SRE 2410 – Statement on Auditing Standards
Scope and objectives
The purpose and scope of the Standard on Review Engagements (SRE) is which provides guidance on the auditor’s responsibilities when reviewing an audit client’s interim financial information. Interim financial information refers to financial statements prepared for a period that is shorter than the entity’s financial year. The auditor should perform the review in accordance with the SRE 2410, which includes updating their understanding of the entity and its environment through inquiries made during the review process. If a practitioner who is not the auditor of the entity is engaged to perform a review of interim financial information, they should follow SRE 2400 instead. The SRE 2410 can also be applied to review historical financial information other than interim financial information.
General Principles of a Review of Interim Financial Information
The three general principles of a review of interim financial information:
- Ethical requirements: The auditor should comply with the ethical requirements relevant to the audit of the annual financial statements of the entity. These ethical requirements cover areas such as independence, integrity, objectivity, professional competence and due care, confidentiality, professional behaviour, and technical standards.
- Quality control procedures: The auditor should implement quality control procedures that are applicable to the individual engagement. These procedures include leadership responsibilities for quality on the engagement, ethical requirements, acceptance and continuance of client relationships and specific engagements, assignment of engagement teams, engagement performance, and monitoring.
- Professional scepticism: The auditor should plan and perform the review with an attitude of professional scepticism. This means that the auditor should make a critical assessment, with a questioning mind, of the validity of evidence obtained and be alert to evidence that contradicts or brings into question the reliability of documents or representations by management of the entity. The auditor should recognize that circumstances may exist that could require material adjustments to the interim financial information to be prepared in all material respects in accordance with the applicable financial reporting framework.
Objective of an Engagement to Review Interim Financial Information
An engagement is conducted by an auditor to enable them to express a conclusion on whether anything has come to their attention that causes them to believe that the interim financial information is not prepared in all material respects in accordance with an applicable financial reporting framework.
The auditor uses inquiries and analytical and other review procedures to reduce the risk of expressing an inappropriate conclusion when the interim financial information is materially misstated. The objective of a review of interim financial information differs from that of an audit in that a review does not provide a basis for expressing an opinion on whether the financial information gives a true and fair view, or is presented fairly, in all material respects, in accordance with an applicable financial reporting framework.
A review is not designed to obtain reasonable assurance that the interim financial information is free from material misstatement. Rather, it involves making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review may bring significant matters affecting the interim financial information to the auditor’s attention, but it does not provide all of the evidence that would be required in an audit.
Agreeing the Terms of the Engagement
The terms of engagement are typically documented in an engagement letter to ensure that both parties understand the objective and scope of the review, the responsibilities of management and the auditor, the assurance obtained, and the form and content of the report.
The engagement letter should cover various matters, including the objective and scope of the review, management’s responsibility for the interim financial information, management’s responsibility for maintaining effective internal control relevant to the preparation of interim financial information, management’s agreement to provide written representations to the auditor to confirm representations made orally during the review, and the anticipated form and content of the report.
The terms of engagement to review interim financial information can be combined with the terms of engagement to audit the annual financial statements. The purpose of agreeing on the terms of engagement is to avoid misunderstandings and ensure that both parties have a clear understanding of the expectations and requirements of the review engagement.
Procedures for a Review of Interim Financial Information
The auditor must identify potential material misstatements and select appropriate procedures to review the interim financial information. This requires updating their understanding of the entity and its environment, including its internal control, which can be achieved through reading documentation of the preceding year’s audit and reviews of prior interim periods, considering any significant risks identified in the audit of the prior year’s financial statements, and reading the most recent annual and comparable prior period interim financial information, among other procedures.
The auditor must also consider materiality, any corrected material misstatements and uncorrected immaterial misstatements from the prior year’s financial statements, significant financial accounting and reporting matters, and the results of any audit procedures or internal audits performed. They must also inquire of management about various matters related to the interim financial information, including management’s assessment of the risk of material misstatement due to fraud, changes in the entity’s business activities, significant changes in internal control, and the process by which the interim financial information was prepared and the reliability of the underlying accounting records.
The auditor must determine the nature of review procedures to be performed for components and communicate these matters to other auditors involved in the review, if applicable. For recently appointed auditors who have not yet performed an audit of the annual financial statements, they must obtain an understanding of the entity and its environment, including its internal control, to plan and conduct a review of the interim financial information. This understanding is gained through inquiries of the predecessor auditor and review of the prior period financial statements and relevant documents.
