Type of Review Report Letters Vs Compilation Report Letters

Review engagements provide express assurance using AR-C 90, Review of Fiscal Statements. And these engagements tin can be washed with much less effort than audits.

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

I'll answer these questions below, but, starting time here's a quick video introduction to the post.

Review Date Guidance

The guidance for reviews tin be found in AR-C xc, Review of Fiscal Statements. AR-C xc is office of  the AICPA's Statements on Standards for Accounting and Reporting Services (SSARS)..

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

Applicability of AR-C 90

Y'all should perform a review engagement when engaged to do so. If your client asks for this service and you take, yous are engaged.

A review engagement letter of the alphabet should be prepared and signed by the accountant or the accountant's firm and direction or those charged with governance. See date letter guidance below.

AR-C 90 Objectives

The objective of the auditor in a review engagement is to provide express assurance regarding the financial statements. Other historical information such as supplementary information tin likewise be included.

So how does an auditor perform a review engagement? Primarily with inquiries and analytics.

So, how does the limited assurance in a review appointment compare with compilations and audits?

In a compilation engagement, no assurance is provided. What procedures are employed in a compilation? Primarily, the accountant reads the financial statements for appropriateness. Why perform a compilation rather than a review? Economic system and price. Since procedures are minimal, it'due south easier to perform a compilation and less costly to the client.

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

Prior to performing a review date, make sure all stakeholders volition have this product. Some lenders might require an audit.

Review Reports

A review report is always 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-matter paragraph is added to the review report. If the effects of the difference are adamant, they are disclosed in the report. If not known, the paragraph states that the furnishings take not been determined.

Review Financial Statements

The accountant prepares financial statements as directed by direction or those charged with governance. The financials should be prepared using an acceptable reporting framework including any of the following:

• Greenbacks basis
• Tax basis
• Regulatory basis
• Contractual basis
• Other basis (every bit long every bit the ground uses reasonable, logical criteria that are applied to all fabric items)
• Generally accepted accounting principles (GAAP)

All of the above bases of accounting, 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 face of the financial statements

The financial statement should disclose how the special purpose framework differs from generally accepted bookkeeping principles. If, for example, a company uses accelerated depreciation in taxation-basis statements, the financial statements should disembalm how this method differs from directly-line (the usual GAAP method).

The review report linguistic communication changes when a company uses a special purpose reporting framework. See Exhibit C, illustration 3 in AR-90 for a tax-basis review report.

Which Financial Statements?

Management specifies the financial statements to be prepared. Unremarkably a company desires a balance canvass, an income statement, and a greenbacks menstruation argument. The auditor can, all the same, issue just ane financial statement (e.thou., income statement).

Who prepares the financial statements? The company or the CPA business firm can prepare them.

Can the cash menstruation statement be omitted? GAAP requires a greenbacks flow statement when a statement of financial condition and an income statement are included. Compilation standards allow for the omission of the GAAP greenbacks flow statement if the omission is noted in the compilation report. Non and so in a review engagement. The greenbacks menses statement must be included when GAAP is used.

But is the greenbacks menses argument required when the tax-basis of accounting is used? No, the cash menstruation argument can be omitted when the financial statements are tax-footing.

Disclosures in Reviewed Fiscal Statements

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

In compilation engagements, disclosures can be omitted. Not 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 written report and the notes be included at the lesser of each financial statement page? While not required past the SSARS, information technology is adequate to add together a reference such every bit:

• Run across Accountant'southward Report and accompanying notes
• See Accountant's Review Written report and accompanying notes, or
• See Independent Accountant's Review Report and accompanying notes

Review Date Documentation Requirements

The accountant should set up and retain the following documentation:

• Date letter
• Financial statements
• Accountant'due south 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
• Accent-of-matter or other-matter paragraph communications with management or others
• The representation letter (see Showroom B of AR-C 90 for sample diction)

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

• the nature, timing, and extent of the review procedures,
• the results of the review procedures and evidence obtained, and
• pregnant findings or bug, 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 prepare the fiscal statements, nearly review engagement letters will country that the following volition be performed by the auditor:

1. Grooming of the financial statements (a nonattest service)
2. A review date (an adjure service)

Since a nonattest service and an attest service are being provided, the auditor will add together language to the engagement letter describing the client's responsibility for the nonattest service.

Meet illustrative engagement letters in Showroom A of AR-C 90.

AICPA independence standards require the accountant to consider whether he is independent when the CPA performs an attest service (e.thousand., review) and a nonattest service (e.g., preparation of financial statements) for the same client. If direction does not possess the skill, noesis, and experience to oversee the preparation of the financial statements and accept responsibleness, the accountant may not be independent.

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

AR-C xc Review Procedures

The accountant should:

1. Make inquiries,
2. Perform analytical procedures, and
3. Perform other procedures, every bit advisable

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

i. Review Inquiries

AR-90.22 provides a serial 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 yous create your belittling procedures, you lot may take questions regarding unexpected changes.

two. Review Analytical Procedures

Apply analytical procedures to the numbers. What kind? Well that depends. What numbers are most important? What numbers are most probable to be misstated? What types of analytics illuminate the client'south business organization? Consideration of such factors volition lead you lot to the correct analytics.

