What is “review of historical financial statements”? (Part II)

 

Forming a conclusion on a review of the financial statements

In forming the conclusion on the financial statements, the practitioner shall:

(a)   Evaluate whether the financial statements adequately refer to the applicable financial reporting framework.

(b)   Consider whether:

·   The terminology used in the financial statements is appropriate.

·   The financial statements adequately disclose the significant accounting policies selected and applied.

·  The accounting policies selected and applied are consistent with the applicable financial reporting framework and are appropriate.

·   Accounting estimates made by management appear reasonable.

· The information presented in the financial statements appears relevant, reliable, comparable, and understandable; and

·  The financial statements provide adequate disclosures to enable the intended users to understand the effects of material transactions and events.

(c)   Consider the impact of uncorrected misstatements identified during the review, and in the previous year’s review of the entity’s financial statements.

(d)  Consider qualitative aspects of the entity’s accounting practices, including indicators of possible bias in the management’s judgment.

Types of conclusions for a review of historical financial information

 The practitioner’s conclusion on the financial statements, whether unmodified or modified, shall be expressed in the appropriate form in the context of the financial reporting framework applied in the financial statements.

There are four types of conclusions: unmodified conclusion, a qualified conclusion, an adverse conclusion and disclaim a conclusion.

Unmodified conclusion. The practitioner shall express an unmodified conclusion on the financial statements as a whole when it is obtained limited assurance to be able to conclude that nothing has come to the practitioner’s attention that causes to believe that the financial statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework.

 Qualified conclusion. A qualified conclusion is expressed when the practitioner concludes that the effects of the matter(s) giving rise to the modification are material, but not pervasive to the financial statements, or if the practitioner is unable to form a conclusion on the financial statements due to inability to obtain sufficient appropriate evidence and possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.

 Adverse conclusion. An adverse opinion is expressed when the effects of the matter(s) giving rise to the modification are both material and pervasive to the financial statements.

Disclaim a conclusion. This type of conclusion is used if the practitioner is unable to form a conclusion on the financial statements due to inability to obtain sufficient appropriate evidence and the effects on the financial statements of undetected misstatements could be both material and pervasive.

 “Emphasis of matter” and “Other matter paragraphs” in   a report on the review of the historical financial statements

Emphasis of Matter Paragraph. The practitioner may consider it necessary to draw users’ attention to a matter presented or disclosed in the financial statements that, in the practitioner’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements. In such cases an “Emphasis of Matter” paragraph is included in the report.

Other Matter Paragraph.

If it is considered to communicate a matter other than those that are presented or disclosed in the financial statements that, in the practitioner’s judgment, is relevant to users’ understanding of the review, the practitioner’s responsibilities or the practitioner’s report and this is not prohibited by law or regulation, it is used a paragraph in the practitioner’s report with the heading “Other Matter”.

 Report on review of historical financial statements

Report for the review engagement shall be in writing, and contains the following elements:

(a)   A title, which clearly indicates that it is the report of an independent practitioner for a review engagement.

(b)   The addressee(s), as required by the circumstances of the engagement.

(c)    An introductory paragraph that identifies the financial statements reviewed.

(d)  A description of the responsibility of management for the preparation of the financial statements.

(e)   A description of the practitioner’s responsibility to express a conclusion on the financial statements.

(f)     A description of a review of financial statements and their limitations.

(g)    A paragraph under the heading “Conclusion”.

(h)   A reference to the practitioner’s obligation under this ISRE to comply with relevant ethical requirements.

(i)     The date of the practitioner’s report.

(j)     The practitioner’s signature; and

(k)    The location in the jurisdiction where the practitioner practices.

An example of a review report is here

Difference between the audit opinion in an audit report and the review conclusion in a review of historical financial statements report

The audit opinion

The auditor, unless required by law or regulation, uses in an audit report opinion one of the following phrases, which are regarded as being equivalent:

(a)   “In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20X1, and (of) its financial performance and its cash flows for the year then ended in accordance with [the applicable financial reporting framework]; or “

(b)   “In our opinion, the accompanying financial statements give a true and fair view of the financial position of the Company as of December 31, 20X1, and (of) its financial performance and its cash flows for the year then ended in accordance with [the applicable financial reporting framework]”

The review conclusion

The practitioner, unless required by law or regulation, uses in a review report conclusion one of the following phrases, as appropriate:

(a)    “Based on our review, nothing has come to our attention that causes us to believe that the financial statements do not present fairly, in all material respects (or do not give a true and fair view), … in accordance with the applicable financial reporting framework,” (for financial statements prepared using a fair presentation framework); or

(b)   “Based on our review, nothing has come to our attention that causes us to believe that the financial statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework,” (for financial statements prepared using a compliance framework)

  Aspects of documentation for a review engagement

The preparation of documentation for the review provides evidence that the review was performed in accordance with accepted standard, and legal and regulatory requirements where relevant, and a sufficient and appropriate record of the basis for the practitioner’s report.

The practitioner shall document the following aspects of the engagement:

·       The nature, timing and extent of the procedures performed including who performed the work and the date such work was completed and who reviewed the work performed for the purpose of quality control.

·       Results obtained from the procedures, and the conclusions formed on the basis of those results.

·       Significant matters arising during the engagement, the practitioner’s conclusions reached thereon, and significant professional judgments made in reaching those conclusions.