties before the necessary amendments have been made. If the financial statements are nevertheless subsequently issued without the necessary amendments, the practitioner must take appropriate action to seek to prevent reliance on the practitioner’s report.
Written Representations
The procedures and responsibilities of a practitioner (such as an accountant or auditor) in conducting a review engagement, which involves reviewing an entity’s financial statements to provide a limited level of assurance that they are free from material misstatement.
It specifically focuses on the practitioner’s responsibility to obtain written representations from management, which are statements made by management in writing regarding their fulfilment of their responsibilities for the preparation of financial statements in accordance with the applicable financial reporting framework. These written representations serve as important evidence in a review engagement.
The practitioner is required to request written representations from management regarding various matters, including the entity’s related parties and related party transactions, fraud or suspected fraud affecting the entity, non-compliance with laws and regulations affecting the financial statements, and material commitments or contingencies that may affect the entity’s financial statements.
If management does not provide the requested written representations, the practitioner must discuss the matter with management and those charged with governance, re-evaluate the integrity of management, and determine the possible effect on the conclusion in the practitioner’s report.
The practitioner is also responsible for evaluating whether sufficient appropriate evidence has been obtained from the procedures performed and, if not, performing additional procedures to form a conclusion on the financial statements. If the practitioner is unable to obtain sufficient appropriate evidence, they must determine the effect on their report or their ability to complete the engagement.
Finally, the scope limitations, which occur when the practitioner is unable to perform a specific procedure but can obtain sufficient appropriate evidence by performing other procedures. If there are limitations on the scope of the review imposed by management, there may be implications for the practitioner’s report.
Forming the Practitioner’s Conclusion on the Financial Statements
The requirements and considerations that a practitioner, such as an auditor or accountant, must consider when forming a conclusion on financial statements.
The first requirement is that the practitioner must evaluate whether the financial statements adequately refer to or describe the applicable financial reporting framework. This is important because it advises users of the financial statements of the framework on which the financial statements are based. The description of the framework must be accurate and precise, as imprecise language may mislead users of the financial statements.
The practitioner must also consider whether the financial statements are consistent with the requirements of the applicable financial reporting framework, and whether the accounting policies selected and applied by management are appropriate. The practitioner must evaluate whether accounting estimates made by management appear reasonable, and whether the information presented in the financial statements is relevant, reliable, comparable, and understandable. The financial statements must provide adequate disclosures to enable users to understand the effects of material transactions and events on the information conveyed in the financial statements.
The practitioner must also consider the impact of any uncorrected misstatements identified during the review, and in the previous year’s review of the entity’s financial statements, on the financial statements as a whole. Additionally, the practitioner must consider qualitative aspects of the entity’s accounting practices, including indicators of possible bias in management’s judgments.
Overall, the practitioner’s conclusion on the financial statements must be formed based on a thorough evaluation of the financial statements in the context of the applicable financial reporting framework and the results of procedures performed.
Qualitative Aspects of the Entity’s Accounting Practices
The requirements and considerations that a practitioner (such as an auditor) should keep in mind when evaluating an entity’s financial statements. Specifically, it discusses the qualitative aspects of an entity’s accounting practices that may affect the practitioner’s assessment of whether the financial statements are materially misstated.
The mentions indicators of a lack of neutrality in management’s judgments, which can affect the practitioner’s evaluation of whether the financial statements are materially misstated. These indicators may include selective correction of misstatements (i.e., correcting errors that increase earnings but not those that decrease earnings), and possible management bias in making accounting estimates.
It also mentions that if the financial statements are prepared using a fair presentation framework, the practitioner’s evaluation should include an assessment of whether the financial statements and related notes represent the underlying transactions and events in a manner that achieves fair presentation or gives a true and fair view, as appropriate.
It goes on to discuss the form of the practitioner’s conclusion on the financial statements, which can be unmodified (meaning no material misstatements were found) or modified (meaning material misstatements were found). The practitioner must use the appropriate heading and language in their report depending on whether their conclusion is qualified, adverse, or a disclaimer of conclusion, and provide a description of the matter giving rise to the modification in a separate paragraph in the report.
The Practitioner’s Report
The elements that are required in a practitioner’s report for a review engagement. This report must be in writing and should include certain specific information.
