When SSARS No. 1 was issued in 1978, a lot of CPA practitioners were confused about the impact of risk on review services, Accountants were required to understand a client’s business and industry, perform analytical procedures and make inquiries, all for the purpose of identifying unusual matters (incorrect, incomplete or unsatisfactory information). Although the word “risk” was not used in SSARS literature, some of us believed those requirements constituted risk assessment!
After 30 years, this issue has been clarified by SSARS No. 19. Review services are risk-driven services! SSARS No. 19 requires accountants to have an understanding of review risk and to use that understanding to determine how much review evidence is needed to achieve limited assurance that there are no material modifications necessary for the financial statements to be presented in accordance with the applicable reporting framework. As specified in the new standard, accountants must exercise professional judgment in determining what analytical procedures to perform and what inquiries to make on each review engagement.
No longer can we purchase a canned set of practice aids for review engagements from a publisher, perform all procedures contained in those aids, and demonstrate to peer reviewers that we have exercised professional judgment. Professional judgment begins with an understanding of risk and designing procedures that will determine if such risks materially misstate financial statements. No longer can we perform every procedure expecting that we will discover the effects of every material risk. Understanding risks must come first!
So, how can an accountant achieve and use this understanding for review engagements? Here are some simple ways:
1) Read the client’s general ledger. Make a subjective determination of materiality and look for large or unusual transactions, incorrect posting references, general journal entries and accounting policies and procedures that are inappropriate.
2) After making inquiries, inspecting certain corroborating evidence and performing other necessary procedures relating to the unusual matters, ask the client to revise the financial information or propose any necessary adjusting journal entries.
3) After the client has approved adjusting journal entries, perform a trend comparison of the adjusted trial balance accounts with prior periods’ balances, preferably three or more years. Identify material variances, make inquiries of client personnel and inspect corroborating evidence when considered necessary. For larger reviews, key ratios may be compared among years.
Realizing that most accountants already perform these procedures, SSARS No. 19 has added several new requirements. Exercising professional judgment will require planning a review engagement. The subjective determination of materiality, the identification of risks of misstatements (unusual matters) and the design of necessary analytical procedures and inquiries are part of the planning process.
We’ve learned that when professional standards require certain procedures, those procedures must be documented in some way. Here are a few ways the understanding of risk and professional judgment can be documented for review engagements:
1) Prepare a planning document that includes the reasoning for subjective materiality levels, expected risks of material misstatement due to error or fraud and planned analytical procedures, inquiries or other procedures considered necessary to respond to the risks.
2) A memorandum or spreadsheet documenting the criteria used in reading the general ledger, unusual matters discovered and the results of additional procedures performed.
3) A spreadsheet or other documentation of the comparison of absolute dollar balances in accounts among years, identification of material variances and any additional procedures performed and their results. For larger reviews, key ratio comparisons among years may be appropriate.
While most accountants may not be performing more procedures on reviews in the future, the requirements of SSARS No. 19 may change our engagement documentation policies. If you’d like a copy of an illustrative planning document for review engagements, send me an email under the “Contact Us” tab on our website, www.cpafirmsupport.com.
Please post a comment and tell our readers about the changes you’ve made in your documentation to satisfy the requirements of SSARS No. 19 for review engagements.