Engagements to Review Historical Financial Statements

2. This SRE does not address a review of an entity’s financial statements or interim financial information performed by a practitioner who is the independent auditor of the entity’s financial statements. (Ref: Para. A2)

3. This SRE is to be applied, adapted as necessary, to reviews of other historical financial information.

Relationship with SQC 11

4. Quality control systems, policies and procedures are the responsibility of the firm. SQC 1 applies to firms of professional accountants in respect of a firm’s engagements to review financial statements.2 The provisions of this SRE regarding quality control at the level of individual review engagements are premised on the basis that the firm is subject to SQC 1. (Ref: Para. A3-A4)

The Engagement to Review Historical Financial Statements

5. The review of historical financial statements is a limited assurance engagement, as described in the Framework for Assurance Engagements.3 (Ref:

Para. A5-A6)

6. In a review of financial statements, the practitioner expresses a conclusion that is designed to enhance the degree of confidence of intended users regarding the preparation of an entity’s financial statements in accordance with an applicable financial reporting framework. The practitioner’s conclusion is based on the practitioner obtaining limited assurance. The practitioner’s report includes a description of the nature of a review engagement as context for the readers of the report to be able to understand the conclusion.

7. The practitioner performs primarily inquiry and analytical procedures to 1 Standard on Quality Control (SQC) 1, Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements. 3 Framework for Assurance Engagements, Paragraphs 6 and 10.

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72 obtain sufficient appropriate evidence as the basis for a conclusion on the financial statements as a whole, expressed in accordance with the requirements of this SRE.

8. If the practitioner becomes aware of a matter that causes the practitioner to believe the financial statements may be materially misstated, the practitioner designs and performs additional procedures, as the practitioner considers necessary in the circumstances, to be able to conclude on the financial statements in accordance with this SRE.

Authority of this SRE

9. This SRE contains the objectives of the practitioner in following the SRE which provide the context in which the requirements of this SRE are set, and are intended to assist the practitioner in understanding what needs to be accomplished in a review engagement.

10. The SRE contains requirements, expressed using “shall,” that are designed to enable the practitioner to meet the stated objectives.

11. In addition, this SRE contains introductory material, definitions, and application and other explanatory material, that provide context relevant to a proper understanding of the SRE.

12. The application and other explanatory material provides further explanation of the requirements and guidance for carrying them out. While such guidance does not itself impose a requirement, it is relevant to the proper application of the requirements. The application and other explanatory material may also provide background information on matters addressed in this SRE that assists in the application of the requirements.

Effective Date

13. This SRE is effective for reviews of financial statements for periods beginning on or after April 1, 2016.

Objectives

14. The practitioner’s objectives in a review of financial statements under this SRE are to:

15. In all cases when limited assurance cannot be obtained and a qualified conclusion in the practitioner’s report is insufficient in the circumstances, this SRE requires that the practitioner either disclaim a conclusion in the report issued for the engagement or, where appropriate, withdraw from the engagement if withdrawal is possible under applicable law or regulation. (Ref. Para. A7-A9,

A114-A115)

Definitions

16. The Glossary of Terms issued by the ICAI4 (“the Glossary”) includes the terms defined in this SRE as well as descriptions of other terms used in this SRE, to assist in consistent application and interpretation. For example, the terms “management” and “those charged with governance” used throughout this

SRE are as defined in the Glossary. (Ref: Para. A10-A11)

17. For purposes of this SRE, the following terms have the meanings attributed below:

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74 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 SRE. 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.5 (Ref: Para. A12)

Requirements

Conduct of a Review Engagement in Accordance with this SRE

18. The practitioner shall have an understanding of the entire text of this SRE, including its application and other explanatory material, to understand its objectives and to apply its requirements properly. (Ref: Para. A13)

Complying with Relevant Requirements

19. The practitioner shall comply with each requirement of this SRE, unless a requirement is not relevant to the review engagement. A requirement is relevant 5 Attention is also drawn to paragraph 10 of the Framework for Assurance Engagements, issued by ICAI. to the review engagement when the circumstances addressed by the requirement exist.

20. The practitioner shall not represent compliance with this SRE in the practitioner’s report unless the practitioner has complied with all the requirements of this SRE relevant to the review engagement.

Ethical Requirements

21. The practitioner shall comply with relevant ethical requirements, including those pertaining to independence. (Ref: Para. A14-A15)

Professional Skepticism and Professional Judgment

22. The practitioner shall plan and perform the engagement with professional skepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated. (Ref: Para. A16-A19)

23. The practitioner shall exercise professional judgment in conducting a review engagement. (Ref: Para. A20-A24)

Engagement Level Quality Control

24. The engagement partner shall possess competence in assurance skills and techniques, and competence in financial reporting, appropriate to the engagement circumstances. (Ref: Para. A25)

25. The engagement partner shall take responsibility for: (Ref: Para. A26-A29)

Preconditions for Accepting a Review Engagement

30. Prior to accepting a review engagement, the practitioner shall: (Ref: Para.

A38)

Additional Considerations When the Wording of the Practitioner’s Report Is

Prescribed by Law or Regulation

33. The practitioner’s report issued for the review engagement shall refer to this SRE only if the report complies with the requirements of paragraph 86.

34. In some cases, when the review is performed pursuant to the specific law or regulation applicable to the entity, such law or regulation may prescribe the layout or wording of the practitioner’s report in a form or in terms that are significantly different from the requirements of this SRE. In those circumstances, the practitioner shall evaluate whether users might misunderstand the assurance obtained from the review of the financial statements and, if so, whether additional explanation in the practitioner’s report can mitigate possible misunderstanding. (Ref: Para. A50, A141)

35. If the practitioner concludes that additional explanation in the practitioner’s report cannot mitigate possible misunderstanding, the practitioner shall not accept the review engagement unless required by law or regulation to do so. A review conducted in accordance with such law or regulation does not comply with this SRE. Accordingly, the practitioner shall not include any reference within the practitioner’s report to the review having been conducted in accordance with this SRE. (Ref: Para. A50, A141)

Agreeing the Terms of Engagement

36. The practitioner shall agree the terms of the engagement with management or those charged with governance, as appropriate, prior to performing the engagement.

37. The agreed terms of engagement shall be recorded in an engagement letter or other suitable form of written agreement, and shall include: (Ref: Para.

A51-A53, A55)

Recurring Engagements

38. On recurring review engagements, the practitioner shall evaluate whether circumstances, including changes in the engagement acceptance considerations, require the terms of engagement to be revised and whether there is a need to remind management or those charged with governance, as appropriate, of the existing terms of engagement. (Ref: Para. A56)

Acceptance of a Change in the Terms of the Review Engagement

39. The practitioner shall not agree to a change in the terms of the engagement where there is no reasonable justification for doing so. (Ref: Para. A57-A59)

40. If, prior to completing the review engagement, the practitioner is requested to change the engagement to an engagement for which no assurance is obtained, the practitioner shall determine whether there is reasonable justification for doing so. (Ref: Para. A60-A61)

41. If the terms of engagement are changed during the course of the engagement, the practitioner and management or those charged with governance, as appropriate, shall agree on and record the new terms of the engagement in an engagement letter or other suitable form of written agreement.

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Communication with Management and Those Charged with

Governance

42. The practitioner shall communicate with management or those charged with governance, as appropriate, on a timely basis during the course of the review engagement, all matters concerning the review engagement that, in the practitioner’s professional judgment, are of sufficient importance to merit the attention of management or those charged with governance, as appropriate. (Ref: Para. A62-A68)

Performing the Engagement

Materiality in a Review of Financial Statements

43. The practitioner shall determine materiality for the financial statements as a whole, and apply this materiality in designing the procedures and in evaluating the results obtained from those procedures. (Ref: Para. A69-A72)

44. The practitioner shall revise materiality for the financial statements as a whole in the event of becoming aware of information during the review that would have caused the practitioner to have determined a different amount initially. (Ref.

