The changes to the proposed ISRE 2400 (Revised) will help practitioners performing what are now called independent reviews, to do so in line with globally accepted standards. This will promote better clarity for users about the nature of a review and may also fill a growing need for this type of service in areas that currently do not have national standards addressing reviews of financial statements.
Key principles followed in revising ISRE 2400
The engagement should:
The ability to clearly distinguish a review of financial statements from an audit of financial statements is a matter of public interest. The proposed ISRE aims to describe the review as a distinct assurance engagement which is different from an audit in key respects, including the performance of the engagement and reporting. The following are key areas of difference:
The proposed ISRE also seeks to strengthen extant ISRE 2400 in a number of ways. The proposed standard:
ISRE 2400 (Revised), Engagements to Review Historical Financial Statements - the practitioner’s objectives in a review
Paragraph 14 of the proposed ISRE describes the practitioner’s objectives in a review. In addition to reporting, the objectives state that the practitioner is to:
… conclude, through performing primarily inquiry and analytical procedures, and evaluating the sufficiency and appropriateness of evidence obtained, whether anything has come to the practitioner’s attention that causes the practitioner to believe the financial statements are not prepared, in all material respects, in accordance with an applicable financial reporting framework.
This objective focuses appropriately on the outcome of the practitioner’s work, while explaining the means by which the outcome is to be achieved. In particular, this objective addresses the procedures ordinarily expected to provide an adequate basis for the practitioner to conclude and report on the financial statements in the form required by the proposed ISRE. Consistent with the existing ISRE, the proposed standard emphasises the more procedural nature of a review engagement in contrast to an audit. The objective, however, also addresses the need to evaluate the sufficiency and appropriateness of evidence obtained.
As for all assurance engagements, the basis for the practitioner’s conclusion is the evidence obtained in the course of the engagement through the performance of procedures. While the ISRE specifies types of procedures to be performed at a minimum (that is, primarily inquiry and analytical procedures), it does not specify the nature and extent of those procedures because that is expected to vary between engagements. Accordingly the practitioner must, in each review engagement, evaluate the sufficiency and appropriateness of the evidence obtained through the procedures performed. That evidence provides the basis for the practitioner to conclude and report on the financial statements in the form required by the proposed ISRE.
Acceptance and continuance of client relationships and review engagements
The proposed ISRE makes clear the factors that need to be considered by the practitioner, and the preconditions that need to be in place, in order for the practitioner to be able to perform a review on a meaningful basis. It’s important for those factors and preconditions to be reflected in the requirements of the proposed standard. These proposed requirements aim to strengthen practice surrounding performance of reviews, by making clear to practitioners that there are certain circumstances when it is not appropriate to accept and perform a review engagement.
Performing the Review
In general terms, the practitioner designs the procedures to be performed for the review based on the practitioner’s understanding of the entity and its environment, and the applicable financial reporting framework.
The practitioner’s understanding needs to design procedures appropriate for the engagement is intended to be scalable (that is, for entities of different size and complexity) and will likely also differ between engagements, depending on the nature of the entity’s business and industry.
While a review primarily involves performing inquiry and analytical procedures, the proposed ISRE makes clear that the nature and extent of these procedures is always designed with the individual entity’s characteristics and circumstances in mind. Accordingly, there is no set of procedures to be performed in every review. That the proposed standard should not require a detailed assessment of the risks of material misstatement in the financial statements. Rather, the practitioner is required to focus inquiry and analytical procedures on areas in the financial statements where, based on the practitioner’s understanding of the entity and its environment, and the applicable financial reporting framework, material misstatements are likely to arise. This approach is intended to encourage practitioners to design and perform procedures appropriate to the circumstances of each engagement.
Unlike the existing ISRE, the proposed standard does not contain a list of illustrative procedures, as the potential for such a list to be misunderstood as being a set of default procedures for every review engagement.
