What is a review of interim financial information?

 

Interim financial report means a financial report containing either a complete set of financial statements or a set of condensed financial statements for an interim period.

Governments, securities regulators, stock exchanges, and accountancy bodies often require entities whose debt or equity securities are publicly traded to publish interim financial reports.

A review, in contrast to an audit, is not designed to obtain reasonable assurance that the interim financial information is free from material misstatement. The auditor’s conclusion is based on the auditor obtaining limited assurance that the interim financial information is free from material misstatement. A review consists of making inquiries and applying analytical and other review procedures. The objective of an engagement to review interim financial information is to enable the auditor to express a conclusion whether, on the basis of the review, 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 an applicable financial reporting framework.

Difference between interim audit and a review of interim financial reporting

Interim audit is the part of the independent audit of financial statements that is conducted before the financial year-end of the client. Usually, the auditor fieldwork will separate into the interim and final audits. The interim audit will be performed before year-end while the final audit will be performed after the year-end. Not all audit engagements require an interim audit, it depends on the auditor and size of client.

Interim Audit (process) includes the following activities:

·        Understanding client.

·        Evaluating internal control.

·        Detecting high-risk areas.

·        Performing substantive procedures on accounts line items in the income statement. It will help to reduce the testing at year-end.

·        Performing substantive procedures on balance sheet items.

Substantive procedures performed by auditor during interim audit include:

·        Inspection.

·        Observation.

·        External Confirmation. 

·        Recalculation. 

·        Inquiry.

·        Analytical procedures.

Interim audit of financial statements does not result in an independent auditor`s report.  An auditor`s report will be provided by the auditors after they complete the final stage of audit and test the annual financial statements. If auditors identify significant deficiencies in a client’s internal control system during interim audit they will communicate these deficiencies to management on a timely basis.

A review of interim financial reporting is a separate engagement. Auditors perform a review on a complete set of financial statements or on a set of condensed financial statements for an interim period (less than one year). A review of interim financial reporting results in a review report of the interim financial statements.

Engagement letter to review of interim financial information

An engagement letter outlines the terms of the engagement to review interim financial information. It helps to avoid misunderstandings regarding the nature of the engagement and, in particular, the objective and scope of the review, management’s responsibilities, the extent of the auditor’s responsibilities, the assurance obtained, and the nature and form of the report.

An engagement letter to review of interim financial information includes the following matters:

·        The objective of a review of interim financial information.

·        The scope of the review.

·        Management’s responsibility for the interim financial information.

·     Management’s responsibility for establishing and maintaining effective internal control relevant to the preparation of interim financial information.

·      Management’s responsibility for making all financial records and related information available to the auditor.

·     Management’s agreement to provide written representations to the auditor to confirm representations made orally during the review, as well as representations that are implicit in the entity’s records. 

·        The anticipated form and content of the report to be issued, including the identity of the addressee of the report.

·      Management’s agreement that where any document containing interim financial information indicates that the interim financial information has been reviewed by the entity’s auditor, the review report will also be included in the document.

 Procedures to review interim financial information

Auditors usually perform the following procedures for a review of interim financial information.

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

·        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.

·        Communicating, where appropriate, with other auditors who are performing a review of the interim financial information of the reporting entity’s significant components.

·        Considering the effect, if any, of matters giving rise to a modification of the audit or review report at the time of the previous audit or reviews.

·        Inquiring of members of management responsible for financial and accounting matters.

·        Applying analytical procedures to the interim financial information designed to identify relationships and individual items that appear to be unusual and that may reflect a material misstatement in 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.

Auditor`s report on review of interim financial information

The auditor should issue a written report that contains the following:

v  An appropriate title.

v  An addressee, as required by the circumstances of the engagement.

v  Identification of the interim financial information reviewed.

v  A statement that management is responsible for the preparation and fair presentation of the interim financial information in accordance with the applicable financial reporting framework.

v  A statement that the auditor is responsible for expressing a conclusion on the interim financial information based on the review.

v  A statement that the review of the interim financial information was conducted in accordance with International Standard on Review Engagements (ISRE) 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity.

v  A statement that a review is substantially less in scope than an audit.

v  A conclusion as to whether anything has come to the auditor’s attention that causes the auditor to believe that the interim financial information does not give a true and fair view, or does not present fairly, in all material respects, in accordance with the applicable financial reporting framework.

v  The date of the report.

v  The location in the country or jurisdiction where the auditor practices.

v  The auditor’s signature.

The following is an example of review report on interim financial reporting

 

Implications for the review report of interim financial statements relating to going concern issues

Under the going concern basis of accounting, the financial statements are prepared on the assumption that the entity is a going concern and will continue its operations for the foreseeable future.

When the use of the going concern assumption is appropriate, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business. The financial statements should be prepared on a going concern basis unless management either intends to liquidate the entity or has no realistic alternative but to do so.

When management is aware of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, the entity shall disclose those uncertainties. When an entity does not prepare financial statements on a going concern basis, it shall disclose the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern.

If a material uncertainty that casts significant doubt about the entity’s ability to continue as a going concern is adequately disclosed  by an entity in the interim financial information, the auditor should add an emphasis of matter paragraph to the review report to highlight a material uncertainty relating to an event or condition that may cast significant doubt on the entity’s ability to continue as a going concern.

If a material uncertainty that casts significant doubt about the entity’s ability to continue as a going concern is not adequately disclosed in the interim financial information, the auditor should express a qualified or adverse conclusion. The report should include specific reference to the fact that there is such a material uncertainty.