The report should have a clear title that indicates that it is the report of an independent practitioner for a review engagement. This affirms that the practitioner has met all the relevant ethical requirements regarding independence.
The report should also indicate who the addressees are. This is usually the shareholders or those charged with governance of the entity whose financial statements are being reviewed. If the financial statements will be included in a larger document that contains other information, the practitioner may consider identifying the page numbers on which the financial statements that have been reviewed are presented.
The report should have an introductory paragraph that identifies the financial statements reviewed, including identification of the title of each of the statements contained in the set of financial statements and the date and period covered by each financial statement. It should also refer to the summary of significant accounting policies and other explanatory information and state that the financial statements have been reviewed.
The report should describe the responsibility of management for the preparation of the financial statements, including an explanation that management is responsible for their preparation in accordance with the applicable financial reporting framework, such as Generally Accepted Accounting Principles (GAAP), and for maintaining adequate internal control to prevent material misstatements due to fraud or error.
If the financial statements are special purpose financial statements, the report should describe the purpose for which the financial statements are prepared, and if necessary, the intended users. It should also include a reference within the explanation of management’s responsibility for the financial statements to management’s responsibility for determining that the applicable financial reporting framework is acceptable in the circumstances.
The report should describe the practitioner’s responsibility to express a conclusion on the financial statements based on the review performed. This is to contrast the practitioner’s responsibility with management’s responsibility for preparation of the financial statements. The report should also reference the standards used by the practitioner for the review to convey to the users of the practitioner’s report that the review has been conducted in accordance with established standards.
The report should include a description of the nature of a review engagement, the procedures performed by the practitioner, and its limitations. This is to explain the scope and limitations of the engagement undertaken for the benefit of the readers of the report. It should be clarified that the review is not an audit, and the practitioner does not express an audit opinion on the financial statements.
Finally, the report should include a conclusion section that contains the practitioner’s conclusion on the financial statements, based on the review performed. The conclusion should be in accordance with the review engagement standards used by the practitioner.
Overall, it provides guidance for practitioners on how to assess and report on the financial statements of an entity, particularly with regards to qualitative aspects of accounting practices and the form of their conclusion.
Emphasis of Matter and Other Matter Paragraphs in the Practitioner’s Report
Emphasis of Matter paragraphs are used to draw the attention of users to a matter presented in the financial statements that the practitioner believes is fundamental to the users’ understanding of the financial statements. The practitioner must have obtained sufficient appropriate evidence to conclude that the matter is not likely to be materially misstated as presented in the financial statements. If the financial statements are prepared using a special purpose framework, the practitioner must include an Emphasis of Matter paragraph to alert users that the financial statements may not be suitable for another purpose.
Other Matter paragraphs may be used to communicate a matter that is relevant to users’ understanding of the review, the practitioner’s responsibilities, or the practitioner’s report but is not presented or disclosed in the financial statements. This is only appropriate if it is not prohibited by law or regulation.
If the practitioner has other reporting responsibilities in addition to reporting on the financial statements, such as reporting on certain matters that come to their attention during the review or expressing a conclusion on the adequacy of accounting books and records, these responsibilities should be addressed in a separate section of the practitioner’s report headed “Report on Other Legal and Regulatory Requirements.” Depending on the law or regulation applicable to the entity, the distribution or use of the practitioner’s report may be restricted.
Date of the Practitioner’s Report
The requirements for dating a practitioner’s report, which is a report prepared by an accountant or other professional who has reviewed the financial statements of an entity. The practitioner must date the report no earlier than the date on which they have obtained sufficient appropriate evidence to support their conclusion on the financial statements. The date of the report must inform the user that the practitioner has considered events and transactions up to that date.
The report provides a conclusion on the financial statements, which are the responsibility of management, and the practitioner cannot conclude that sufficient evidence has been obtained until all statements comprising the financial statements have been prepared and management has accepted responsibility for them. If law or regulation identifies the individuals or bodies responsible for concluding that the statements have been prepared, evidence of that approval must be obtained before dating the report. If the approval process is not prescribed in law or regulation, the entity’s procedures are considered to identify the individuals or body with the authority to conclude that the statements have been prepared.
Final approval of the financial statements by shareholders is not necessary for the practitioner to conclude on the financial statements. The date of approval of the financial statements for purposes of this standard is the earlier date on which those with recognized authority determine that the statements have been prepared and that they have taken responsibility for them.
