Example of Review Report Using Gaap Under Ssars 21

Review engagements provide limited assurance using AR-C 90, Review of Financial Statements. And these engagements can be done with much less effort than audits.

So, what are the requirements of a review engagement? When might a review be preferable to an audit? Must the CPA exist independent? Can the CPA prepare the financial statements and perform the review date? Can a special purpose reporting framework be used? Who might desire a review report (rather than an audit or a compilation report)?

I'll respond these questions below, merely, first here'southward a quick video introduction to the post.

Review Engagement Guidance

The guidance for reviews can be institute in AR-C 90, Review of Fiscal Statements. AR-C 90 is function of  the AICPA's Statements on Standards for Accounting and Reporting Services (SSARS)..

Though this article is long, it'due south not intended to be comprehensive. It's an overview.

Applicability of AR-C 90

You lot should perform a review appointment when engaged to do and then. If your customer asks for this service and you accept, you are engaged.

A review engagement alphabetic character should be prepared and signed by the accountant or the accountant's firm and management or those charged with governance. Encounter appointment letter guidance below.

AR-C ninety Objectives

The objective of the accountant in a review engagement is to provide limited balls regarding the financial statements. Other historical information such every bit supplementary information tin also be included.

Then how does an accountant perform a review date? Primarily with inquiries and analytics.

Then, how does the express assurance in a review engagement compare with compilations and audits?

In a compilation date, no assurance is provided. What procedures are employed in a compilation? Primarily, the auditor reads the financial statements for appropriateness. Why perform a compilation rather than a review? Economy and cost. Since procedures are minimal, it's easier to perform a compilation and less costly to the client.

In an audit, the accountant provides a high level of assurance. The auditor performs procedures beyond inquires and analytics such every bit confirmations. Audit risk assessment and planning requirements are much more rigorous than that of a review. While audits provide a higher level of balls, they are more than time-consuming. Consequently, the boosted time raises the cost for the client. This is why reviews are sometimes performed rather than an audit.

Prior to performing a review engagement, make sure all stakeholders volition accept this product. Some lenders might crave an audit.

Review Reports

A review study is e'er required in a review engagement. That report states that no material modifications are necessary for the financial statements to be in accordance with the reporting framework. (Meet a sample review report below.)

If a divergence from the reporting framework is present, an other-affair paragraph is added to the review study. If the effects of the departure are determined, they are disclosed in the report. If non known, the paragraph states that the effects have non been determined.

Review Financial Statements

The accountant prepares fiscal statements as directed by management or those charged with governance. The financials should exist prepared using an acceptable reporting framework including any of the post-obit:

• Cash basis
• Tax ground
• Regulatory ground
• Contractual ground
• Other footing (as long equally the basis uses reasonable, logical criteria that are practical to all cloth items)
• Generally accustomed bookkeeping principles (GAAP)

All of the above bases of bookkeeping, with the exception of GAAP, are referred to as special purpose frameworks. When such a frameworkis used, a description is required andcan be included in:

• The financial statement titles
• The notes to the financial statements, or
• Otherwise on the confront of the financial statements

The financial statement should disclose how the special purpose framework differs from generally accustomed accounting principles. If, for example, a company uses accelerated depreciation in tax-footing statements, the fiscal statements should disembalm how this method differs from straight-line (the usual GAAP method).

The review written report linguistic communication changes when a visitor uses a special purpose reporting framework. Encounter Exhibit C, illustration iii in AR-90 for a taxation-basis review report.

Which Financial Statements?

Management specifies the financial statements to be prepared. Normally a visitor desires a residuum sheet, an income statement, and a greenbacks period argument. The auditor can, however, issue just ane financial statement (eastward.grand., income statement).

Who prepares the financial statements? The company or the CPA house tin gear up them.

Can the greenbacks catamenia statement exist omitted? GAAP requires a cash menstruation argument when a statement of fiscal status and an income statement are included. Compilation standards allow for the omission of the GAAP cash menses statement if the omission is noted in the compilation written report. Not and then in a review engagement. The greenbacks menses statement must be included when GAAP is used.

But is the cash flow statement required when the tax-basis of accounting is used? No, the greenbacks menstruum statement tin be omitted when the financial statements are tax-basis.

Disclosures in Reviewed Financial Statements

What about disclosures? Are they required in a review engagement?

In compilation engagements, disclosures can exist omitted. Non so in a review engagement. Full disclosure is required, regardless of the reporting framework..