Para. A73)

The Practitioner’s Understanding

45. The practitioner shall obtain an understanding of the entity and its environment, and the applicable financial reporting framework, to identify areas in the financial statements where material misstatements are likely to arise and thereby provide a basis for designing procedures to address those areas. (Ref:

Para. A74-A76)

46. The practitioner’s understanding shall include the following: (Ref: Para.

A77, A86, A88)

Designing and Performing Procedures

47. In obtaining sufficient appropriate evidence as the basis for a conclusion on the financial statements as a whole, the practitioner shall design and perform inquiry and analytical procedures: (Ref: Para. A78-A82, A86, A88)

48. The practitioner’s inquiries of management and others within the entity, as appropriate, shall include the following: (Ref: Para. A83-A86)

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82 practitioner’s report that require adjustment of, or disclosure in, the financial statements;

49. In designing analytical procedures, the practitioner shall consider whether the data from the entity’s accounting system and accounting records are adequate for the purpose of performing the analytical procedures. (Ref: Para.

A88-A90)

Procedures to Address Specific Circumstances

Related Parties6

50. During the review, the practitioner shall remain alert for arrangements or information that may indicate the existence of related party relationships or transactions that management has not previously identified or disclosed to the practitioner.

51. If the practitioner identifies significant transactions outside the entity’s normal course of business in the course of performing the review, the practitioner shall inquire of management about:

Fraud and non-compliance with laws or regulations

52. When there is an indication that fraud or non-compliance with laws or regulations, or suspected fraud or non-compliance with laws or regulations, has occurred in the entity, the practitioner shall:

A91)

Going concern

53. A review of financial statements includes consideration of the entity’s ability to continue as a going concern. In considering management’s assessment of the entity’s ability to continue as a going concern, the practitioner shall cover the same period as that used by management to make its assessment as required by the applicable financial reporting framework, or by law or regulation where a longer period is specified.

54. If, during the performance of the review, the practitioner becomes aware of events or conditions that may cast significant doubt about the entity’s ability to continue as a going concern, the practitioner shall: (Ref: Para. A92)

Use of work performed by others

55. In performing the review, it may be necessary for the practitioner to use work performed by other practitioners, or the work of an individual or organization possessing expertise in a field other than accounting or assurance. If the practitioner uses work performed by another practitioner or an expert in the

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84 course of performing the review, the practitioner shall take appropriate steps to be satisfied that the work performed is adequate for the practitioner’s purposes. (Ref: Para. A79)

Reconciling the Financial Statements to the Underlying Accounting

Records

56. The practitioner shall obtain evidence that the financial statements agree with, or reconcile to, the entity’s underlying accounting records. (Ref: Para. A93)

Additional Procedures When the Practitioner Becomes Aware that the

Financial Statements May Be Materially Misstated

57. If the practitioner becomes aware of a matter(s) that causes the practitioner to believe the financial statements may be materially misstated, the practitioner shall design and perform additional procedures sufficient to enable the practitioner to: (Ref: Para. A94-A98)

Subsequent Events

58. If the practitioner becomes aware of events occurring between the date of the financial statements and the date of the practitioner’s report that require adjustment of, or disclosure in, the financial statements, the practitioner shall request management to correct those misstatements.

59. The practitioner has no obligation to perform any procedures regarding the financial statements after the date of the practitioner’s report. However, if, after the date of the practitioner’s report but before the date the financial statements are issued, a fact becomes known to the practitioner that, had it been known to the practitioner at the date of the practitioner’s report, may have caused the practitioner to amend the report, the practitioner shall:

60. If management does not amend the financial statements in circumstances where the practitioner believes they need to be amended, and the practitioner’s report has already been provided to the entity, the practitioner shall notify management and those charged with governance not to issue the financial statements to third parties before the necessary amendments have been made. If the financial statements are nevertheless subsequently issued without the necessary amendments, the practitioner shall take appropriate action to seek to prevent reliance on the practitioner’s report.

Written Representations

61. The practitioner shall request management to provide a written representation that management has fulfilled its responsibilities described in the agreed terms of engagement. The written representation shall include that: (Ref:

Para. A99-A101)

62. The practitioner shall also request management’s written representations that management has disclosed to the practitioner: (Ref: Para. A100)

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63. If management does not provide one or more of the requested written representations, the practitioner shall: (Ref: Para. A99)

64. The practitioner shall disclaim a conclusion on the financial statements, or withdraw from the engagement if withdrawal is possible under applicable law or regulation, as appropriate, if:

Date of and Period(s) Covered by Written Representations

65. The date of the written representations shall be as near as practicable to, but not after, the date of the practitioner’s report. The written representations shall be for all financial statements and period(s) referred to in the practitioner’s report.

Evaluating Evidence Obtained from the Procedures Performed

66. The practitioner shall evaluate whether sufficient appropriate evidence has been obtained from the procedures performed and, if not, the practitioner shall perform other procedures judged by the practitioner to be necessary in the circumstances to be able to form a conclusion on the financial statements. (Ref:

Para. A102)

67. If the practitioner is not able to obtain sufficient appropriate evidence to form a conclusion, the practitioner shall discuss with management and those charged with governance, as appropriate, the effects such limitations have on the scope of the review. (Ref: Para. A103-A104)

Evaluating the Effect on the Practitioner’s Report

68. The practitioner shall evaluate the evidence obtained from the procedures performed to determine the effect on the practitioner’s report. (Ref: Para. A102)

Forming the Practitioner’s Conclusion on the Financial Statements

Consideration of the Applicable Financial Reporting Framework in Relation to the Financial Statements

69. In forming the conclusion on the financial statements, the practitioner shall:

71. If the financial statements are prepared using a fair presentation framework, the practitioner’s consideration shall also include: (Ref: Para. A108)

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Form of the Conclusion

72. The practitioner’s conclusion on the financial statements, whether unmodified or modified, shall be expressed in the appropriate form in the context of the financial reporting framework applied in the financial statements.

Unmodified Conclusion

73. The practitioner shall express an unmodified conclusion in the practitioner’s report on the financial statements as a whole when the practitioner has obtained limited assurance to be able to conclude that nothing has come to the practitioner’s attention that causes the practitioner to believe that the financial statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework.

74. When the practitioner expresses an unmodified conclusion, the practitioner shall, unless otherwise required by law or regulation, use one of the following phrases, as appropriate: (Ref: Para. A112-A113)

Modified Conclusion

75. The practitioner shall express a modified conclusion in the practitioner’s report on the financial statements as a whole when:

76. When the practitioner modifies the conclusion expressed on the financial statements, the practitioner shall:

Financial statements are materially misstated

77. If the practitioner determines that the financial statements are materially misstated, the practitioner shall express:

78. When the practitioner expresses a qualified conclusion on the financial statements because of a material misstatement, the practitioner shall, unless otherwise required by law or regulation, use one of the following phrases, as appropriate:

79. When the practitioner expresses an adverse conclusion on the financial statements, the practitioner shall, unless otherwise required by law or regulation, use one of the following phrases, as appropriate:

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90 respects), in accordance with the applicable financial reporting framework,” (for financial statements prepared using a fair presentation framework); or

80. In the basis for conclusion paragraph, in relation to material misstatements that give rise to either a qualified conclusion or an adverse conclusion, the practitioner shall:

Inability to obtain sufficient appropriate evidence

81. If the practitioner is unable to form a conclusion on the financial statements due to inability to obtain sufficient appropriate evidence, the practitioner shall:

82. The practitioner shall withdraw from the engagement if the following conditions are present: (Ref: Para. A114-A116)

83. When the practitioner expresses a qualified conclusion on the financial statements due to inability to obtain sufficient appropriate evidence, the practitioner shall, unless otherwise required by law or regulation, use one of the following phrases, as appropriate:

84. When disclaiming a conclusion on the financial statements the practitioner shall state in the conclusion paragraph that:

85. In the basis for conclusion paragraph, in relation to either the qualified conclusion due to inability to obtain sufficient appropriate evidence or when the practitioner disclaims a conclusion, the practitioner shall include the reason(s) for the inability to obtain sufficient appropriate evidence.

