What is a review of interim financial information and why is it required?

 Interim financial information is financial information that is prepared and presented in accordance with an applicable financial reporting framework and comprises either a complete or a condensed set of financial statements for a period that is shorter than the entity’s financial year.

A review is designed to provide limited assurance that the interim financial information is free from material misstatement.

Limited assurance engagement is an assurance engagement in which the practitioner reduces engagement risk to a level that is acceptable in the circumstances of the engagement but where that risk is greater than for a reasonable assurance engagement and the practitioner’s conclusion is expressed in a negative form.

Review of interim financial information could be required in following situations:

·        Some stock exchanges require listed companies to provide a review of interim financial statements performed by independent auditors.

·        Banks sometimes ask companies to bring a review report on interim financial information together with interim financial statements.

·        Government structures may require some companies to present a review report on interim financial information.

·        Major suppliers and customers also may ask for a review report on interim financial information of a company.

Stages of performing a review of interim financial information

It is possible to distinguish the following stages of performing engagement to review of interim financial information:

o   Agreeing the Terms of the Engagement.

o   Understanding the entity and its environment, including its internal control.

o   Performing inquiries, analytical and other review procedures.

o   Evaluating misstatements.

o   Obtaining management representations

o   Communicating findings to management or those charged with governance.

o   Reporting on the nature, extent, and results of the review of interim financial information.

o   Preparing documentation relating to a review of interim financial information.

Below is a brief description of stages “Performing inquiries, analytical and other review procedures” and “Evaluating misstatements.”

Inquires when performing a review of interim financial information

Auditors inquire of members of management responsible for financial and accounting matters, and others as appropriate about the following:

·       Whether the interim financial information has been prepared and presented in accordance with the applicable financial reporting framework.

·        Whether there have been any changes in accounting principles or in the methods of applying them.

·        Whether any new transactions have necessitated the application of a new accounting principle.

·     Whether the interim financial information contains any known uncorrected misstatements.

·        Unusual or complex situations that may have affected the interim financial information,

·        Significant changes in commitments and contractual obligations.

·        Significant changes in contingent liabilities including litigation or claims.

·        Compliance with debt covenants.

·        Matters about which questions have arisen in the course of applying the review procedures.

·        Significant transactions occurring in the last several days of the interim period or the first several days of the next interim period.

·        Knowledge of any fraud or suspected fraud affecting the entity involving management, employees, or others.

·        Knowledge of any allegations of fraud, or suspected fraud, affecting the entity’s interim financial information communicated by employees, former employees, analysts, regulators, or others.

·        Knowledge of any actual or possible noncompliance with laws and regulations that could have a material effect on the interim financial information.

 

Along with inquiries auditors commonly apply analytical procedures when performing a review of interim financial information.

Examples of analytical procedures that an auditor can apply when performing a review of interim financial information

Examples of analytical procedures the auditor may consider when performing a review of interim financial information include the following:

·        Comparing the interim financial information with the interim financial information of the immediately preceding interim period, with the interim financial information of the corresponding interim period of the preceding financial year.

·        Comparing current interim financial information with anticipated results, such as budgets or forecasts.

·        Comparing current interim financial information with relevant non-financial information.

·        Comparing the recorded amounts, or ratios developed from recorded amounts to expectations developed by the auditor.

·        Comparing ratios and indicators for the current interim period with those of entities in the same industry.

·        Comparing disaggregated data. For example, by period, by product line or source of revenue, by location, for example, by component, by attributes of the transaction, for example, revenue generated by designers, architects, or craftsmen.

 In addition to inquiries and analytical procedures auditors also can use other audit procedures.

Other procedures, in addition to inquiries and analytical procedures used by auditors

When performing a review of interim financial information in addition to inquiries and analytical procedures the auditor may perform the following procedures:

·        Reading the minutes of the meetings of shareholders, those charged with governance, and other appropriate committees to identify matters that may affect the interim financial information.

·        Reading the interim financial information and considering whether anything has come to the auditor’s attention that causes the auditor to believe that the interim financial information is not prepared, in all material respects, in accordance with the applicable financial reporting framework.

·        Obtaining evidence that the interim financial information agrees or reconciles with the underlying accounting records by tracing the interim financial information to the accounting records, such as the general ledger, or a consolidating schedule and Other supporting data in the entity’s records, as necessary.

·        Inquiring whether management has identified all events up to the date of the review report that may require adjustment to or disclosure in the interim financial information.

·        Inquiring whether management has changed its assessment of the entity’s ability to continue as a going concern.

 Evaluation of misstatements

Misstatements which come to the auditor’s attention, including inadequate disclosures, are evaluated individually and in the aggregate to determine whether a material adjustment is required to be made to the interim financial information in order it to be prepared, in all material respects, in accordance with the applicable financial reporting framework.

When evaluating of misstatements, the auditor considers:

ü  The amount below which misstatements need not be aggregated, because the auditor expects that the aggregation of such amounts clearly would not have a material effect on the interim financial information.

ü  Nature, cause, and amount of the misstatements.

ü  Whether the misstatements originated in the preceding year or interim period of the current year.

ü  The potential effect of the misstatements on future interim or annual periods. 

When discussing the terms of review of interim financial statements a company`s management should understand the difference between a review of financial statements and an audit of financial statements.

Difference between a review of financial statements and an audit of financial statements

The following differences between a review of financial statements and an audit of financial statements could be distinguished:

a)      Objectives. The overall objective of an audit of financial statements is   to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. The objective of a review of financial statements is to express a conclusion that is designed to enhance the degree of confidence of intended users regarding the preparation of an entity’s financial statements in accordance with an applicable financial reporting framework. A review, in contrast to an audit, is not designed to obtain reasonable assurance that the interim financial information is free from material misstatement.

b)     Level of assurance. In an audit of financial statements auditors obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, in a review of financial statements – limited assurance.

c)      Procedures used. When performing a review of financial statements auditors mostly use such procedures as inquiries and analytical procedures. In an audit of financial statements, the procedures used are broader and include inspection, observation, external confirmation, recalculation, inquiry, and analytical procedures.

d)     Content of reports, wording of opinion (conclusion). The content of an audit report and the wording of opinion differ from these of a review report. For example, opinion in an audit report is as follows “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”.

  Conclusion in a review report is as follows “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 in accordance with the applicable financial reporting framework.”

e)     Time spent. A review of financial statements takes less time than an audit of financial statements because the auditor obtains less evidence and a lower level of assurance.

f)       Price of the service. A review of financial statements is cheaper than an audit of financial statements.