BACKGROUND
CPA Canada has issued Canadian Standard on Review Engagements (CSRE) 2400 Engagements to Review Historical Financial Statements. This new standard replaces existing standards for review engagements, including Section 8100 (General Review Standards), Section 8200 (Public Accountant's Review of Financial Statements), Section 8500 (Reviews of Financial Information Other Than Financial Statements), as well as Assurance and Related Services Guidelines 20 and 47. This will be effective for reviews of financial statements for periods ending on or after December 14, 2017. Early application of CSRE 2400 is not permitted. This publication will address the key changes to review engagements that will impact users of the financial statements, including shareholders, investors, those charged with governance, management and other stakeholders.
KEY CHANGES AND IMPACTS
Objective of the review engagement
Both standards encompass the notion of the scope of a review being less than that of an audit. Therefore, the level of assurance provided is lower in a review engagement. Under existing standards, practitioners provide negative assurance that nothing has come to the practitioners' attention that causes them to believe that the financial statements are not, in all material respects, in accordance with the basis of accounting used. This negative assurance is primarily based on inquiry, analytical procedures and discussion to assess whether the financial statements are plausible or worthy of belief based on information obtained. Under the new standard, practitioners provide a conclusion on whether anything has come to the practitioners' attention that causes the practitioner to believe that the financial statements are not prepared, in all material respects, in accordance with the basis of accounting used. This conclusion is primarily based on evidence from inquiry and analysis that is at least sufficient for the practitioner to obtain a meaningful level of assurance, which is likely to enhance the users' confidence in the financial statements. This change will result in new wording in the review engagement report.
Understanding the entity
The major difference between the new and existing standards is the new requirement for the practitioner to explicitly identify areas where material misstatements are likely to arise and to then design procedures to address those areas. Users may notice that practitioners are doing more work in certain areas and less work in other areas. Users may also find that practitioners are performing more inquiries to obtain a greater depth of understanding of the entity. However, similar to existing review standards and unlike current audit standards, practitioners do not have a responsibility to evaluate the design of controls to determine whether they have been implemented or to evaluate their operating effectiveness. Practitioners will not be performing cradle to grave testing on review engagements.
Nature and extent of procedures
Management and those charged with governance are likely to observe an increase in the number of inquiries directed at them by practitioners, particularly around the areas of fraud and non-compliance with laws or regulations and going concern.
Materiality
The requirement under the new standard to determine materiality is unlikely to have a significant impact on users. However, entities may observe practitioners performing fewer procedures and making fewer inquiries for areas that are immaterial. In addition, management and those charged with governance may wish to discuss materiality with practitioners to better understand the extent of work performed.
Review Engagement Report
Content of Report
The new review engagement report will be substantially longer than the existing report. Users will note that it is more closely aligned with audit reporting standards in that it includes discrete management and practitioner responsibility sections. Users will also note that the report will provide a conclusion based on limited assurance as opposed to the negative assurance provided under existing standards.
Emphasis of Matter paragraph
Users can expect to see periodic inclusions of Emphasis of Matter paragraphs if the practitioner considers it necessary to draw users' attention to a matter presented or disclosed in the financial statements that is of such importance that it is fundamental to users' understanding of the financial statements. These paragraphs do not modify the nature of the limited assurance provided, but do provide additional perspective and insight. Emphasis of Matter paragraphs will be included when special purpose financial statements are prepared or when a material uncertainty exists relating to going concern.
Other Matter paragraph
Users can expect to see periodic inclusions of Other Matter paragraphs if the practitioner considers it necessary to communicate a matter other than those that are presented or disclosed in the financial statements that is relevant to the users' understanding of the review, the practitioners' responsibilities or the practitioners' report. These paragraphs do not modify the nature of the limited assurance provided, but do provide additional insight into that assurance. Other Matter paragraphs will be included when the prior period financial statements were audited or reviewed by a predecessor practitioner or if the prior period financial statements were not reviewed or audited.
Date of Review Engagement Report
Under both the new and existing standards, the review report cannot be dated until the practitioner has substantially completed their work and those with the recognized authority have taken responsibility for the final financial statements. In practice, the date of review reports will not change significantly on the transition to the new standard.
Communication with management and those charged with governance
Engagement Letter
Management or those charged with governance will continue to agree to the terms of engagement in writing under the new standard. However, the engagement letter under the new standard will contain an expanded description of management's responsibilities.
Summary of Identified Misstatements
Management will receive communication from the practitioner of all non-trivial misstatements accumulated during the review engagement and will be requested to consider correcting all of the non-trivial misstatements. The correction of the misstatements is intended to assist management in maintaining accurate accounting books and records and reduce the risks of material misstatement of future financial statements because of the cumulative effect of immaterial uncorrected misstatements related to prior periods.
Management Representations
Management will continue to provide written representations. However, the new representation letter will require additional representations around specific management disclosures, management's responsibilities and management's belief that the effects of uncorrected misstatements are immaterial.
Significant Findings
The new standard expands the guidance on the type of matters that practitioners may wish to communicate to management or those charged with governance. Management and those charged with governance are more likely to receive communication from practitioners regarding the review process and findings. There is also an increased expectation of two-way communication between practitioners and management and those charged with governance.
CONCLUSION
In summary, the transition to a new review engagement standard will impact the interaction between users of the financial statements – namely management and those charged with governance – and practitioners. More communication and interactions will likely be required, but users stand to benefit as they will receive more information regarding the nature of the review engagement and its findings.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