The Practitioner’s Report

86. The practitioner’s report for the review engagement shall be in writing, and shall contain the following elements: (Ref: Para. A117-A120, A141, A143)

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The practitioner’s signature; and (Ref: Para. A131)

Emphasis of Matter and Other Matter Paragraphs in the Practitioner’s

Report

Emphasis of Matter Paragraphs

87. The practitioner may consider it necessary to draw users’ attention to a matter presented or disclosed in the financial statements that, in the practitioner’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements. In such cases, the practitioner shall include an Emphasis of Matter paragraph in the practitioner’s report, provided the practitioner has obtained sufficient appropriate evidence to conclude that the matter is not likely to be materially misstated as presented in the financial statements. Such paragraph shall refer only to information presented or disclosed in the financial statements.

88. The practitioner’s report on special purpose financial statements shall include an Emphasis of Matter paragraph alerting users of the practitioner’s

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94 report that the financial statements are prepared in accordance with a special purpose framework and that, as a result, the financial statements may not be suitable for another purpose. (Ref: Para. A132-A133)

89. The practitioner shall include an Emphasis of Matter paragraph immediately after the paragraph that contains the practitioner’s conclusion on the financial statements under the heading “Emphasis of Matter,” or other appropriate heading.

Other Matter Paragraphs

90. If the practitioner considers it necessary to communicate a matter other than those that are presented or disclosed in the financial statements that, in the practitioner’s judgment, is relevant to users’ understanding of the review, the practitioner’s responsibilities or the practitioner’s report and this is not prohibited by law or regulation, the practitioner shall do so in a paragraph in the practitioner’s report with the heading “Other Matter” or other appropriate heading.

Other Reporting Responsibilities

91. A practitioner may be requested to address other reporting responsibilities in the practitioner’s report on the financial statements that are in addition to the practitioner’s responsibilities under this SRE to report on the financial statements. In such situations, those other reporting responsibilities shall be addressed by the practitioner in a separate section in the practitioner’s report headed “Report on Other Legal and Regulatory Requirements,” or otherwise as appropriate to the content of the section, following the section of the report headed “Report on the Financial Statements.” (Ref: Para. A134-A136)

Date of the Practitioner’s Report

92. The practitioner shall date the report no earlier than the date on which the practitioner has obtained sufficient appropriate evidence as the basis for the practitioner’s conclusion on the financial statements, including being satisfied that: (Ref: Para. A137-A140)

Documentation

93. The preparation of documentation for the review provides evidence that the review was performed in accordance with this SRE, and legal and regulatory requirements where relevant, and a sufficient and appropriate record of the basis for the practitioner’s report. The practitioner shall document the following aspects of the engagement in a timely manner, sufficient to enable an experienced practitioner, having no previous connection with the engagement, to understand: (Ref: Para. A144)

94. In documenting the nature, timing and extent of procedures performed as required in this SRE, the practitioner shall record:

95. The practitioner shall also document discussions with management, those charged with governance, and others as relevant to the performance of the review of significant matters arising during the engagement, including the nature of those matters.

96. If, in the course of the engagement, the practitioner identified information that is inconsistent with the practitioner’s findings regarding significant matters affecting the financial statements, the practitioner shall document how the inconsistency was addressed.

Application and Other Explanatory Material

Scope of this SRE (Ref: Para. 1-2)

A1. In performing a review of financial statements, the practitioner may be required to comply with legal or regulatory requirements, which may differ from the requirements established in this SRE. While the practitioner may find aspects of this SRE helpful in these circumstances, it is the responsibility of the practitioner to ensure compliance with all relevant legal, regulatory and professional obligations. Reviews of Financial Information of Components in the Context of an Audit of the Financial Statements of a Group of Entities

A2. Review engagements in accordance with this SRE may be requested for

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96 component entities by the auditor of the financial statements of a group of entities. Such a review engagement performed in accordance with this SRE may be accompanied by a request from the group auditor to undertake additional work or procedures as needed in the circumstances of the group audit engagement.

Relationship with SQC 1 (Ref: Para. 4)

A3. SQC 1 deals with the firm’s responsibilities to establish and maintain its system of quality control for assurance engagements, including review engagements. Those responsibilities are directed at establishing the firm’s: 

Quality control system; and

 Related policies designed to achieve the objective of the quality control system and the firm’s procedures to implement and monitor compliance with those policies, including policies and procedures that address each of the following elements: ○ Leadership responsibilities for quality within the firm. ○ Relevant ethical requirements. ○

Acceptance and continuance of client relationships and specific engagements. ○ Human resources. ○ Engagement performance. ○ Monitoring.

A4. Under SQC 1, the firm has an obligation to establish and maintain a system of quality control to provide it with reasonable assurance that:

A5. Reviews of financial statements may be performed for a wide range of entities that vary by type or size, or by the level of complexity in their financial reporting. In some cases, the review of financial statements of an entity may also 7 It is clarified that in India the reports are not issued/signed in the firm’s name, rather they are issued/signed on behalf of the firm by the sole practitioner, proprietor or a partner of the firm, as the case may be, in his individual name. be subject to the applicable laws or regulations and related reporting requirements.

A6. Reviews may be performed in a variety of circumstances. For example, they may be required for entities that are exempt from requirements specified in law or regulation for mandatory audit. Reviews may also be requested on a voluntary basis, such as in connection with financial reporting undertaken for arrangements under the terms of a private contract, or to support funding arrangements.

Objectives (Ref: Para. 15)

A7. This SRE requires the practitioner to disclaim a conclusion on the financial statements if:

A8. The situation of being unable to obtain sufficient appropriate evidence in a review engagement (referred to as a scope limitation) may arise from:

A9. This SRE sets out requirements and guidance for the practitioner when the practitioner encounters a scope limitation, either prior to accepting a review engagement, or during the engagement.

Definitions (Ref: Para. 16)

Use of the Terms “Management” and “Those Charged with Governance”

A10. The respective responsibilities of management and those charged with governance will differ between entities of various types. These differences affect the way the practitioner applies the requirements of this SRE in relation to management or those charged with governance. Accordingly, the phrase “management and, where appropriate, those charged with governance” used in various places throughout this SRE is intended to alert the practitioner to the fact that different entity environments may have different management and governance structures and arrangements.

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A11. Various responsibilities relating to preparation of financial information and external financial reporting will fall to either management or those charged with governance according to factors such as: 

The resources and structure of the entity; and



The respective roles of management and those charged with governance within the entity as set out in relevant law or regulation or, if the entity is not regulated, in any formal governance or accountability arrangements established for the entity (for example, as recorded in contracts, a constitution or other type of establishment documents of the entity). For example, in small entities there is often no separation of the management and governance roles. In larger entities, management is often responsible for execution of the business or activities of the entity and reporting thereon, while those charged with governance oversee management. In some entities, the responsibility for preparation of financial statements for an entity is the legal responsibility of those charged with governance, and in some other entities it is a management responsibility. Limited Assurance - Use of the Term Sufficient Appropriate Evidence (Ref:

Para. 17(f))

A12. Sufficient appropriate evidence is required to obtain limited assurance to support the practitioner’s conclusion. Evidence is cumulative in nature and is primarily obtained from the procedures performed during the course of the review. Conduct of a Review Engagement in Accordance with this SRE (Ref:

Para. 18)

A13. This SRE does not override laws and regulations that govern a review of financial statements. In the event that those laws and regulations differ from the requirements of this SRE, a review conducted only in accordance with laws and regulations will not automatically comply with this SRE.

