SSARS No. 19 Requires Professional Judgment for Reviews!
While we know accountants and auditors are required to use professional judgment for all services, we must pay close attention to the new requirements in SSARS No. 19. Here is paragraph .07 of Section AR 90 of the AICPA professional standards:
" The performance of a review engagement requires that the accountant perform procedures designed to accumulate review evidence that will provide a reasonable basis for obtaining limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework. The accountant should apply professional judgment in determining the specific nature, timing, and extent of review procedures. Such procedures should be tailored based on the accountant’s understanding of the industry in which the client operates and the accountant’s knowledge of the entity."
Professional judgment always begins with an evaluation of risk in each engagement’s circumstances. For the first time, the term “risk” is used in SSARS literature. Paragraph .14 of Section AR 90 says this:
a. the accountant’s understanding of the industry,
b. his or her knowledge of the client, and
c. his or her awareness of the risk that he or she may unknowingly fail to modify the accountant’s review report on financial statements that are materially misstated, the accountant should design and perform analytical procedures and make inquiries and perform other procedures, as appropriate, to accumulate review evidence in obtaining limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework."
Paragraph .15 states:
"The accountant should focus the analytical procedures and inquiries in those areas where the accountant believes there are increased risks of misstatements. The results of the accountant’s analytical procedures and inquiries may modify the accountant’s risk awareness. For example, the response to an inquiry that cash has not been reconciled for several months may revise the accountant’s awareness of risks relative to the cash account."
To say it again, when the accountant has an awareness of increased risks of misstatements, based on the understanding of a client’s business and industry, analytical procedures and inquiries should be focused on the areas of increased risk. This is the beginning of the application of professional judgment to review engagements!
Risk awareness must come from review engagement planning activities such as completing a Client Information Form and reading (scanning) the transactions in general ledger accounts. Evidence of unusual matters (incomplete, incorrect or unsatisfactory information) creates the accountant’s risk awareness.
Only by performing and documenting analytical procedures, inquiries, evaluation of responses of client personnel and inspections of any necessary corroborating evidence, can the accountant collect sufficient review evidence to express limited assurance that no material modifications are necessary for financial statements to be presented in accordance with the applicable reporting framework. Simply completing all procedures in a canned set of practice aids without modifications to compensate for engagement risks, in other words, will not demonstrate professional judgment! This may be the most significant change in SSARS No. 19!
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