Here are examples:

• Comparing the electric current year fiscal argument numbers with the prior yr
• Comparison the current year trial remainder numbers with the prior year
• Ratios such every bit debt/equity or current avails/current liabilities or depreciation/total depreciable assets
• Computing numbers with nonfinancial information such as the number of units sold times the average cost
• Comparison quarterly revenues by location

As you can encounter, 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 assurance that a misstatement will be identified."

Hither are the five steps I use:

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

I detect that many accountants fail to certificate their expectations. Or if expectations are documented, a 2d 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

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

It is helpful to have a discussion with direction prior to computing your numbers. You want to know, for example, if sales rose during the twelvemonth or if there were reductions in the workforce. The conversation informs your expectations.

Besides, if yous've previously worked with the client, you lot accept knowledge regarding the customer such equally profit margins or debt levels. This prior cognition informs your expectations.

Finally, you might also read the minutes (if at that place are any) earlier computing your numbers.

3. Other Review Procedures

AR-C ninety states that procedures include inquiry, analytics, and other procedures. The third element--other procedures-- is a general category that encompasses reading the financial statements and responding to risks. Yous might, for example, identify potential misstatements every bit yous perform analytical procedures. If revenues are up 25% but you wait them to be stable, y'all'll perform boosted procedures to come across why.

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

Review Representation Letter

A signed representation letter is required in all review engagements.

The date of the representation letter will agree with the date of the review report. In no event should the appointment of the representation alphabetic character precede the appointment of the review report. (The auditor is not required to have physical possession of the letter on the appointment of the review study. Simply the accountant should accept the signed alphabetic character prior to releasing the financial statements.)

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

Additionally, the representation letter should cover all financial statements and all periods in the report.

Showroom B of AR-90 provides a sample representation alphabetic character.

Review Study Sample

The following is a review report sample (sometimes referred to as an bookkeeping review report):

Independent Accountant'southward Review Study

[Appropriate Leaseholder]

I (Nosotros) accept reviewed the accompanying financial statements of XYZ Visitor, which contain the residual sheets equally of December 31, 20X2 and 20X1, and the related statements of income, changes in stockholders' equity, and cash flows for the years then concluded, and the related notes to the financial statements. A review includes primarily applying analytical procedures to management's (owners') fiscal information and making inquiries of company management (owners). A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements every bit a whole. Accordingly, I (we) do not limited such an stance.

Management's Responsibility for the Financial Statements

Management (Owners) is (are) responsible for the preparation and fair 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 free from material misstatement whether due to fraud or error.

Accountant'south Responsibility

My (Our) responsibleness is to comport 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 crave me (us) to perform procedures to obtain limited balls as a basis for reporting whether I am (nosotros are) aware of any material modifications that should be made to the financial statements for them to be in accordance with accounting principles generally 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.

Accountant'southward Determination

Based on my (our) reviews, I am (nosotros are) not enlightened of any material modifications that should be made to the accompanying fiscal statements in order for them to be in accordance with accounting principles mostly accepted in the Us of America.

[Signature of accounting business firm or accountant, every bit appropriate]

[Accountant's metropolis and state]

[Appointment of the auditor'due south review report]

Exhibit C of AR-C 90 provides six review study illustrations.

Reporting When At that place are Other Accountants

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

First, obtain and read the subsidiary report.

2nd, determine whether to make reference to the other accountants in your review report. If reference is fabricated, AR-C xc.79 states "the accountant should conspicuously bespeak in the accountant'due south review study 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 into Illustration vi in Appendix C of AR-C xc for sample report linguistic communication. If you refer to the other accountant, you volition land that you did not review the subsidiary fiscal statements.

Third, regardless of whether yous decide to make reference to the other accountants, communicate with the other accountants. This advice includes a statement that the other accountants understand the relevant reporting framework and review or auditing standards, as applicable. Advise them that you lot are including the subsidiary's financials in the consolidation. Additionally, communicate the upstanding requirements of the date, 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 management evaluate going business, then you should perform review procedures in regard to that and other related data.

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

See my article titled Going Concern in Compilation and Review Engagements.

Other Historical Information in Review Engagements

In addition to historical fiscal statements, AR-C 90 may be applied to the following:

• Specified elements, accounts, or items of a financial statement, including schedules of:
  • Rents
  • Royalties
  • Turn a profit participation, or
  • Income tax provisions
• Supplementary information
• Required supplementary data
• Taxation return information

Review Engagements Conclusion

At that place you have it. Now you know how to perform a review engagement.

The principal purpose of a review is to provide limited assurance in regard to the information. Inquiries and analytics are required. A signed representation letter is likewise required.

If you desire to issue financial statements without a compilation or review report, consider the use of AR-C 70, Preparation of Financial Statements.

If y'all want to issue fiscal statements without a review written report, consider using AR-C fourscore, Compilation Engagements.

The AICPA provides the full text of AR-C 90 online. You can download the PDF if yous similar. In one case you download the document, you tin can use control-f to find particular words. I find this useful.

For additional SSARS-related articles see:

• AR-C 70: Preparation of Fiscal Statements Engagement
• AR-C eighty: How to Perform Compilation Engagements

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