In 2016, CPA Ontario issued the new Canadian Standard on Review Engagements (CSRE 2400).
The new standard applies to the review of financial statements for periods ending on or after December 14, 2017.
The standard replaces the old guidance which was issued in 2003 and was lacking specificity. Review engagements are increasingly becoming more common as they are often required for financing or bonding purposes. After 13 years, it was time for an updated, more specific standard, to address the growing need.
The CSRE now aligns the requirements for completion of Review Engagements with the similar core principles laid out in the Canadian Auditing Standard.
What Has Changed?
- A new report. The Review Engagement report was previously 2 paragraphs. Now there are 6 paragraphs in a standard report. There is a clear description of managements’ responsibilities and our (practitioner’s) responsibilities. There is also a clear conclusion paragraph. An example of the new report is provided below:
INDEPENDENT PRACTITIONER’S REVIEW ENGAGEMENT REPORT
We have reviewed the accompanying financial statements of ABC Company that comprise the balance sheet as at December 31, 20X1, and the statements of income, retained earnings and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Financial Statements
Or other term that is appropriate in the context of the legal framework.
Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian accounting standards for private enterprises, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Our responsibility is to express a conclusion on the accompanying financial statements based on our review. We conducted our review in accordance with Canadian generally accepted standards for review engagements, which require us to comply with relevant ethical requirements.
A review of financial statements in accordance with Canadian generally accepted standards for review engagements is a limited assurance engagement. The practitioner performs procedures, primarily consisting of making inquiries of management and others within the entity, as appropriate, and applying analytical procedures, and evaluates the evidence obtained.
The procedures performed in a review are substantially less in extent than, and vary in nature from, those performed in an audit conducted in accordance with Canadian generally accepted auditing standards. Accordingly, we do not express an audit opinion on these financial statements.
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, the financial position of ABC Company as at December 31, 20X1, and the results of its operations and its cash flows for the year then ended in accordance with Canadian accounting standards for private enterprises.
2. Terminology. You will notice the term “plausibility” is gone in the above opinion. This term is now replaced with the term “limited assurance”. Limited assurance is defined as follows:
“the level of assurance obtained where engagement risk is reduced to a level that is acceptable in the circumstances of the engagement, but where that risk is greater than for a reasonable assurance engagement as the basis for expressing a conclusion in accordance with this CSRE. The combination of the nature, timing and extent of evidence gathering procedures is at least sufficient for the practitioner to obtain a meaningful level of assurance. To be meaningful, the level of assurance obtained by the practitioner is likely to enhance the intended users’ confidence about the financial statements.”
The change in the terminology was completed as a way to link available assurance options on a continuum. Limited assurance for a Review Engagement and reasonable assurance for an audit. However, it does allow for a lot of professional judgment as to what constitutes “limited assurance”.
3. Planning procedures. There is a more rigorous requirement to understand your business processes. We are now required to formally document our understanding sufficient to identify areas where material misstatements are likely to arise. The guidance specifically stipulates an understanding the following areas:
- Industry, regulatory and external factors
- Ownership and governance structure
- Types of investments the entity is making and plans to make
- The way the entity is structured and financed
- Entity objectives and strategies
- Inquiries about fraud risk
- Entity accounting systems and processes for recording, classifying and summarizing transactions
- Methods of selection for accounting policies
It is items 7 and 8 where you will likely notice a change in our procedures. Our team will be spending more time understanding and documenting the controls that exist in your company in these specific areas. We may ask your accounting personnel to help us in this regard so we can continue to complete our review it the most efficient manner possible to meet your needs.
4. The management representation letter. The letter you sign to us indicating that you have informed us of all material matters in the company will now be more extensive. We must also receive this letter prior to the issuance of the financial statements.
What has Not Changed?
- Our procedures on the specific financial statement accounts will remain unchanged and will consist largely of inquiry and analytical procedures. We believe that our firm’s procedures are sufficient to provide limited assurance on your financial statements.
- There is now a formal requirement that we communicate specific matters directly with management or those charges with governance. At SB Partners this was a step we always performed as a best practice. However the content of the communication may have varied. We now are required to communicate in the following areas:
- Terms of the engagement – you will see this in our engagement letter
- Significant findings – these would be matters such as adjusting journal entries, unadjusted differences, other qualitative matters about your company’s accounting
- Any difficulties encountered
- The standard now requires a formal calculation of materiality. Again we always completed this as a best practice as SB partners.
If you have any questions regarding the impact of the new standards on your review engagement, please contact your client service partner.