Analytical Procedures in a Review Engagement
Are analytical procedures required for a compilation engagement?
CPAs are fearful that if analytical procedures are performed in a compilation engagement, the engagement will be upgraded to a review. This thinking, of course, is not true. Paragraph 1 of SSARS No. 19 (AR 90) states that an accountant must comply with the provisions for a review engagement if he or she has been engaged to review financial statements. Therefore, an accountant only issues a review report if he or she has been hired to conduct a review engagement. The fact that review-type procedures (such as inquiry and analytical procedures) have been performed during a compilation engagement does not, in itself, upgrade the engagement from a compilation to a review.
In conducting a review engagement, the accountant performs procedures consisting of inquiries of company personnel and analytical procedures applied to financial statement data. Generally, the accountant does not gather evidence as he or she does in an audit.
Analytical procedures include evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. A basic premise underlying the application of analytical procedures is that plausible relationships among data exist. Analytical procedures may help identify potential material misstatements. The results of such procedures should be used as a basis for making additional inquiries and obtaining additional information. Using analytical procedures includes not only calculating ratios and trends, but also analyzing the results and identifying significant fluctuations and their cause.
The rules for applying analytical procedures are found in SSARS No. 19 and include the following:
a) Compare financial statements from year to year, for comparable periods.
b) Compare financial statements with budgeted/forecasted information for comparable periods.
c) Study relationships of the elements of the financial statements that would be expected to conform to a predictable pattern based on an entity’s experience and the industry.
Note further that Paragraph 17 of SSARS No. 19 emphasizes that the accountant should develop expectations prior to performing analytical procedures.
When analytical procedures identify significant fluctuations and lead the accountant to believe that information may be incorrect, incomplete or otherwise unsatisfactory, SSARS No. 19 requires the accountant to perform the additional procedures he or she deems necessary to achieve limited assurance that no material modifications should be made to the financial statements.
This article is an excerpt from Steven Fustolo's course 2013 Practice Issues: Compilation & Review Update