Ethical Requirements (Ref: Para. 21)

A14. The Code of Ethics issued by the ICAI establishes the fundamental principles of professional ethics practitioners must comply with, and provides a conceptual framework for applying those principles. The fundamental principles are:

A15. In the case of an engagement to review financial statements, the Code of Ethics requires that the practitioner be independent of the entity whose financial statements are reviewed. The Code of Ethics describes independence as comprising both independence of mind and independence in appearance. The practitioner’s independence safeguards the practitioner’s ability to form a conclusion without being affected by influences that might otherwise compromise that conclusion. Independence enhances the practitioner’s ability to act with integrity, to be objective and to maintain an attitude of professional skepticism.

Professional Skepticism and Professional Judgment

Professional Skepticism (Ref: Para. 22)

A16. Professional skepticism is necessary for the critical assessment of evidence in a review. This includes questioning inconsistencies and investigating contradictory evidence, and questioning the reliability of responses to inquiries and other information obtained from management and those charged with governance. It also includes consideration of the sufficiency and appropriateness of evidence obtained in the light of the engagement circumstances.

A17. Professional skepticism includes being alert to, for example:  Evidence that is inconsistent with other evidence obtained. 

Information that calls into question the reliability of documents and responses to inquiries to be used as evidence.  Conditions that may indicate possible fraud.  Any other circumstances that suggest the need for additional procedures.

A18. Maintaining professional skepticism throughout the review is necessary if the practitioner is to reduce the risks of:  Overlooking unusual circumstances.  Over-generalizing when drawing conclusions from evidence obtained. 

Using inappropriate assumptions in determining the nature, timing, and extent of the procedures performed in the review, and evaluating the results thereof.

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A19. The practitioner cannot be expected to disregard past experience of the honesty and integrity of the entity’s management and those charged with governance. Nevertheless, a belief that management and those charged with governance are honest and have integrity does not relieve the practitioner of the need to maintain professional skepticism or allow the practitioner to be satisfied with evidence that is inadequate for the purpose of the review.

Professional Judgment (Ref: Para. 23)

A20. Professional judgment is essential to the proper conduct of a review engagement. This is because interpretation of relevant ethical requirements and the requirements of this SRE, and the need for informed decisions throughout the performance of a review engagement, require the application of relevant knowledge and experience to the facts and circumstances of the engagement. Professional judgment is necessary, in particular:  Regarding decisions about materiality, and the nature, timing, and extent of procedures used to meet the requirements of this SRE, and to gather evidence. 

When evaluating whether the evidence obtained from the procedures performed reduces the engagement risk to a level that is acceptable in the engagement circumstances. 

When considering management’s judgments in applying the entity’s applicable financial reporting framework.  When forming the conclusion on the financial statements based on the evidence obtained, including considering the reasonableness of the estimates made by management in preparing the financial statements.

A21. The distinguishing feature of the professional judgment expected of the practitioner is that it is exercised by a practitioner whose training, knowledge and experience, including in the use of assurance skills and techniques, have assisted in developing the necessary competencies to achieve reasonable judgments. Consultation on difficult or contentious matters during the course of the engagement, both within the engagement team and between the engagement team and others at the appropriate level within or outside the firm, assists the practitioner in making informed and reasonable judgments.

A22. The exercise of professional judgment in individual engagements is based on the facts and circumstances that are known by the practitioner throughout the engagement, including: 

Knowledge acquired from engagements carried out with respect to the entity’s financial statements in prior periods, where applicable.  The practitioner’s understanding of the entity and its environment, including its accounting system, and of the application of the applicable financial reporting framework in the entity’s industry.  The extent to which the preparation and presentation of the financial statements require the exercise of management judgment.

A23. Professional judgment can be evaluated based on whether the judgment reached reflects a competent application of assurance and accounting principles, and is appropriate in the light of, and consistent with, the facts and circumstances that were known to the practitioner up to the date of the practitioner’s report.

A24. Professional judgment needs to be exercised throughout the engagement. It also needs to be appropriately documented in accordance with the requirements of this SRE. Professional judgment is not to be used as the justification for decisions that are not otherwise supported by the facts and circumstances of the engagement, or the evidence obtained.

Engagement Level Quality Control (Ref: Para. 24-25)

A25. Assurance skills and techniques include: 

Applying professional skepticism and professional judgment to planning and performing an assurance engagement, including obtaining and evaluating evidence;  Understanding information systems and the role and limitations of internal control;  Linking the consideration of materiality and engagement risks to the nature, timing and extent of procedures for the review; 

Applying procedures as appropriate to the review engagement, which may include other types of procedures in addition to inquiry and analytical procedures (such as inspection, re-calculation, re-performance, observation and confirmation); 

Systematic documentation practices; and

 Application of skills and practices relevant for writing reports for assurance engagements.

A26. Within the context of the firm’s system of quality control, engagement teams have a responsibility to implement quality control procedures applicable to the engagement, and provide the firm with relevant information to enable the functioning of that part of the firm’s system of quality control relating to independence.

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A27. The actions of the engagement partner and appropriate messages to the other members of the engagement team, in the context of the engagement partner taking responsibility for the overall quality on each review engagement, emphasize the fact that quality is essential in performing a review engagement, and the importance to the quality of the review engagement of:

A28. Unless information provided by the firm or other parties suggests otherwise, the engagement team is entitled to rely on the firm’s system of quality control. For example, the engagement team may rely on the firm’s system of quality control in relation to:  Competence of personnel through their recruitment and formal training. 

Independence through the accumulation and communication of relevant independence information. 

Maintenance of client relationships through acceptance and continuance systems. 

Adherence to regulatory and legal requirements through the monitoring process. In considering deficiencies identified in the firm’s system of quality control that may affect the review engagement, the engagement partner may consider measures taken by the firm to rectify those deficiencies.

A29. A deficiency in the firm’s system of quality control does not necessarily indicate that a review engagement was not performed in accordance with professional standards and applicable legal and regulatory requirements, or that the practitioner’s report was not appropriate.

Assignment of Engagement Teams (Ref: Para. 25(b))

A30. When considering the appropriate competence and capabilities expected of the engagement team as a whole, the engagement partner may take into consideration such matters as the team’s:  Understanding of, and practical experience with, review engagements of a similar nature and complexity through appropriate training and participation. 

Understanding of professional standards and applicable legal and regulatory requirements. 

Technical expertise, including expertise with relevant information technology and specialized areas of accounting or assurance.  Knowledge of relevant industries in which the client operates.  Ability to apply professional judgment.  Understanding of the firm’s quality control policies and procedures.

Acceptance and Continuance of Client Relationships and Review

Engagements (Ref: Para. 25(d)(i))

A31. SQC 1 requires the firm to obtain information as it considers necessary in the circumstances before accepting an engagement with a new client, when deciding whether to continue an existing engagement, and when considering acceptance of a new engagement with an existing client. Information that assists the engagement partner in determining whether acceptance and continuance of client relationships and review engagements are appropriate may include information concerning:  The integrity of the principal owners, key management and those charged with governance; and  Significant matters that have arisen during the current or a previous review engagement, and their implications for continuing the relationship.