Consistency in the practitioner’s report, when the review has been conducted in accordance with this standard, promotes credibility in the global marketplace. The report may refer to this standard when the differences between legal or regulatory requirements and this standard relate only to the layout or wording of the report, and at a minimum, the report complies with the requirements for dating the report. If specific requirements applicable to the entity do not conflict with this standard, adopting the layout and wording used in this standard assist user of the report in recognizing it as a report on a review of financial statements conducted in accordance with this standard.
When the practitioner complies with other specific relevant legal or regulatory requirements governing the review engagement, the report may refer to the review having been performed in accordance with both this standard and such legal or regulatory requirements. However, a reference to both is not appropriate if there is a conflict between the requirements of this standard and those legal or regulatory requirements that would lead the practitioner to form a different conclusion or not to include an emphasis of matter paragraph that, in the circumstances, would be required by this standard.
Documentation
The importance of proper documentation in the context of financial statement reviews. It is critical that all financial statements and related notes are prepared and that those with recognized authority take responsibility for them. This is important because it provides assurance that the financial statements have been accurately prepared and that those responsible for them have acknowledged their responsibility.
In addition to preparing the financial statements and obtaining the necessary assertions of responsibility, the practitioner must also document the nature, timing, and extent of procedures performed during the review, as well as the results obtained, significant matters arising during the engagement, and professional judgments made. This documentation is necessary to provide evidence that the review was performed in accordance with the applicable framework and legal and regulatory requirements. Furthermore, it is essential to ensure that an experienced practitioner, who has no previous connection to the engagement, can understand the basis for the practitioner’s report.
The practitioner must record who performed and reviewed the work and the date it was completed. This information is important for quality control purposes, and it ensures that there is a clear record of who is responsible for each aspect of the review. Additionally, the practitioner must document discussions with management, those charged with governance, and others who are relevant to the performance of the review. This documentation is necessary to ensure that all significant matters arising during the engagement are addressed and that there is a clear record of the nature of those matters.
Finally, if the practitioner identifies any inconsistencies during the engagement, they must document how these inconsistencies were addressed. This documentation is essential to ensure that all significant matters affecting the financial statements are addressed and that the review is performed accurately and appropriately. Overall, proper documentation is critical in financial statement reviews to provide evidence of compliance with applicable standards and requirements and to ensure that the review is performed accurately and effectively.
Quiz: Engagements to Review Historical Financial Statements
1. Which standard outlines the responsibilities of a practitioner when performing a review of financial statements?
a) SRE 2410
b) SQC 1
c) SRE 2400
d) ICAI Code of Ethics
Answer: c)
2. What is the primary objective of a review engagement?
a) To provide reasonable assurance on the financial statements
b) To obtain limited assurance on the financial statements
c) To detect and prevent material misstatements in the financial statements
d) To express an opinion on the financial statements
Answer: b)
3. What are the fundamental principles of professional ethics that practitioners must comply with?
a) Objectivity, Professional competence and due care, Confidentiality, and Professional behaviour
b) Independence, Professional competence and due care, Integrity, and Professional behaviour
c) Professional competence and due care, Confidentiality, Independence, and Professional scepticism
d) Integrity, Professional competence and due care, Independence, and Professional behaviour
Answer: a)
4. What is the responsibility of the engagement partner in a review engagement?
a) Taking charge of the overall quality of the engagement and compliance with quality control policies and procedures
b) Conducting analytical procedures on the financial statements
c) Determining materiality for the financial statements
d) Communicating with management or those charged with governance on a timely basis
Answer: a)
5. What are the preconditions for accepting a review engagement?
a) Ensuring the financial statements are audited by an independent auditor
b) Determining the acceptability of the financial reporting framework and obtaining management’s acknowledgement of responsibilities
c) Conducting a comprehensive assessment of internal controls
d) Reviewing the engagement terms with the engagement partner
Answer: b)
6. What is the purpose of designing and performing procedures in a review engagement?
a) To ensure compliance with applicable laws and regulations
b) To obtain sufficient appropriate evidence to support the conclusion on the financial statements
c) To identify related party transactions in the entity’s financial statements
d) To assess the entity’s ability to continue as a going concern
Answer: b)