Inquiries, Analytical and Other Review Procedures
The auditor should perform inquiries, primarily of persons responsible for financial and accounting matters, and perform analytical and other review procedures to enable the auditor to conclude whether the interim financial information is prepared, in all material respects, in accordance with the applicable financial reporting framework.
The review procedures include reading the minutes of meetings of shareholders, those charged with governance, and other appropriate committees to identify matters that may affect the interim financial information, considering the effect of matters giving rise to a modification of the audit or review report, and inquiring of members of management responsible for financial and accounting matters about the interim financial information.
The auditor should also apply analytical procedures to the interim financial information designed to identify relationships and individual items that appear to be unusual and may reflect a material misstatement in the interim financial information.
The auditor may perform many of the review procedures before or simultaneously with the entity’s preparation of the interim financial information, as performing some of the review procedures earlier in the interim period allows early identification and consideration of significant accounting matters affecting the interim financial information.
The auditor performing the review of interim financial information is also engaged to perform an audit of the annual financial statements of the entity, and the auditor may decide to perform certain audit procedures concurrently with the review of interim financial information for convenience and efficiency.
Finally, SRE 2410 notes that a review of interim financial information ordinarily does not require corroborating inquiries about litigation or claims, and it is therefore ordinarily not necessary to send an inquiry letter to the entity’s lawyer. The auditor should instead communicate directly with the entity’s legal counsel as needed.
Evaluation of Misstatements
The auditor is responsible for evaluating whether uncorrected misstatements that have come to their attention are material, both individually and in aggregate. This means they must consider whether the misstatements would have a significant impact on the interim financial information if they were not corrected.
While a review of interim financial information is not designed to provide reasonable assurance that it is free from material misstatement (unlike a full audit engagement), the auditor must still evaluate any misstatements that come to their attention to determine whether a material adjustment is needed to ensure that the information is prepared in accordance with the applicable financial reporting framework.
The auditor must use professional judgement to determine the materiality of any misstatements that have not been corrected. This involves considering factors such as the nature, cause, and amount of the misstatements, as well as their potential impact on future interim or annual periods.
In some cases, the auditor may decide that misstatements below a certain amount need not be aggregated, if they do not have a material effect on the interim financial information. However, the auditor must be careful in making this determination, as materiality is not just a quantitative consideration, but also involves qualitative factors. Even relatively small misstatements could have a material impact on the interim financial information.
Management Representations
In auditing, SRE 2410 is important for auditors to obtain written representations from management to ensure that the information provided in the financial statements is accurate and reliable. The text specifies the requirements for obtaining such representations in relation to interim financial information, which is financial information that is prepared and presented between the entity’s annual financial statements.
The management should provide written representation to the auditor stating that it acknowledges its responsibility for the design and implementation of internal control to prevent and detect fraud and error. This means that management is responsible for establishing and maintaining effective internal control systems to ensure that the financial information is accurate and reliable.
Management should also confirm in writing that the interim financial information is prepared and presented in accordance with the applicable financial reporting framework, which means that the financial information complies with the relevant accounting standards and regulations.
In addition, management should state that any uncorrected misstatements that the auditor has identified during the review process are immaterial, both individually and in the aggregate, to the interim financial information as a whole. This means that any errors or discrepancies that have been identified are not significant enough to impact the overall financial information.
Management should also disclose to the auditor all significant facts relating to any frauds or suspected frauds that may have affected the entity. This includes any instances where fraud may have occurred or where there is suspicion of fraud, as this information can impact the accuracy of the financial information.
Management should also disclose to the auditor the results of its assessment of the risks that the interim financial information may be materially misstated as a result of fraud. This means that management has assessed the risk of fraudulent activity impacting the financial information and has taken appropriate measures to mitigate those risks.
Furthermore, management should disclose to the auditor all known actual or possible noncompliance with laws and regulations whose effects are to be considered when preparing the interim financial information. This includes any instances where the entity may not be in compliance with relevant laws and regulations that could impact the financial information.