A32. If the engagement partner has cause to doubt management’s integrity to a degree that is likely to affect proper performance of the review, it is not appropriate under this SRE to accept the engagement, unless required by law or regulation, as doing so may lead to the practitioner being associated with the entity’s financial statements in an inappropriate manner.

Acceptance and Continuance of Client Relationships and Review

Engagements (Ref: Para. 29)

A33. The practitioner’s consideration of engagement continuance, and relevant ethical requirements, including independence, occurs throughout the engagement, as conditions and changes in circumstances occur. Performing initial procedures on engagement continuance and evaluation of relevant ethical requirements (including independence) at the beginning of an engagement informs the practitioner’s decisions and actions prior to the performance of other significant activities for the engagement.

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104 Factors Affecting Acceptance and Continuance of Client Relationships and

Review Engagements (Ref: Para. 29)

A34. Assurance engagements may only be accepted when the engagement exhibits certain characteristics9 that are conducive to achieving the practitioner’s objectives specified for the engagement.

Rational Purpose (Ref: Para. 29(a)(i))

A35. It may be unlikely that there is a rational purpose for the engagement if, for example:

Review Engagement is Appropriate (Ref: Para. 29(a)(ii) and 29(d))

A36. When the practitioner’s preliminary understanding of the engagement circumstances indicates that accepting a review engagement would not be appropriate, the practitioner may consider recommending that another type of engagement be undertaken. Depending on the circumstances, the practitioner may, for example, believe that performance of an audit engagement would be more appropriate than a review. In other cases, if the engagement circumstances preclude performance of an assurance engagement, the practitioner may recommend a compilation engagement, or other accounting services engagement, as appropriate.

Information Needed to Perform the Review Engagement (Ref: Para. 29(c))

A37. An example of where the practitioner may have cause to doubt that the information needed to perform the review will be available or reliable is where the accounting records necessary for purposes of performing analytical procedures are suspected to be substantially inaccurate or incomplete. This consideration is not directed at the need that sometimes arises in the course of a review engagement to assist management by recommending adjusting entries required to finalize the financial statements prepared by management.

Preconditions for Accepting a Review Engagement (Ref: Para. 30)

A38. This SRE also requires the practitioner to ascertain certain matters, upon which it is necessary for the practitioner and the entity’s management to agree, 9 Framework for Assurance Engagements, paragraph 16. and which are within the control of the entity, prior to the practitioner accepting the engagement.

The Applicable Financial Reporting Framework (Ref: Para. 30(a))

A39. A condition for acceptance of an assurance engagement is that the criteria10 referred to in the definition of an assurance engagement are suitable and available to intended users.11 For purposes of this SRE, the applicable financial reporting framework provides the criteria the practitioner uses to review the financial statements including, where relevant, the fair presentation of the financial statements. Some financial reporting frameworks are fair presentation frameworks, while others are compliance frameworks. The requirements of the applicable financial reporting framework determine the form and content of the financial statements, including what constitutes a complete set of financial statements.

Acceptability of the applicable financial reporting framework

A40. Without an acceptable financial reporting framework, management does not have an appropriate basis for the preparation of the financial statements and the practitioner does not have suitable criteria for the review of the financial statements.

A41. The practitioner’s determination of the acceptability of the financial reporting framework applied in the financial statements is made in the context of the practitioner’s understanding of who the intended users of the financial statements are. The intended users are the person, persons or group of persons for whom the practitioner prepares the report. The practitioner may not be able to identify all those who will read the assurance report, particularly where there is a large number of people who have access to it.

A42. In many cases, in the absence of any indications to the contrary, the practitioner may presume that the applicable financial reporting framework is acceptable (for example, a financial reporting framework that is prescribed by law or regulation governing the entity to be used in the preparation of general purpose financial statements for certain types of entities).

A43. Factors that are relevant to the practitioner’s determination of the acceptability of the financial reporting framework to be applied in the preparation of the financial statements include:  The nature of the entity (for example, whether it is a business enterprise, a public sector entity or a not-for-profit organization). 10 Framework for Assurance Engagements, paragraph 33. 11 Framework for Assurance Engagements, paragraph 16(b)(ii).

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106  The purpose of the financial statements (for example, whether they are prepared to meet the common financial information needs of a wide range of users or the financial information needs of specific users).  The nature of the financial statements (for example, whether the financial statements are a complete set of financial statements or a single financial statement). 

Whether the applicable financial reporting framework is prescribed in relevant law or regulation.

A44. If the financial reporting framework used to prepare the financial statements is not acceptable in view of the purpose of the financial statements and management will not agree to use of a financial reporting framework that is acceptable in the practitioner’s view, the practitioner is required under this SRE to decline the engagement.

A45. Deficiencies in the applicable financial reporting framework that indicate that the framework is not acceptable may be encountered after the review engagement has been accepted. When use of that financial reporting framework is not prescribed by law or regulation, management may decide to adopt another framework that is acceptable. When management does so, the practitioner is required under this SRE to agree the new terms of the review engagement with management to reflect the change in the applicable financial reporting framework. Responsibilities of Management and Those Charged with Governance (Ref:

Para. 30(b), 37(e))

A46. The financial statements subject to review are those of the entity, prepared by management of the entity with oversight from those charged with governance. This SRE does not impose responsibilities on management and those charged with governance, nor does it override laws and regulations that govern their respective responsibilities. However, a review in accordance with this SRE is conducted on the premise that management, and those charged with governance as appropriate, have acknowledged certain responsibilities that are fundamental to the conduct of the review. The review of the financial statements does not relieve management and those charged with governance of their responsibilities.

A47. As part of its responsibility for the preparation of the financial statements, management is required to exercise judgment in making accounting estimates that are reasonable in the circumstances, and to select and apply appropriate accounting policies. These judgments are made in the context of the applicable financial reporting framework.

A48. Because of the significance of the preconditions for undertaking a review of financial statements, the practitioner is required under this SRE to obtain the agreement of management that it understands its responsibilities before accepting a review engagement. The practitioner may obtain management’s agreement either orally or in writing. However, management’s agreement is subsequently recorded within the written terms of the engagement.

A49. If management, and those charged with governance where appropriate, do not or will not acknowledge their responsibilities in relation to the financial statements, it is not appropriate to accept the engagement unless law or regulation requires the practitioner to do so. In circumstances where the practitioner is required to accept the review engagement, the practitioner may need to explain to management and those charged with governance, where different, the importance of these matters and the implications for the engagement.

Additional Considerations When the Wording of the Practitioner’s Report is

Prescribed by Law or Regulation (Ref: Para. 34-35)

A50. This SRE requires the practitioner to not represent compliance with this SRE unless the practitioner has complied with all the requirements of this SRE that are relevant to the review engagement. Law or regulation may prescribe matters in relation to an engagement that would ordinarily cause the practitioner to decline the engagement were it possible to do so, for example, if:  The practitioner considers that the financial reporting framework prescribed by law or regulation is not acceptable; or  The prescribed layout or wording of the practitioner’s report is in a form or in terms that are significantly different from the layout or wording required by this SRE. Under this SRE, a review conducted in these situations does not comply with this SRE and the practitioner cannot represent compliance with this SRE in the report issued for the engagement. Notwithstanding that the practitioner is not permitted to represent compliance with this SRE, the practitioner is, however, encouraged to apply this SRE, including the reporting requirements, to the extent practicable. When appropriate to avoid misunderstanding, the practitioner may consider including a statement in the report that the review is not conducted in accordance with this SRE.