7 When should a practitioner inquire about significant or unusual transactions in a review engagement?
a) Only if management requests specific attention to those transactions
b) At the beginning of the engagement to gather necessary information
c) During the review engagement, as appropriate, to obtain relevant details
d) After the review is completed, to provide feedback to management
Answer: c)
8. What should a practitioner do if they become aware of fraud or non-compliance during a review engagement?
a) Report the matter to the appropriate level of senior management or those charged with governance
b) Modify the conclusion on the financial statements to reflect the potential misstatement
c) Discontinue the review engagement and notify regulatory authorities
d) Exclude the affected transactions from the review engagement without further investigation
Answer: a)
9. What is the purpose of reconciling financial statements to the underlying accounting records?
a) To identify any inconsistencies or discrepancies between the two
b) To ensure that the financial statements comply with the applicable financial reporting framework
c) To determine the entity’s ability to continue as a going concern
d) To obtain written representations from management regarding the accuracy of the records
Answer: a)
10. Why is proper documentation important in a financial statement review engagement?
a) To demonstrate compliance with ethical requirements regarding independence
b) To provide evidence of the practitioner’s report being conducted in accordance with established standards
c) To ensure that financial statements are accurately prepared and responsibility is acknowledged
d) All of the above
Answer: d)
Additional questions:
11. Which form of communication should the practitioner use during a review engagement to understand matters arising and develop a constructive working relationship?
a) Inquiries
b) Written reports
c) Third-party communication
d) Two-way communication
Answer: d)
12. When should the practitioner communicate significant findings from the review to management or those charged with governance?
a) At the beginning of the engagement
b) At the end of the engagement
c) During the review engagement on a timely basis
d) Only if requested by management or those charged with governance
Answer: c)
13. What is the purpose of determining materiality in a review engagement?
a) To identify areas in the financial statements where fraud may have occurred
b) To assess the entity’s compliance with applicable laws and regulations
c) To evaluate the significance of misstatements in the financial statements
d) To determine the level of assurance to be provided in the engagement
Answer: c)
14. Which of the following factors should be considered when determining materiality for the financial statements in a review engagement?
a) The engagement team’s expertise in financial reporting
b) The entity’s industry and economic environment
c) The practitioner’s personal financial interests
d) The requirement to comply with international accounting standards
Answer: b)
15. What is the purpose of agreeing on the terms of engagement in a review engagement?
a) To establish the financial reporting framework to be used by the practitioner
b) To determine the fees to be charged for the review engagement
c) To outline the practitioner’s responsibilities and the scope of the engagement
d) To ensure the financial statements are free from material misstatement
Answer: c)
16. What should a practitioner do if they become aware of events or conditions that may cast significant doubt about the entity’s ability to continue as a going concern?
a) Request additional financial statements from management to assess the situation
b) Evaluate the results of inquiries about management’s plans for future actions
c) Modify the financial statements to reflect the potential going concern issues
d) Terminate the review engagement and withdraw from the client
Answer: b)
17. In a review engagement, what is the purpose of obtaining written representations from management?
a) To assess the accuracy of the financial statements
b) To confirm the existence of related party transactions
c) To provide evidence of management’s responsibility for the financial statements
d) To disclose any instances of fraud or non-compliance
Answer: c)
18. What are “Emphasis of Matter” paragraphs in a practitioner’s report?
a) Paragraphs used to highlight matters that are fundamental to users’ understanding of the financial statements
b) Paragraphs that communicate additional procedures performed during the review engagement
c) Paragraphs that discuss the entity’s ability to continue as a going concern
d) Paragraphs that provide an audit opinion on the financial statements
Answer: a)
19. What is the purpose of the conclusion section in the practitioner’s report?
a) To summarize the key findings of the review engagement
b) To express the practitioner’s opinion on the financial statements
c) To provide recommendations for improving the entity’s financial reporting
d) To disclose any limitations or scope restrictions in the review engagement
Answer: b)
20. Why is the date of the practitioner’s report important?
a) It indicates when the financial statements were prepared by management
b) It determines the deadline for submitting the report to regulatory authorities
c) It informs users of the report about the period covered by the financial statements
d) It signifies when the practitioner obtained sufficient evidence to support their conclusion
Answer: d)
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