Finally, management should disclose to the auditor all significant events that have occurred subsequent to the balance sheet date and through to the date of the review report that may require adjustment to or disclosure in the interim financial information. This includes any events that may have occurred after the balance sheet date that may impact the accuracy of the financial information
Auditor’s Responsibility for Accompanying Information
When a company prepares its interim financial information, it may also include other information, such as management’s discussion and analysis, press releases, and presentations. The auditor is responsible for reading this accompanying information and ensuring that it is not materially inconsistent with the interim financial information.
If the auditor identifies a material inconsistency, they must determine whether the interim financial information or the other information needs to be amended. If management refuses to make the necessary amendments, the auditor should consider taking further action, such as including an additional paragraph in the review report or withdrawing from the engagement. This is important because the accompanying information can be misleading to the stakeholders and misrepresent the company’s financial position.
If the auditor identifies a material misstatement of fact in the other information, they should discuss the matter with management and consider requesting management to consult with a qualified third party to resolve the issue. If management refuses to make the necessary amendments, the auditor should consider notifying those charged with governance and obtaining legal advice. This ensures that the auditor maintains their independence and upholds their professional and ethical responsibilities to provide a fair and accurate assessment of the company’s financial information.
Communication
If the auditor believes that a material adjustment is necessary for the interim financial information to be prepared in accordance with the applicable financial reporting framework, they should communicate this matter to the appropriate level of management as soon as possible.
If management does not respond appropriately within a reasonable period of time, the auditor should inform those charged with governance. The communication can be made orally or in writing, depending on the nature, sensitivity, and significance of the matter, as well as the timing of the communication. The auditor should document any oral communication.
If those charged with governance do not respond appropriately within a reasonable period of time, the auditor should consider modifying the report, withdrawing from the engagement, or resigning from the appointment to audit the annual financial statements.
If the auditor identifies the existence of fraud or noncompliance with laws and regulations during the review, they should communicate the matter to the appropriate level of management as soon as possible. The auditor should also consider the need to report such matters to those charged with governance and the implications for the review.
The auditor should communicate any relevant matters of governance interest arising from the review of interim financial information to those charged with governance. If the auditor becomes aware of any important and relevant matters that could affect the financial reporting and disclosure process, they should communicate such matters to those charged with governance.
Reporting the Nature, Extent and Results of the Review of Interim Financial Information
The report should contain specific information, such as a title, identification of the interim financial information, a statement on management’s responsibility for preparing the financial information, a statement on the auditor’s responsibility to review the information, a statement on the scope of the review, and the auditor’s conclusion on the financial information.
If the interim financial information is not prepared in accordance with the applicable financial reporting framework, the auditor should express a qualified or adverse conclusion in their report. In the case of a qualified conclusion, the auditor should describe the nature of the departure from the financial reporting framework and its effects on the financial information. In the case of an adverse conclusion, the auditor should express that the financial information is not prepared, in all material respects, in accordance with the applicable financial reporting framework.
SRE 2410 also mentions that the auditor’s conclusion wording may be prescribed by law or regulation in some jurisdictions, but the auditor’s responsibilities remain the same. Illustrative review reports are provided in the appendix.
Limitation on Scope
There are different types of limitations on scope, and the response of the auditor to each will differ.
SRE 2410 explains that a limitation on scope is any factor that prevents the auditor from completing their review of the interim financial information. If such a limitation exists, the auditor should inform the appropriate level of management and those charged with governance in writing of the reason why the review cannot be completed. The auditor should also consider whether it is appropriate to issue a report.
If a limitation on scope is imposed by management, the auditor should not accept the engagement to review the interim financial information if their preliminary knowledge of the engagement circumstances indicates that they would be unable to complete the review. If management imposes a limitation on the scope of the review after the engagement has been accepted, the auditor should request the removal of that limitation. If management refuses to remove the limitation, the auditor will be unable to complete the review and express a conclusion. In such cases, the auditor should communicate in writing the reason why the review cannot be completed. If the auditor becomes aware of any material adjustments that need to be made to the financial information, they should communicate these to the appropriate parties.
There may also be other limitations on scope, which are not imposed by management. In such circumstances, the auditor should follow the guidance provided in certain objectives. However, in rare circumstances where the limitation on scope is confined to specific matters that are not pervasive to the financial information, the auditor may modify the review report by qualifying the conclusion.
SRE 2410 also notes that if the auditor has previously expressed a qualified opinion on the audit of the latest annual financial statements due to a limitation on scope, they should consider whether that limitation on scope still exists and its implications for the review report.
