Review Engagements: Mastering the Fundamentals

The standards for reviews of private company financial statements have changed and the risks have increased. Many young CPAs may lack the skills and experience to perform meaningful analytical reviews and make incisive inquiries of management; and many seasoned CPAs could use a good refresher in these areas. Reduce your firm’s risk and make yourself aware of the current standards with this popular course.

Highlights include understanding the client’s industry and business, the engagement letter, work programs, making effective inquiries, analytical procedures, representation letters, the accountant’s report and documentation.

Identify the activities required to perform a basic review of a set of financial statements, draft the accountant’s report and document the engagement in accordance with professional standards

Prerequisite:  None

Chapter 1 - Introduction to Review Engagements

Learning Objectives

Upon completion of this chapter, you should be able to

• Understand review engagements and their scope.
• Identify the standards from the Code of Conduct that apply to reviews.
• Understand the performance requirements and level of assurance for reviews.

Introduction

In this chapter, we discuss the following:

• The definition of a review engagement
• Independence
• Professional standards that apply to review engagements
• Levels of assurance provided by different engagements

Resources

• Appendix A, Codification of Statements on Standards for Accounting and Review Services.
• Appendix B, Technical Inquiries: Compilation and Review Engagements
• Appendix I, ET Section 101-3 - Independence

Defining a Review

In a review engagement, the accountant performs limited procedures on financial statements in order to provide limited assurance that the financial statements are presented in accordance with generally accepted accounting principles. Limited procedures include only inquiry, analytical procedures and management's representation letter. Limited assurance states that the accountant is not aware of any material modifications that would be necessary for the financial statements to be in accordance with generally accepted accounting principles. Note, though, that had more expansive procedures been performed, the accountant might have learned of material modifications necessary to state the financial statements in accordance with generally accepted accounting principles.

Review engagements may only be provided to nonpublic entities. Nonpublic entities are those that do not have listed securities, filings with a regulatory agency in preparation for a public sale of securities or a subsidiary, or are joint ventures or controlled enterprises of a public entity.

By providing limited assurance on the associated financial statements, reviews are significantly less in scope than audit engagements. An audit engagement, for example, begins with a set of financial statements provided by management. In these financial statements, management asserts that the transactions and accounts underlying the financial statements: 1) exist or occurred, 2) are complete, 3) represent rights and obligations of the company, 4) are valued and allocated correctly, and 5) are presented and provide disclosure in accordance with generally accepted accounting principles. The auditor's objective is to provide reasonable assurance on the financial statements. In order to provide reasonable assurance, the auditor must obtain evidence - through such procedures as inquiry, analytical procedures, confirmations, vouching, management representation letters, and others - to corroborate management's assertions about the financial statements. Since reasonable assurance is the highest level of assurance provided by accountants, the audit requires the highest level of rigor. As previously noted, review engagements require significantly fewer procedures - inquiry, analytical procedures and management's representation letter - to achieve limited assurance. While review engagements are definitely a lower level service than audit, they are a higher level of service than compilation engagements. A compilation engagement provides no assurance on the financial statements. And accordingly, the performance requirements for a compilation are very low. Where the compilation engagement produces financial statements, the review engagement begins with a set of financial statements and the associated management assertions.

Independence

Recall that in the compilation engagement where no assurance is provided, accountants are not required to be independent as long as the lack of independence is disclosed. Because review engagements provide some assurance on the financial statements being reviewed, accountants are required to be independent of their clients on these engagements. See Appendix I, ET Section 101-3 - Independence.

Since the accountant is precluded from issuing a review report when the accountant lacks independence, it is important to examine some of the items that more typically impair independence. For example, an accountant's independence is impaired when fees for professional services rendered more than one year prior to the date of the accountant's report remain unpaid when the current year's report is released. These fees include both billed and unbilled amounts.

Another major question regarding independence involves the provision of accounting or write-up services. It is not uncommon for smaller business to utilize their accountants in such a way that the accountant's independence is impaired for purposes of providing compilation services. In order to provide nonattest services and maintain independence, the following requirements must be met:

• The accountant must not perform management functions. The accountant can assist management and make recommendations, but must not make management decisions for the client.
• The client must perform certain functions, including designation an individual to be responsible for overseeing the services to be performed; evaluating the adequacy and results of the services performed, making all management decisions and performing all management functions; accepting responsibility for the results of the services; and establishing and maintaining internal controls.
• The understanding between the accountant and the client must be documented in writing before performing the nonattest services.

There are also some specific services that impair the accountant's independence. These services include

• Exercising authority on behalf of the client, such as authorizing, executing or consummating a transaction, or having the authority to do so.
• Preparing source documents, in electronic or other form, that evidence the occurrence of a transaction.
• Having custody of client assets.
• Supervising client employees performing their normal recurring activities.
• Determining which of the auditor's recommendations should be implemented.
• Reporting to the board of directors on behalf of management.
• Serving as a client's stock transfer or escrow agent, registrar, or general counsel.
• Designing a client's financial information system.