Now that new Review Engagement standards are in place, bankers, shareholders and regulators may want to consider whether they need to make changes to their assurance requirement. These new standards, which apply for periods ended on or after Dec. 14, 2017 (e.g. companies with Dec. 31 year-ends), will affect financial statements going forward.
Historically, public accountants have provided three levels of service for financial statements—audits, reviews and compilations (notice to reader). Public accountants render reports on these services for users of financial statements, who have understood the underlying level of assurance that the accountants provide and its impact on their reliance on the financial statements.
How have Review Engagements changed?
- Traditionally, a Review Engagement consisted of analytical review of the financial statements and inquiry of the company’s management and considered the “Plausibility” of the attached financial statements. The new Review Engagement standards are designed to provide “Limited Assurance,” which is intended to enhance the creditability of the financial statements and make them more user-focused. In particular, the new Review Engagement standards:
- Are risk-focused (as is an audit)
- Require additional rigour in the analytic process
- Include a requirement to focus on significant or unusual transactions
- Include a requirement to explicitly identify areas where material misstatements are likely to arise and design procedures to address these areas
- Require fraud considerations
- Result in more communication with both management and those charged with governance (shareholders, etc.) to obtain a depth of understanding of the entity.
The new review engagement report is longer. Users will note that, like the audit report, the new report addresses management’s responsibility and the practitioner’s responsibility. Users may see additional inclusions where the practitioner considers it necessary to draw attention to a matter that is fundamental to the understanding of the statements. This could include:
- Whether a material uncertainty exists relating to going concern
- Where prior period statements were reviewed or audited by a predecessor practitioner
- When the prior period statements were not reviewed or audited at all.
What does this mean to the difference in assurance?
The new Review Engagement standards are designed to increase the amount of assurance provided, but the level of assurance is still more limited compared to an Audit. It will also increase the cost and the time required to complete the work closer to what is required for an audit.
Auditor’s Report also changing
Interestingly, the Auditor’s Report is also changing for periods ending on or after Dec. 15, 2018. While the assurance provided will not change, this report’s expanded description of responsibilities and reordering to provide the opinion in the first section will provide more clarity.
This information is critical to anyone who uses these financial statements and needs to know how much reliance can be placed on them. In light of these changes, you may wish to discuss the most appropriate level of assurance—both the cost and the benefit for your business—with the users of your financial statements, your management team and your public accountant.