Additional procedures
From the results obtained from performing procedures as explained above, the practitioner will either have obtained evidence that is sufficient and appropriate to conclude on the financial statements, or will have identified the need to perform additional procedures for the review. In regard to this latter circumstance, paragraph 57 of the proposed ISRE states:
If the practitioner becomes aware of matter(s) that cause the practitioner to believe the financial statements may be materially misstated, the practitioner shall design and perform additional procedures sufficient to enable the practitioner to:
The word ―may, in the proposed ISRE to describe the trigger point for performing additional procedures. The words ―are‖ or ―are likely to be, were considered as a substitute for word ―may on the basis that ―may might set too low a threshold and would therefore lead to an excessive amount of work being performed in a review engagement. These alternatives were rejected because it was not considered for a practitioner to report without having performed additional procedures when in fact the practitioner has cause to believe that the financial statements may be materially misstated. Also, this requirement would apply only when the practitioner has become aware of a relevant matter(s) that causes the practitioner to have this belief. This is in contrast to, for example, merely being aware of a risk of material misstatement when planning the engagement.
The additional procedures to be performed by the practitioner depend on the circumstances. Such procedures could include types of procedures aimed at verification of transactions or balances where the practitioner views that as necessary. The practitioner should perform additional procedures to the extent where the practitioner either is able to determine that the matter(s) causes the financial statements as a whole to be materially misstated (paragraph 57(b)) or, alternatively, is able to conclude that the matter(s) is not likely to cause the financial statements as a whole to be materially misstated (paragraph 57(a)). This required response captures the key principle to be applied as a matter of public interest in undertaking any limited assurance engagement, including a review, that whenever matters come to the practitioner’s attention that cause the practitioner to believe the financial statements may be materially misstated, the practitioner must pursue those matters.
In regard to paragraph 57(a), the IAASB discussed defining or describing the meaning of ―not likely‖ or ―likely.‖ It was decided that any definition or description that involved a quantitative approach (such as ―more likely than not‖) would imply a level of precision that is rarely, if ever, achievable in practice. The term must be interpreted in a ―plain language‖ sense rather than quantitatively. In regard to paragraph 57(b), in a review (as with an audit) of financial statements, the practitioner needs to obtain sufficient appropriate evidence to support a conclusion in the review report that the financial statements are materially misstated.
The practitioner’s report
The practitioner’s report is the means by which the practitioner communicates with users about the engagement undertaken. The report contains the practitioner’s conclusion on the financial statements, expressed in the form required by the proposed ISRE. It also describes, in broad terms, the practitioner’s responsibilities in the engagement and work undertaken.
Under the proposed ISRE, the practitioner’s report describes the work undertaken in a review with reference to the primary types of procedures performed. The report also states the circumstances when additional procedures need to be performed. These communications together describe for users the practitioner’s work effort in the review that provides the basis for the practitioner to form a conclusion on the financial statements.
It is in the public interest for users of the financial statements to have a clear understanding of the limited assurance obtained by the practitioner in a review engagement. It was considered whether the practitioner’s report should set out a more detailed articulation of the procedures performed. Arguably, doing so might enable users to understand more fully the work effort applied in the engagement. However, that, in a review where specified types of procedures are required (that is, primarily inquiry and analytical review), there is no need to provide that level of detail. Indeed it is recognized that doing so might introduce the potential for misunderstanding, as readers of the report may infer from the level of detail a higher level of assurance than is actually the case.
It was explored whether the practitioner’s conclusion should use wording that may be viewed as taking a more positive form. The use of phrases such as ―based on our review, the financial statements are credible‖ or ―… appear credible, or are ―worthy of belief or ―plausible in place of the phrase ―nothing has come to our attention that causes us to believe …‖ were considered. For example it was considered whether the practitioner’s conclusion could be expressed as, ―Based on our review, it appears credible that the financial statements are prepared, in all material respects, in accordance with the financial reporting framework.
Taking account of input received from various stakeholders, that these alternative expressions may have the unintended result of causing users to misinterpret the basis of the practitioner’s conclusion on the financial statements, which in a review is always limited assurance. It is believed that the expression of the practitioner’s conclusion in the required form (that is, ―nothing has come to our attention that causes us to believe that these financial statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework‖…), taken in conjunction with the description of the work performed, is a critical element of the auditor’s communications to users to signal the limits of the review engagement.