References to Review Report and Notes

Should a reference to the review report and the notes exist included at the bottom of each financial statement page? While not required by the SSARS, it is adequate to add a reference such every bit:

• Run into Accountant'south Report and accompanying notes
• Encounter Accountant's Review Written report and accompanying notes, or
• Run across Contained Accountant's Review Report and accompanying notes

Review Engagement Documentation Requirements

The auditor should prepare and retain the following documentation:

• Engagement letter of the alphabet
• Financial statements
• Accountant's review report
• Communications with management or others regarding fraud or noncompliance with laws or regulations
• Communications with other accountants that reviewed or audited financial statements of significant components
• Emphasis-of-matter or other-matter paragraph communications with direction or others
• The representation letter (see Exhibit B of AR-C 90 for sample wording)

The review documentation should be sufficient to enable an experienced accountant, having no previous connexion to the appointment to understand:

• the nature, timing, and extent of the review procedures,
• the results of the review procedures and testify obtained, and
• meaning findings or problems, and the related conclusions and judgments

Review Engagement Letter of the alphabet

While it is possible for the accountant to perform only a review and not ready the fiscal statements, most review engagement messages volition country that the following will be performed by the accountant:

1. Preparation of the financial statements (a nonattest service)
2. A review appointment (an attest service)

Since a nonattest service and an attest service are being provided, the auditor will add together linguistic communication to the appointment letter of the alphabet describing the client'due south responsibility for the nonattest service.

See illustrative engagement messages in Exhibit A of AR-C ninety.

AICPA independence standards require the accountant to consider whether he is independent when the CPA performs an adjure service (eastward.one thousand., review) and a nonattest service (e.1000., grooming of financial statements) for the same customer. If management does not possess the skill, knowledge, and experience to oversee the preparation of the fiscal statements and accept responsibility, the accountant may not exist contained.

And then, must the accountant be independent? Yes, independence is required in review engagements.

AR-C 90 Review Procedures

The accountant should:

1. Brand inquiries,
2. Perform analytical procedures, and
3. Perform other procedures, as appropriate

Direct your procedures to areas with increased risks of material misstatement. An understanding of the entity and the industry in which the entity operates will amend enable you to place potential misstatements.

one. Review Inquiries

AR-90.22 provides a series of inquiries that should be made of management and others. Those questions includes matters such as fraud, subsequent events, related party transactions, and litigation. Additionally, once you create your analytical procedures, you may have questions regarding unexpected changes.

2. Review Analytical Procedures

Use analytical procedures to the numbers. What kind? Well that depends. What numbers are almost important? What numbers are most probable to be misstated? What types of analytics illuminate the customer's business? Consideration of such factors will atomic number 82 you lot to the right analytics.

Here are examples:

• Comparing the current year financial statement numbers with the prior year
• Comparing the current twelvemonth trial residue numbers with the prior yr
• Ratios such as debt/equity or current assets/current liabilities or depreciation/full depreciable assets
• Computing numbers with nonfinancial data such as the number of units sold times the average price
• Comparing quarterly revenues by location

As y'all tin can run into, judgment is required. Moreover, y'all need to develop expectations prior to computing the numbers. AR-C 90 states "Develop an expectation of recorded amounts or ratios that is precise enough to provide the auditor with limited balls that a misstatement will be identified."

Here are the v steps I use:

1. Develop expectations
2. Compute the numbers
3. See if the numbers align with expectations
4. Follow up with additional inquiries if expectations are not met
5. Develop a conclusion

I find that many accountants fail to certificate their expectations. Or if expectations are documented, a second problem occurs: The numbers don't align with the expectation, and there's no documented follow up. If the numbers don't align with expectations, make sure you determine why.

Expectations

One question I often receive is, "How practise I develop my expectations?"

It is helpful to have a discussion with management prior to computing your numbers. You lot desire to know, for instance, if sales rose during the year or if in that location were reductions in the workforce. The conversation informs your expectations.

Likewise, if you've previously worked with the client, yous accept knowledge regarding the client such as turn a profit margins or debt levels. This prior knowledge informs your expectations.

Finally, you might likewise read the minutes (if there are any) before computing your numbers.

3. Other Review Procedures

AR-C ninety states that procedures include inquiry, analytics, and other procedures. The 3rd element--other procedures-- is a general category that encompasses reading the financial statements and responding to risks. You might, for example, identify potential misstatements as you perform belittling procedures. If revenues are upwardly 25% but you expect them to be stable, you'll perform additional procedures to come across why.

Interestingly (at least to me), AR-C 90.A34 states that you tin can perform inspect procedures in a review appointment. Though your review date letter states you lot are not performing an inspect, your review file tin can include audit procedures. Why would the AICPA provide this latitude? To give you the ability to accomplish beyond your typical review procedures (inquiry and analytics). You demand a basis for the limited balls you are providing. And in some situations, you may need inspect procedures to become y'all there.

Review Representation Letter

A signed representation letter is required in all review engagements.