Agreeing the Terms of Engagement

Engagement Letter or Other Form of Written Agreement (Ref: Para. 37)

A51. It is in the interests of both management and those charged with governance, and the practitioner, that the practitioner sends an engagement

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108 letter prior to performing the review engagement, to help avoid misunderstandings with respect to the engagement.

Form and content of the engagement letter

A52. The form and content of the engagement letter may vary for each engagement. In addition to including the matters required by this SRE, an engagement letter may make reference to, for example: 

Arrangements concerning the involvement of other practitioners and experts in the review engagement.  Arrangements to be made with the predecessor practitioner, if any, in the case of an initial engagement.  The fact that a review engagement will not satisfy any statutory or third party requirements for an audit.  The expectation that management will provide written representations to the practitioner.  The agreement of management to inform the practitioner of facts that may affect the financial statements of which management may become aware during the period from the date of the practitioner’s report to the date the financial statements are issued.  A request for management to acknowledge receipt of the engagement letter and to agree to the terms of the engagement outlined therein.

Review of components of groups of entities

A53. The auditor of the financial statements of a group of entities may request that a practitioner perform a review of the financial information of a component entity of the group. Depending on the instructions of the group auditor, a review of the financial information of a component may be performed in accordance with this SRE. The group auditor may also specify additional procedures to supplement the work done for the review performed under this SRE. Where the practitioner conducting the review is the auditor of the component entity’s financial statements, the review is not performed in accordance with this SRE. Responsibilities of Management prescribed by law or regulation (Ref: Para. 37(e))

A54. If, in the circumstances of the engagement, the practitioner concludes that it is not necessary to record certain terms of the engagement in an engagement letter, the practitioner is still required to seek the written agreement from management, and those charged with governance where appropriate, required under this SRE that they acknowledge and understand their responsibilities set out in this SRE. This written agreement may use the wording of the law or regulation if the law or regulation establishes responsibilities for management that are equivalent in effect to those described in this SRE.

Illustrative Engagement Letter (Ref: Para. 37)

A55. An illustrative engagement letter for a review engagement is set out in Appendix 1 to this SRE.

Recurring Engagements (Ref: Para. 38)

A56. The practitioner may decide not to send a new engagement letter or other written agreement each period. However, the following factors may indicate that it is appropriate to revise the terms of the review engagement or to remind management and those charged with governance, as appropriate, of the existing terms of the engagement: 

Any indication that management misunderstands the objective and scope of the review.  Any revised or special terms of the engagement.  A recent change of senior management of the entity.  A significant change in ownership of the entity.  A significant change in nature or size of the entity’s business.  A change in legal or regulatory requirements affecting the entity.  A change in the applicable financial reporting framework. Acceptance of a Change in the Terms of the Review Engagement Request to Change the Terms of the Review Engagement (Ref: Para. 39)

A57. A request from the entity for the practitioner to change the terms of the review engagement may result from factors including:  A change in circumstances affecting the need for the service.  Misunderstanding as to the nature of a review engagement as originally requested.  A restriction on the scope of the review engagement, whether imposed by management or caused by other circumstances.

A58. A change in circumstances that affects the entity’s requirements or a misunderstanding concerning the nature of the service originally requested may be considered a reasonable basis for requesting a change to the terms of the review engagement.

A59. In contrast, a change may not be considered reasonable if it appears that the change relates to information that is incorrect, incomplete or otherwise

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110 unsatisfactory. An example might be where the practitioner is unable to obtain sufficient appropriate evidence for a material item in the financial statements, and management asks for the engagement to be changed to a related services engagement to avoid the expression of a modified conclusion by the practitioner.

Request to Change the Nature of the Engagement (Ref: Para. 40)

A60. Before agreeing to change a review engagement to another type of engagement or related service, a practitioner who was engaged to perform a review in accordance with this SRE may need to assess, in addition to the matters referred to in this SRE, any legal or contractual implications of the change.

A61. If the practitioner concludes that there is reasonable justification to change the review engagement to another type of engagement or related service, the work performed in the review engagement to the date of change may be relevant to the changed engagement; however, the work required to be performed and the report to be issued would be those appropriate to the revised engagement. In order to avoid confusing the reader, the report on the other engagement or related service would not include reference to:

Communication with Management and Those Charged with

Governance (Ref: Para. 42)

A62. In a review engagement, the practitioner’s communications with management and those charged with governance take the form of:

A63. The appropriate timing for communications will vary with the circumstances of the engagement. Relevant factors include the significance and nature of the matter, and any action expected to be taken by management or those charged with governance. For example, it may be appropriate to communicate a significant difficulty encountered during the review as soon as practicable if management or those charged with governance are able to assist the practitioner to overcome the difficulty.

A64. Law or regulation may restrict the practitioner’s communication of certain matters with those charged with governance. For example, law or regulation may specifically prohibit a communication, or other action, that might prejudice an investigation by an appropriate authority into an actual, or suspected, illegal act. In some circumstances, potential conflicts between the practitioner’s obligations of confidentiality and obligations to communicate may be complex. In such cases, the practitioner may consider obtaining legal advice.

Communicating Matters Concerning the Review

A65. Matters to be communicated to management or those charged with governance, as appropriate, under this SRE may include:  The practitioner’s responsibilities in the review engagement, as included in the engagement letter or other suitable form of written agreement.  Significant findings from the review, for example: ○

The practitioner’s views about significant qualitative aspects of the entity’s accounting practices, including accounting policies, accounting estimates and financial statement disclosures. ○

Significant findings from the performance of procedures, including situations where the practitioner considered performance of additional procedures necessary under this SRE. The practitioner may need to confirm that those charged with governance have the same understanding of the facts and circumstances relevant to specific transactions or events. ○

Matters arising that may lead to modification of the practitioner’s conclusion. ○

Significant difficulties, if any, encountered during the review; for example, unavailability of expected information; unexpected inability to obtain evidence that the practitioner considers necessary for the review; or restrictions imposed on the practitioner by management. In some circumstances, such difficulties may constitute a scope limitation that, if not addressed by management or those charged with governance, may lead to modification of the practitioner’s conclusion or to the practitioner’s withdrawal from the engagement in certain circumstances.

A66. In some entities, different persons are responsible for the management and the governance of an entity. In these circumstances, management may have the

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112 responsibility to communicate matters of governance interest to those charged with governance. Communication by management with those charged with governance of matters that the practitioner is required to communicate does not relieve the practitioner of the responsibility to also communicate them to those charged with governance. However, communication of these matters by management may affect the form or timing of the practitioner’s communication with those charged with governance.

Communication with Third Parties

A67. In some entities, the practitioner may be required by law or regulation to, for example:  Notify a regulatory or enforcement body of certain matters communicated with those charged with governance. For example, in some cases the practitioner has a duty to report misstatements to authorities where management and those charged with governance fail to take corrective action. 

Submit copies of certain reports prepared for those charged with governance to relevant regulatory or funding bodies or, in some cases, make such reports publicly available.

A68. Unless required by law or regulation to provide a third party with a copy of the practitioner’s written communications with those charged with governance, the practitioner may need the prior consent of management or those charged with governance before doing so.

Performing the Engagement

Materiality in a Review of Financial Statements (Ref: Para. 43)

A69. The practitioner’s consideration of materiality is made in the context of the applicable financial reporting framework. Some financial reporting frameworks discuss the concept of materiality in the context of the preparation and presentation of financial statements. Although financial reporting frameworks may discuss materiality in different terms, they generally explain that:  Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements; 

Judgments about materiality are made in light of surrounding circumstances, and are affected by the size or nature of a misstatement, or a combination of both; and  Judgments about matters that are material to users of the financial statements are based on a consideration of the common financial information needs of users as a group. The possible effect of misstatements on specific individual users, whose needs may vary widely, is not considered.

