Academic journal article Journal of Accountancy

An Update on Review Engagements: SSARS No. 10 Amends the Guidance Covering Reviews of Financial Statements

Academic journal article Journal of Accountancy

An Update on Review Engagements: SSARS No. 10 Amends the Guidance Covering Reviews of Financial Statements

Article excerpt

In issuing Statement on Standards for Accounting and Review Services (SSARS) no. 10, Performance of Review Engagements, the AICPA accounting and review services committee (ARSC) has introduced the most significant changes in review engagement requirements since it released its first statement in 1978. This article gives practitioners and members in industry a look at the changes, which take effect for reviews of financial statements for periods ending on or after December 15, 2004.

SSARS no. 1, Compilation and Review of Financial Statements, has long been the source of information on procedures applicable to a financial statement review. But practitioners said they needed new and more comprehensive direction on several topics, such as inquiries, analytical procedures and documentation requirements. The new statement, which the ARSC issued in May 2004, amends SSARS no. 1 by providing guidance on

* Analytical procedures, including specific instruction on how CPAs should compare client financial data with their existing expectations based on their understanding of the entity and the industry in which it operates. (See "Testing for Reasonability," page 71.)

* Questions that accountants should consider directing to management, including specific ones about its knowledge of any actual or suspected fraud that could have a material effect on the financial statements, or of transactions occurring or recognized near the end of the reporting period.

* Statements in the representation letter required from management to confirm its oral responses to the CPA's inquiries about fraud.

* Documentation requirements.

EXAMINE, MEASURE, APPRAISE

Analytical procedures provide a basis for the limited assurance CPAs provide in the review report and may identify financial statement items that appear to be materially misstated. The techniques for conducting an analysis fall into two categories: developing expectations--although this term was introduced in SSARS no. 10, SSARS no. 1 introduced the concept it represents--and evaluating results.

Developing expectations. In review engagements CPAs develop expectations by identifying and considering relationships they reasonably could assume might exist, given their understanding of the entity and the industry in which it operates. Expectations developed by a CPA in a review ordinarily are less encompassing than those developed in an audit, and in a review, it isn't necessary to corroborate management's responses with other evidence. Although SSARS no. 10 does not provide guidance on how to deal with the highly judgmental nature of this process, practitioners must be able to assimilate a wealth of reformation into a series of logical and internally consistent conclusions (see "Key Factors in a Financial Relationship," page 72).

Evaluating results. CPAs do this by comparing the recorded amounts--or ratios developed from them--with the expectations they've developed. The practitioner's knowledge of the client and the industry in which it operates is essential to interpret the results of the analytical procedures and to determine when a difference from an expected amount is significant. For example, it's important for CPAs to know whether fluctuations from previous periods resulted from changed conditions, such as major increases in product selling price, inventory obsolescence or changes in credit policy. It's equally crucial to identify when a value should have fluctuated but did not, such as when a company's gross profit percentage remained substantially the same even though its raw material costs increased significantly while its prices stayed flat. The AICPA's annual Audit Risk Alert series is a good source of up-to-date information on economic and industry trends that can help CPAs make such evaluations accurately. For titles in the series, see "AICPA Resources," page 73.

After applying a specific analytical procedure to the client's financial information, CPAs should compare the actual results with their original expectations of what that outcome should be. …

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