The date of the representation alphabetic character will hold with the date of the review written report. In no event should the date of the representation letter precede the engagement of the review written report. (The accountant is not required to have physical possession of the letter on the date of the review report. But the accountant should have the signed alphabetic character prior to releasing the financial statements.)

So, provide the draft of the financial statements to the client in a timely manner so they tin review them and presume responsibleness. Thereafter, the client tin can sign the representation letter of the alphabet.

Additionally, the representation letter should comprehend all financial statements and all periods in the study.

Exhibit B of AR-90 provides a sample representation letter.

Review Report Sample

The following is a review written report sample (sometimes referred to every bit an bookkeeping review report):

Independent Auditor's Review Report

[Appropriate Leaseholder]

I (We) have reviewed the accompanying financial statements of XYZ Company, which contain the remainder sheets as of December 31, 20X2 and 20X1, and the related statements of income, changes in stockholders' equity, and cash flows for the years and so concluded, and the related notes to the fiscal statements. A review includes primarily applying analytical procedures to direction's (owners') financial data and making inquiries of company management (owners). A review is substantially less in scope than an inspect, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, I (nosotros) do not express such an opinion.

Management's Responsibility for the Financial Statements

Management (Owners) is (are) responsible for the preparation and off-white presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are costless from fabric misstatement whether due to fraud or error.

Accountant's Responsibleness

My (Our) responsibleness is to conduct the review engagements in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. Those standards require me (u.s.a.) to perform procedures to obtain limited assurance as a basis for reporting whether I am (we are) aware of any textile modifications that should be made to the fiscal statements for them to be in accordance with bookkeeping principles mostly accepted in the United states of America. I (We) believe that the results of my (our) procedures provide a reasonable basis for my (our) conclusion.

Auditor'south Determination

Based on my (our) reviews, I am (we are) non aware of any material modifications that should be made to the accompanying fiscal statements in order for them to exist in accordance with accounting principles generally accustomed in the United States of America.

[Signature of accounting business firm or accountant, equally advisable]

[Accountant's city and state]

[Date of the accountant's review report]

Exhibit C of AR-C 90 provides vi review report illustrations.

Reporting When There are Other Accountants

What are your responsibilities if you are performing the review of a consolidated entity that includes a subsidiary audited or reviewed past some other accountant?

Kickoff, obtain and read the subsidiary report.

Second, determine whether to make reference to the other accountants in your review study. If reference is fabricated, AR-C xc.79 states "the accountant should clearly betoken in the accountant's review report that the accountant used the work of other accountants and should include the magnitude of the portion of the financial statements audited or reviewed by the other accountants." Run across Illustration six in Appendix C of AR-C 90 for sample report language. If you refer to the other accountant, you will country that you did not review the subsidiary financial statements.

Third, regardless of whether you lot decide to make reference to the other accountants, communicate with the other accountants. This advice includes a argument that the other accountants understand the relevant reporting framework and review or auditing standards, as applicable. Suggest them that you are including the subsidiary's financials in the consolidation. Additionally, communicate the ethical requirements of the engagement, mainly independence. And finally, advise that you are reviewing matters affecting the intercompany eliminations.

Going Concern in Review Engagements

If the reporting framework requires that direction evaluate going concern, then y'all should perform review procedures in regard to that and other related information.

If the reporting framework does non require management to evaluate going concern just you go enlightened of weather condition or events that raise substantial doubt virtually the entity's ability to continue as a going business, you lot should perform review procedures such every bit inquiries almost whether the going concern basis of accounting is advisable.

Run into my article titled Going Concern in Compilation and Review Engagements.

Other Historical Data in Review Engagements

In improver to historical financial statements, AR-C 90 may be applied to the following:

• Specified elements, accounts, or items of a financial statement, including schedules of:
  • Rents
  • Royalties
  • Profit participation, or
  • Income tax provisions
• Supplementary information
• Required supplementary information
• Revenue enhancement return information

Review Engagements Conclusion

There you lot take it. Now you know how to perform a review engagement.

The master purpose of a review is to provide limited assurance in regard to the data. Inquiries and analytics are required. A signed representation letter is also required.

If you desire to upshot fiscal statements without a compilation or review report, consider the use of AR-C 70, Grooming of Financial Statements.

If you desire to effect financial statements without a review report, consider using AR-C 80, Compilation Engagements.

The AICPA provides the total text of AR-C ninety online. Y'all can download the PDF if you similar. Once you download the document, y'all can utilise control-f to observe particular words. I find this useful.

For additional SSARS-related manufactures see:

• AR-C lxx: Training of Fiscal Statements Engagement
• AR-C lxxx: How to Perform Compilation Engagements

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