Going Concern and Significant Uncertainties
The auditor should add an emphasis of matter paragraph to highlight a material uncertainty relating to an event or condition that may cast significant doubt on the entity’s ability to continue as a going concern. This means that if there is any doubt about the entity’s ability to continue its operations, the auditor should make sure that this is clearly disclosed in the interim financial information.
A material uncertainty relating to an event or condition that may cast significant doubt on the entity’s ability to continue as a going concern comes to the auditor’s attention and adequate disclosure is made in the interim financial information, the auditor modifies the review report by adding an emphasis of matter paragraph.
If, however, a material uncertainty that casts significant doubt about the entity’s ability to continue as a going concern is not adequately disclosed in the interim financial information, the auditor should express a qualified or adverse conclusion, as appropriate. The report should include specific reference to the fact that there is such a material uncertainty.
SRE 2410 also discusses the need to include the review report in any document containing interim financial information, as per the terms of the engagement. If management does not include the review report in the document, the auditor should consider seeking legal advice to determine the appropriate course of action.
Finally, SRE 2410 explains that interim financial information may not necessarily include all the information that would be included in a complete set of financial statements. The auditor needs to consider whether the interim financial information is misleading in the absence of a reference to the latest audited financial statements and the implications for the review report.
Documentation
The auditor is required to prepare sufficient and appropriate documentation to support their conclusion and provide evidence that the review was performed in accordance with applicable standards and regulations. The documentation should include details of the inquiries made, analytical and other review procedures applied, information obtained, and any significant matters considered during the review, including how these matters were addressed.
The purpose of the documentation is to allow an experienced auditor who has no prior knowledge of the engagement to understand how the review was conducted, the results of the review, and the basis for the auditor’s conclusions. This documentation is also used to support the auditor’s work during quality control reviews or inspections by regulatory bodies.
Finally, the effective date of the standard is April 1, 2010, which means that the requirements outlined in the standard apply to reviews of interim financial information for periods beginning on or after that date.
Review of Interim Financial Information Performed by the Independent Auditor of the Entity
ISRE 2410 is a standard that deals with the written report of an auditor on the Review of Interim Financial Information. The standard specifies that the auditor should mention the location in the country or jurisdiction where the auditor practices in the report. However, in India, the requirement to mention the location in the country or jurisdiction where the auditor practices has been replaced with the requirement to mention the place of signature in the auditor’s report as per the SA 700(Revised).
The standard also requires the auditor to review the predecessor auditor’s documentation for the preceding annual audit and for any prior interim periods in the current year that have been reviewed by the predecessor auditor. But in India, the Code of Ethics prohibits a Chartered Accountant in Practice from disclosing information acquired in the course of his professional engagement to any person other than his client. Hence, the requirement of reviewing the predecessor auditor’s documentation has been replaced with the requirement of perusing the copies of the audited financial statements including the other relevant documents relating to the prior period financial statements.
Quiz: Review of Interim Financial Information
1. Which standard provides guidance on the auditor’s responsibilities when reviewing an audit client’s interim financial information?
a) Standard on Review Engagements (SRE) 2400
b) Standard on Review Engagements (SRE) 2410
c) Standard on Auditing (SA) 2400
d) Standard on Auditing (SA) 2410
Answer: b)
2. What is the purpose of a review of interim financial information?
a) To express an opinion on whether the financial information gives a true and fair view
b) To provide reasonable assurance on the financial information
c) To identify any material misstatements in the financial information
d) To determine if anything has come to the auditor’s attention that causes them to believe the financial information is not prepared in accordance with the applicable financial reporting framework
Answer: d)
3. Which of the following is not one of the three general principles of a review of interim financial information?
a) Ethical requirements
b) Quality control procedures
c) Professional skepticism
d) Professional competence and due care
Answer: d)
4. What should the terms of engagement for reviewing interim financial information cover?
a) The auditor’s responsibilities and qualifications
b) The entity’s financial year-end
c) Management’s agreement to provide oral representations
d) The objective, scope, and responsibilities of the review engagement
Answer: d)
5. What are some procedures that the auditor should perform during a review of interim financial information?
a) Reading the minutes of meetings and inquiring of management
b) Performing detailed testing of transactions and balances
c) Conducting physical inspections of the entity’s assets
d) Interviewing external stakeholders and suppliers
Answer: a)
6. When should the auditor communicate any material adjustments to the interim financial information to the appropriate level of management?