A70. If present in the applicable financial reporting framework, a discussion of the concept of materiality provides a frame of reference for the practitioner in determining materiality for the review. If not present, the above considerations provide the practitioner with a frame of reference.

A71. The practitioner’s determination of materiality is a matter of professional judgment, and is affected by the practitioner’s perception of the needs of the intended users of the financial statements. In this context, it is reasonable for the practitioner to assume that users: 

Have a reasonable knowledge of business and economic activities and accounting, and a willingness to study the information in the financial statements with reasonable diligence;  Understand that financial statements are prepared, presented and reviewed to levels of materiality; 

Recognize the uncertainties inherent in the measurement of amounts based on the use of estimates, judgment and the consideration of future events; and  Make reasonable economic decisions on the basis of the information in the financial statements. Further, unless the review engagement is undertaken for financial statements that are intended to meet the particular needs of specific users, the possible effect of misstatements on specific users, whose information needs may vary widely, is not ordinarily considered.

A72. The practitioner’s judgment about what is material in relation to the financial statements as a whole is the same regardless of the level of assurance obtained by a practitioner as the basis for expressing the conclusion on the financial statements.

Revising Materiality (Ref: Para. 44)

A73. The practitioner’s determination of materiality for the financial statements as a whole may need to be revised during the engagement as a result of:  A change in the circumstances that occurred during the review (for example, a decision to dispose of a major part of the entity’s business).

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114  New information, or a change in the practitioner’s understanding of the entity and its environment as a result of performing procedures for the review in accordance with this SRE (for example, if during the review it appears as though actual financial results are likely to be substantially different from the anticipated period-end financial results that were used initially to determine materiality for the financial statements as a whole).

The Practitioner’s Understanding (Ref: Para. 45-46)

A74. The practitioner uses professional judgment to determine the extent of the understanding of the entity and its environment required to perform the review of the entity’s financial statements in accordance with this SRE. The practitioner’s primary consideration is whether the understanding obtained is sufficient to meet the practitioner’s objectives for the engagement. The breadth and depth of the overall understanding that the practitioner obtains is less than that possessed by management.

A75. Obtaining an understanding of the entity and its environment is a continual dynamic process of gathering, updating and analyzing information throughout the review engagement. The practitioner’s understanding is obtained and applied on an iterative basis throughout performance of the engagement, and is updated as changes in conditions and circumstances occur. Initial procedures for engagement acceptance and continuance at the time of commencement of a review engagement are based on the practitioner’s preliminary understanding of the entity and of the engagement circumstances. In a continuing client relationship, the practitioner’s understanding includes knowledge obtained from prior engagements performed by the practitioner in relation to the entity’s financial statements and other financial information.

A76. The understanding establishes a frame of reference within which the practitioner plans and performs the review engagement, and exercises professional judgment throughout the engagement. Specifically, the understanding needs to be sufficient for the practitioner to be able to identify areas in the financial statements where material misstatements are likely to arise, to inform the practitioner’s approach to designing and performing procedures to address those areas.

A77. In obtaining an understanding of the entity and its environment, and of the applicable financial reporting framework, the practitioner may also consider:  Whether the entity is a component of a group of entities, or an associated entity of another entity.  The complexity of the financial reporting framework.  The entity’s financial reporting obligations or requirements, and whether those obligations or requirements exist under applicable law or regulation or in the context of voluntary financial reporting arrangements established under formalized governance or accountability arrangements, for example, under contractual arrangements with third parties.  Relevant provisions of laws and regulations that are generally recognized to have a direct effect on the determination of material amounts and disclosures in the financial statements, such as tax and pension laws and regulations. 

The level of development of the entity’s management and governance structure regarding management and oversight of the entity’s accounting records and financial reporting systems that underpin preparation of the financial statements. Smaller entities often have fewer employees, which may influence how management exercises oversight. For example, segregation of duties may not be practicable. However, in a small owner-managed entity, the owner-manager may be able to exercise more effective oversight than in a larger entity. This oversight may compensate for the generally more limited opportunities for segregation of duties.  The “tone at the top” and the entity’s control environment through which the entity addresses risks relating to financial reporting and compliance with the entity’s financial reporting obligations.  The level of development and complexity of the entity’s financial accounting and reporting systems and related controls through which the entity’s accounting records and related information are maintained. 

The entity’s procedures for recording, classifying and summarizing transactions, accumulating information for inclusion in the financial statements and related disclosures.  The types of matters that required accounting adjustments in the entity’s financial statements in prior periods.

Designing and Performing Procedures (Ref: Para. 47, 55)

A78. The planned nature, timing and extent of the procedures the practitioner considers are needed to obtain sufficient appropriate evidence as the basis for a conclusion on the financial statements as a whole are influenced by:

A79. When the practitioner is engaged to review the financial statements of a group of entities, the planned nature, timing and extent of the procedures for the

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116 review are directed at achieving the practitioner’s objectives for the review engagement stated in this SRE, but in the context of the group financial statements.

A80. The requirements of this SRE relating to designing and performing inquiry and analytical procedures, and procedures addressing specific circumstances, are designed to enable the practitioner to achieve the objectives specified in this SRE. The circumstances of review engagements vary widely and, accordingly, there may be circumstances where the practitioner may consider it effective or efficient to design and perform other procedures. For example, if in the course of obtaining an understanding of the entity, the practitioner becomes aware of a significant contract the practitioner may choose to read the contract.

A81. The fact that the practitioner may deem it necessary to perform other procedures does not alter the practitioner’s objective of obtaining limited assurance in relation to the financial statements as a whole.

Significant or Unusual Transactions

A82. The practitioner may consider, reviewing the accounting records with a view to identifying significant or unusual transactions that may require specific attention in the review.

Inquiry (Ref: Para. 46-48)

A83. In a review, inquiry includes seeking information of management and other persons within the entity, as the practitioner considers appropriate in the engagement circumstances. The practitioner may also extend inquiries to obtain non-financial data if appropriate. Evaluating the responses provided by management is integral to the inquiry process.

A84. Depending on the engagement circumstances, inquiries may also include inquiries about:  Actions taken at meetings of owners, those charged with governance and committees thereof, and proceedings at other meetings, if any, that affect the information and disclosures contained in the financial statements.  Communications the entity has received, or expects to receive or obtain, from regulatory agencies. 

Matters arising in the course of applying other procedures. When performing further inquiries in relation to identified inconsistencies, the practitioner considers the reasonableness and consistency of management’s responses in light of the results obtained from other procedures, and the practitioner’s knowledge and understanding of the entity and the industry in which it operates.

A85. Evidence obtained through inquiry is often the principal source of evidence about management intent. However, information available to support management’s intent may be limited. In that case, understanding management’s past history of carrying out its stated intentions, management’s stated reasons for choosing a particular course of action, and management’s ability to pursue a specific course of action may provide relevant information to corroborate the evidence obtained through inquiry. Application of professional skepticism in evaluating responses provided by management is important to enable the practitioner to evaluate whether there are any matter(s) that would cause the practitioner to believe the financial statements may be materially misstated.

A86. Performing inquiry procedures assists the practitioner also in obtaining or updating the practitioner’s understanding of the entity and its environment, to be able to identify areas where material misstatements are likely to arise in the financial statements. Inquiry about the entity’s ability to continue as a going concern (Ref: Para. 48(f))

A87. Often in smaller entities, management may not have prepared an assessment of the entity’s ability to continue as a going concern, but instead may rely on knowledge of the business and anticipated future prospects. In these circumstances, it may be appropriate to discuss the medium and long-term prospects and financing of the entity with management, including consideration of whether management’s contentions are not inconsistent with the practitioner’s understanding of the entity.