a) At the completion of the review engagement
b) Before the review procedures are performed
c) As soon as possible after the adjustments are identified
d) Only if the adjustments have a significant impact on the financial information
Answer: c)
7. How should the auditor address any material uncertainties relating to the entity’s ability to continue as a going concern?
a) Express a qualified or adverse conclusion in the review report
b) Discuss the uncertainties with the entity’s legal counsel
c) Seek legal advice on the implications of the uncertainties
d) Include an emphasis of matter paragraph in the review report
Answer: d)
8. What should the auditor do if there are limitations on the scope of the review engagement?
a) Issue a qualified opinion on the interim financial information
b) Modify the review report by excluding the limitations
c) Inform management and request the removal of the limitations
d) Withdraw from the review engagement and resign from the appointment
Answer: c)
9. What is the purpose of documentation in a review of interim financial information?
a) To allow the auditor to understand the entity’s financial position
b) To support the auditor’s conclusions and provide evidence of the review
c) To disclose information acquired in the course of the audit engagement
d) To comply with the Code of Ethics in India
Answer: b)
10. What is the requirement regarding the review of the predecessor auditor’s documentation in India?
a) The auditor should review the predecessor auditor’s documentation for the preceding annual audit.
b) The auditor should disclose the information acquired from the predecessor auditor.
c) The auditor should peruse the copies of the audited financial statements and other relevant documents of the prior period.
d) The auditor should mention the location in the country or jurisdiction where the auditor practices.
Answer: c)
Additional questions:
11. Which standard should be followed if a practitioner who is not the auditor of the entity is engaged to perform a review of interim financial information?
a) SRE 2410
b) SRE 2400
c) SA 2400
d) SA 2410
Answer: b)
12. What is the auditor’s responsibility regarding quality control procedures in a review of interim financial information?
a) Implement quality control procedures that are applicable to the individual engagement
b) Conduct a comprehensive evaluation of the entity’s internal control system
c) Verify the accuracy of all financial transactions
d) Review the ethical requirements relevant to the audit of the annual financial statements
Answer: a)
13. What is the role of professional skepticism in a review of interim financial information?
a) To blindly accept management’s representations
b) To conduct detailed testing of all financial transactions
c) To make a critical assessment of the validity of evidence obtained
d) To provide a guarantee on the accuracy of the financial information
Answer: c)
14. When should the auditor perform inquiries, analytical procedures, and other review procedures for a review of interim financial information?
a) Only after the entity’s preparation of the interim financial information
b) Simultaneously with the entity’s preparation of the interim financial information
c) Before the entity’s preparation of the interim financial information
d) At the conclusion of the review engagement
Answer: b)
15. What factors should the auditor consider when evaluating the materiality of uncorrected misstatements?
a) Nature, cause, and amount of the misstatements
b) Size of the entity’s financial statements
c) Professional judgment of the auditor’s supervisor
d) Reputation of the entity’s management
Answer: a)
16. What type of conclusion should the auditor express in the review report if the interim financial information is not prepared in accordance with the applicable financial reporting framework?
a) Unmodified conclusion
b) Qualified conclusion
c) Adverse conclusion
d) Disclaimer of conclusion
Answer: b)
17. What is the auditor’s responsibility regarding accompanying information in relation to the interim financial information?
a) Ensure the accompanying information is materially consistent with the interim financial information
b) Prepare the accompanying information on behalf of the entity
c) Verify the accuracy of all statements in the accompanying information
d) Exclude the accompanying information from the review report
Answer: a)
18. How should the auditor communicate any material adjustments to the interim financial information?
a) Orally inform the entity’s legal counsel
b) Issue a separate report solely for the material adjustments
c) Discuss the adjustments with the entity’s management
d) Include the adjustments in the review report
Answer: c)
19. What is the purpose of documenting the inquiries made, analytical procedures applied, and significant matters considered during the review of interim financial information?
a) To demonstrate compliance with regulatory bodies
b) To support the auditor’s work during quality control reviews
c) To provide evidence of the review and basis for the auditor’s conclusions
d) To disclose information acquired during the audit engagement
Answer: c)
20. What is the effective date of the standard on Review of Interim Financial Information?
a) April 1, 2010
b) January 1, 2000
c) April 1, 2015
d) January 1, 2012
Answer: a)
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