Analytical Procedures (Ref: Para. 46-47, 49)

A88. In a review of financial statements, performing analytical procedures assists the practitioner in:  Obtaining or updating the practitioner’s understanding of the entity and its environment, including to be able to identify areas where material misstatements are likely to arise in the financial statements.  Identifying inconsistencies or variances from expected trends, values or norms in the financial statements such as the level of congruence of the financial statements with key data, including key performance indicators.  Providing corroborative evidence in relation to other inquiry or analytical procedures already performed.  Serving as additional procedures when the practitioner becomes aware of matter(s) that cause the practitioner to believe that the financial statements may be materially misstated. An example of such an additional procedure is a comparative analysis of monthly revenue and cost figures across profit

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118 centers, branches or other components of the entity, to provide evidence about financial information contained in line items or disclosures contained in the financial statements.

A89. Various methods may be used to perform analytical procedures. These methods range from performing simple comparisons to performing complex analysis using statistical techniques. The practitioner may, for example, apply analytical procedures to evaluate the financial information underlying the financial statements through analysis of plausible relationships among both financial and non-financial data, and assessment of results for consistency with expected values with a view to identifying relationships and individual items that appear unusual, or that vary from expected trends or values. The practitioner would compare recorded amounts, or ratios developed from recorded amounts, to expectations developed by the practitioner from information obtained from relevant sources. Examples of sources of information the practitioner often uses to develop expectations, depending on the engagement circumstances, include:  Financial information for comparable prior period(s), taking known changes into account. 

Information about expected operating and financial results, such as budgets or forecasts including extrapolations from interim or annual data.  Relationships among elements of financial information within the period.  Information regarding the industry in which the entity operates, such as gross margin information, or comparison of the entity’s ratio of sales to accounts receivable with industry averages or with other entities of comparable size in the same industry. 

Relationships of financial information with relevant non-financial information, such as payroll costs to number of employees.

A90. The practitioner’s consideration of whether data to be used for analytical procedures are satisfactory for the intended purpose(s) of those procedures is based on the practitioner’s understanding of the entity and its environment, and is influenced by the nature and source of the data, and by the circumstances in which the data are obtained. The following considerations may be relevant:  Source of the information available. For example, information may be more reliable when it is obtained from independent sources outside the entity;  Comparability of the information available. For example, broad industry data may need to be supplemented or be adjusted to be comparable to data of an entity that produces and sells specialized products;  Nature and relevance of the information available; for example, whether the entity’s budgets are established as results to be expected rather than as goals to be achieved; and  The knowledge and expertise involved in the preparation of the information, and related controls that are designed to ensure its completeness, accuracy and validity.  Such controls may include, for example, controls over the preparation, review and maintenance of budgetary information.

Procedures to Address Specific Circumstances

Fraud and non-compliance with laws or regulations (Ref: Para. 52(d))

A91. Under this SRE, if the practitioner has identified or suspects fraud or illegal acts, the practitioner is required to determine whether there is a responsibility to report the occurrence or suspicion to a party outside the entity. Although the practitioner’s professional duty to maintain the confidentiality of client information may preclude such reporting, the practitioner’s legal responsibilities may override the duty of confidentiality in some circumstances. Events or conditions that may cast doubt regarding use of the going concern assumption in the financial statements (Ref: Para. 54)

A92. The list of factors below gives examples of events or conditions that, individually or collectively, may cast significant doubt about the going concern assumption. The list is not all inclusive, and the existence of one or more of the items does not always signify that uncertainty exists about whether the entity can continue as a going concern.

Financial

 Net liability or net current liability position.  Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment, or excessive reliance on short-term borrowings to finance long-term assets.  Indications of withdrawal of financial support by creditors. 

Negative operating cash flows indicated by historical or prospective financial statements.  Adverse key financial ratios.  Substantial operating losses or significant deterioration in the value of assets used to generate cash flows.  Arrears or discontinuance of dividends.  Inability to pay creditors on due dates.

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120  Inability to comply with the terms of loan agreements.  Change from credit to cash-on-delivery transactions with suppliers.  Inability to obtain financing for essential new product development or other essential investments.

Operating

 Management intentions to liquidate the entity or to cease operations.  Loss of key management without replacement.  Loss of a major market, key customer(s), franchise, license, or principal supplier(s).  Labor difficulties.  Shortages of important supplies.  Emergence of a highly successful competitor.

Other

 Non-compliance with capital or other statutory requirements.  Pending legal or regulatory proceedings against the entity that may, if successful, result in claims that the entity is unlikely to be able to satisfy.  Changes in law or regulation or government policy expected to adversely affect the entity.  Uninsured or underinsured catastrophes when they occur. The significance of such events or conditions often can be mitigated by other factors. For example, the effect of an entity being unable to make its normal debt repayments may be counter-balanced by management’s plans to maintain adequate cash flows by alternative means, such as by disposing of assets, rescheduling loan repayments, or obtaining additional capital. Similarly, the loss of a principal supplier may be mitigated by the availability of a suitable alternative source of supply.

Reconciling the Financial Statements to the Underlying Accounting

Records (Ref: Para. 56)

A93. The practitioner ordinarily obtains evidence that the financial statements agree with, or reconcile to, the underlying accounting records by tracing the financial statement amounts and balances to the relevant accounting records such as the general ledger, or to a summary record or schedule that reflects the agreement or reconciliation of the financial statement amounts with the underlying accounting records (such as a trial balance).

Performing Additional Procedures (Ref: Para. 57)

A94. Additional procedures are required under this SRE if the practitioner becomes aware of a matter that causes the practitioner to believe the financial statements may be materially misstated.

A95. The practitioner’s response in undertaking additional procedures with respect to an item the practitioner has cause to believe may be materially misstated in the financial statements will vary, depending on the circumstances, and is a matter for the practitioner’s professional judgment.

A96. The practitioner’s judgment about the nature, timing and extent of additional procedures that are needed to obtain evidence to either conclude that a material misstatement is not likely, or determine that a material misstatement exists, is guided by:  Information obtained from the practitioner’s evaluation of the results of the procedures already performed;  The practitioner’s updated understanding of the entity and its environment obtained throughout the course of the engagement; and 

The practitioner’s view on the persuasiveness of evidence needed to address the matter that causes the practitioner to believe that the financial statements may be materially misstated.

A97. Additional procedures focus on obtaining sufficient appropriate evidence to enable the practitioner to form a conclusion on matters that the practitioner believes may cause the financial statements to be materially misstated. The procedures may be:  Additional inquiry or analytical procedures, for example, being performed in greater detail or being focused on the affected items (i.e. amounts or disclosures concerning the affected accounts or transactions as reflected in the financial statements); or  Other types of procedures, for example, substantive test of details or external confirmations.

A98. The following example illustrates the practitioner’s evaluation of the need to perform additional procedures, and the practitioner’s response when the practitioner believes additional procedures are necessary.  In the course of performing the inquiry and analytical procedures for the review, the practitioner’s analysis of accounts receivable shows a material amount of past due accounts receivable, for which there is no allowance for bad or doubtful debts.

Handbook on Auditing Pronouncements-I.B

SRE 2400(Revised)

122  This causes the practitioner to believe that the accounts receivable balance in the financial statements may be materially misstated. The practitioner then inquires of management whether there are uncollectible accounts receivable that would need to be shown as being impaired.  Depending on management’s response, the practitioner’s evaluation of the response may:

SRE are therefore used).

Our review will be conducted on the basis that [management and, where appropriate, those charged with governance]17 acknowledge and understand that they have the responsibility: