Standard 2400: Engagements to Review Historical Financial Statements

Standard 2400: Engagements to Review Historical Financial Statements · Complied AI

(d)

The engagement being performed in accordance with the firm’s quality control policies, including the following:

(i)

Being satisfied that appropriate procedures regarding the acceptance and continuance of client relationships and engagements have been followed, and that conclusions reached are appropriate, including considering whether there is information that would lead the engagement partner to conclude that management lacks integrity; (Ref: Para. A31-A32)

(ii)

Being satisfied that the engagement team collectively has the appropriate competence and capabilities, including assurance skills and techniques and expertise in financial reporting, to:

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76 a.

Perform the review engagement in accordance with professional

standards and applicable legal and regulatory requirements; and b. Enable a report that is appropriate in the circumstances to be issued; and

(iii)

Taking responsibility for appropriate engagement documentation being maintained.

Relevant Considerations after Engagement Acceptance

26. If the engagement partner obtains information that would have caused the firm to decline the engagement had that information been available earlier, the engagement partner shall communicate that information promptly to the firm, so that the firm and the engagement partner can take the necessary action.

Compliance with Relevant Ethical Requirements

27. Throughout the engagement, the engagement partner shall remain alert, through observation and making inquiries as necessary, for evidence of non- compliance with relevant ethical requirements by members of the engagement team. If matters come to the engagement partner’s attention through the firm’s system of quality control or otherwise that indicate that members of the engagement team have not complied with relevant ethical requirements, the engagement partner, in consultation with others in the firm, shall determine the appropriate action.

Monitoring

28. An effective system of quality control for a firm includes a monitoring process designed to provide the firm with reasonable assurance that the firm’s policies and procedures relating to the system of quality control are relevant, adequate and operate effectively. The engagement partner shall consider the results of the firm’s monitoring process as evidenced in the latest information circulated by the firm and, if applicable, other network firms and whether deficiencies noted in that information may affect the review engagement.

Acceptance and Continuance of Client Relationships and Review

Engagements

Factors Affecting Acceptance and Continuance of Client Relationships and

Review Engagements

29. Unless required by law or regulation, the practitioner shall not accept a review engagement if: (Ref: Para. A33-A34)

(g)

Reference to the expected form and content of the report to be issued by the practitioner, and a statement that there may be circumstances in which the report may differ from its expected form and content.

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)

(m)

The place of signature.

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)

(b)

Who reviewed the work performed for the purpose of quality control for the engagement, and the date and extent of the review.

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:

(c)

Limitations imposed by management or those charged with governance of the entity.

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:

(e)

Professional behaviour. The Code of Ethics also illustrates how the conceptual framework is to be applied in specific situations. In complying with the Code, threats to the practitioner’s compliance with relevant ethical requirements are required to be identified and appropriately addressed.

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:

(d)

The engagement team’s ability to raise concerns without fear of reprisals.

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:

(c)

The engagement is intended to meet compliance requirements of relevant law or regulation and such law or regulation requires the financial statements to be audited.

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:

(b)

Other communications, in the context of having effective two-way communication to understand matters arising and to develop a constructive working relationship for the engagement.

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:

(b)

Requirements established under applicable law or regulation, including additional reporting requirements contained in applicable laws or regulations.

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.

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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:

(c)

Lead the practitioner to continue to believe that the accounts receivable balance is likely to be materially misstated, while not providing sufficient appropriate evidence for the practitioner to determine that they are in fact misstated. In that case, the practitioner is required to perform additional procedures, for example, requesting from management an analysis of amounts received for those accounts after the balance sheet date to identify uncollectible accounts receivable. The evaluation of the results of the additional procedures may enable the practitioner to get to (a) or (b) above. If not, the practitioner is required to:

(i)

Continue performing additional procedures until the practitioner reaches either (a) or (b) above; or

(ii)

If the practitioner is not able to either conclude that the matter is not likely to cause the financial statements as a whole to be materially misstated, or to determine that the matter does cause the financial statements as a whole to be materially misstated, then a scope limitation exists and the practitioner is not able to form an unmodified conclusion on the financial statements.

Written Representations (Ref: Para. 61-63)

A99. Written representations are an important source of evidence in a review engagement. If management modifies or does not provide the requested written representations, it may alert the practitioner to the possibility that one or more significant issues may exist. Further, a request for written, rather than oral, representations in many cases may prompt management to consider such matters more rigorously, thereby enhancing the quality of the representations.

A100. In addition to the written representations required under this SRE, the practitioner may consider it necessary to request other written representations about the financial statements. These may be needed, for example, to complete the practitioner’s evidence with respect to certain items or disclosures reflected in the financial statements where the practitioner considers such representations to be important in forming a conclusion on the financial statements on either a modified or unmodified basis.

A101. In some cases, management may include in the written representations qualifying language to the effect that representations are made to the best of management’s knowledge and belief. It is reasonable for the practitioner to accept such wording if the practitioner is satisfied that the representations are being made by those with appropriate responsibilities and knowledge of the matters included in the representations. Evaluating Evidence Obtained from the Procedures Performed (Ref:

Para. 66-68)

A102. In some circumstances, the practitioner may not have obtained the evidence that the practitioner had expected to obtain through the design of primarily inquiry and analytical procedures and procedures addressing specific circumstances. In these circumstances, the practitioner considers that the evidence obtained from the procedures performed is not sufficient and appropriate to be able to form a conclusion on the financial statements. The practitioner may: 

Extend the work performed; or

 Perform other procedures judged by the practitioner to be necessary in the circumstances. Where neither of these is practicable in the circumstances, the practitioner will not be able to obtain sufficient appropriate evidence to be able to form a conclusion and is required by this SRE to determine the effect on the practitioner’s report, or on the practitioner’s ability to complete the engagement, for example, if a member of management is unavailable at the time of the review to respond to the practitioner's inquiries on significant matters. This situation may arise even though the practitioner has not become aware of a matter(s) that causes the practitioner to believe the financial statements may be materially misstated, as addressed in paragraph 57.

Scope Limitations

A103. Inability to perform a specific procedure does not constitute a limitation on the scope of the review if the practitioner is able to obtain sufficient appropriate evidence by performing other procedures.

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124

A104. Limitations on the scope of the review imposed by management may have other implications for the review, such as for the practitioner’s consideration of areas where the financial statements are likely to be materially misstated, and engagement continuance.

Forming the Practitioner’s Conclusion on the Financial Statements

Description of the Applicable Financial Reporting Framework (Ref: Para. 69(a))

A105. The description of the applicable financial reporting framework in the financial statements is important because it advises users of the financial statements of the framework on which the financial statements are based. If the financial statements are special purpose financial statements, they may be prepared under a special purpose financial reporting framework that is available only to the engaging party and the practitioner. Description of the special purpose financial reporting framework used is important as the special purpose financial statements may not be appropriate for any use other than the intended use identified for the special purpose financial statements.

A106. A description of the applicable financial reporting framework that contains imprecise qualifying or limiting language (for example, “the financial statements are in substantial compliance with Accounting Standards issued by the ICAI or Accounting Standards notified by the Central Government under the Companies Act, 201312, or the Accounting Standards for Local Bodies issued by the ICAI, as may be applicable”) is not an adequate description of that framework as it may mislead users of the financial statements. Disclosure of Effects of Material Transactions and Events on Information

Conveyed in the Financial Statements (Ref: Para. 69(b)(vi), 71)

A107. The practitioner is required under this SRE to evaluate whether the financial statements provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the entity’s financial position, financial performance and cash flows.

A108. In the case of financial statements prepared in accordance with the requirements of a fair presentation framework, management may need to include additional disclosures in the financial statements beyond those specifically required by the applicable financial reporting framework or, in extremely rare circumstances, to depart from a requirement in the framework, in order to achieve the fair presentation of the financial statements. 12 Read with the General Circular No. 15/2013 dated 13th September 2013 issued by the Ministry of Corporate Affairs.

Considerations When a Compliance Framework is Used

A109. It will be extremely rare for the practitioner to consider financial statements prepared in accordance with a compliance framework to be misleading if, in accordance with this SRE, the practitioner has determined at the time of engagement acceptance that the framework is acceptable. Qualitative Aspects of the Entity’s Accounting Practices (Ref: Para. 70(b))

A110. In considering the qualitative aspects of the entity’s accounting practices, the practitioner may become aware of possible bias in management’s judgments. The practitioner may conclude that the cumulative effect of a lack of neutrality, together with the effect of apparent uncorrected misstatements, causes the financial statements as a whole to be materially misstated. Indicators of a lack of neutrality that may affect the practitioner’s evaluation of whether the financial statements as a whole may be materially misstated include the following: 

The selective correction of apparent misstatements brought to

management’s attention during the review (for example, correcting misstatements with the effect of increasing reported earnings, but not correcting misstatements that have the effect of decreasing reported earnings).  Possible management bias in the making of accounting estimates.

A111. Indicators of possible management bias do not necessarily mean there are misstatements for purposes of drawing conclusions on the reasonableness of individual accounting estimates. They may, however, affect the practitioner’s consideration of whether the financial statements as a whole may be materially misstated.

Form of the Conclusion (Ref: Para. 74)

Description of the Information the Financial Statements Present

A112. In the case of financial statements prepared in accordance with a fair presentation framework, the practitioner’s conclusion states that nothing has come to the practitioner’s attention that causes the practitioner to believe that the financial statements do not give a true and fair view of … (or do not present fairly, in all material respects, …) in accordance with [the applicable fair presentation framework]. In the case of many general purpose frameworks, for example, the financial statements are required to give a true and fair view of (or fairly present) the financial position of the entity as at the end of a period, and the entity’s financial performance and cash flows for that period.

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126 “Gives a true and fair view” or “present fairly, in all material respects”

A113. Whether the phrase “gives a true and fair view” or the phrase “present fairly, in all material respects,” is used in any particular entity is determined by the law or regulation governing the review of financial statements of that entity, or by generally accepted practice in that regard. Where the relevant law or regulation requires the use of different wording, this does not affect the requirement in this SREs for the practitioner to evaluate the fair presentation of financial statements prepared in accordance with a fair presentation framework.

Inability to Form a Conclusion Due to a Management-Imposed Limitation

on the Scope of the Review after Engagement Acceptance (Ref: Para. 15, 82)

A114. The practicality of withdrawing from the engagement may depend on the stage of completion of the engagement at the time that management imposes the scope limitation. If the practitioner has substantially completed the review, the practitioner may decide to complete the review to the extent possible, disclaim a conclusion and explain the scope limitation in the paragraph in the report that describes the basis for disclaiming a conclusion.

A115. In certain circumstances, withdrawal from the engagement may not be possible if the practitioner is required by law or regulation to continue the engagement. For example, this may be the case for a practitioner appointed to review the financial statements of a public sector entity. It may also be the case in entities where the practitioner is appointed to review the financial statements covering a specific period, or appointed for a specific period, and is prohibited from withdrawing before the completion of the review of those financial statements or before the end of that period, respectively. The practitioner may also consider it necessary to include an Other Matter paragraph in the practitioner’s report to explain why it is not possible for the practitioner to withdraw from the engagement.

Communication with Regulators or the Entity’s Owners

A116. When the practitioner concludes that withdrawal from the engagement is necessary because of a scope limitation, there may be a professional, legal or regulatory requirement for the practitioner to communicate matters relating to the withdrawal from the engagement to regulators or the entity’s owners.

The Practitioner’s Report (Ref: Para. 86-92)

A117. The written report encompasses reports issued in hard copy format and those using an electronic medium.

Elements of the Practitioner’s Report (Ref: Para. 86)

A118. A title indicating the report is the report of an independent practitioner, for example, “Independent Practitioner’s Review Report,” affirms that the practitioner has met all of the relevant ethical requirements regarding independence and, therefore, distinguishes the independent practitioner’s report from reports issued by others.

A119. Law or regulation applicable to the entity may specify to whom the practitioner’s report is to be addressed. The practitioner’s report is normally addressed to those for whom the report is prepared, often either to the shareholders or to those charged with governance of the entity whose financial statements are being reviewed.

A120. When the practitioner is aware that the financial statements that have been reviewed will be included in a document that contains other information, such as a financial report, the practitioner may consider, if the form of presentation allows, identifying the page numbers on which the financial statements that have been reviewed are presented. This helps users to identify the financial statements to which the practitioner’s report relates. Management’s Responsibility for the Financial Statements (Ref: Para. 86(d))

A121. The requirement of this SRE that the practitioner must obtain management’s agreement that it acknowledges and understands its responsibilities, both in relation to the preparation of the financial statements and in relation to the review engagement, is fundamental to performing the review and reporting on the engagement. The description of management’s responsibilities in the practitioner’s report provides context for readers of the practitioner’s report about management’s responsibilities, as they relate to the review engagement performed.

A122. The practitioner’s report need not refer specifically to “management” but instead may use the term that is appropriate in the context of the legal framework applicable to the entity. In some entities, the appropriate reference is to those charged with governance of the entity.

A123. There may be circumstances when it is appropriate for the practitioner to add to the description of management’s responsibilities as described in this SRE to reflect additional responsibilities that are relevant to the preparation of the financial statements in the context of law or regulation applicable to the entity, or due to the type of entity.

A124. In some entities, law or regulation prescribing management’s responsibilities may specifically refer to a responsibility for the adequacy of the accounting books and records, or accounting system. As books, records and

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128 systems are an integral part of internal control, this SRE does not use these descriptions or make any specific reference to them.

The Practitioner’s Responsibility (Ref: Para. 86(f))

A125. The practitioner’s report states that the practitioner’s responsibility is to express a conclusion on the financial statements based on the review performed, in order to contrast the practitioner’s responsibility with management’s responsibility for preparation of the financial statements.

Reference to standards (Ref: Para. 86(f))

A126. The reference to the standards used by the practitioner for the review conveys to the users of the practitioner’s report that the review has been conducted in accordance with established standards. Communication of the Nature of a Review of Financial Statements (Ref: Para. 86(g))

A127. The description of the nature of a review engagement in the practitioner’s report explains the scope and limitations of the engagement undertaken for the benefit of the readers of the report. This explanation clarifies, for avoidance of doubt, that the review is not an audit and that accordingly, the practitioner does not express an audit opinion on the financial statements. Description of the Applicable Financial Reporting Framework and How it May

Affect the Practitioner’s Conclusion (Ref: Para. 86(h)(ii))

A128. The identification of the applicable financial reporting framework in the practitioner’s conclusion is intended to advise users of the practitioner’s report of the context in which that conclusion is expressed. It is not intended to limit the evaluation required in paragraph 30(a). The applicable financial reporting framework is identified in such terms as: “… in accordance with the Financial Reporting Standards13 or “… in accordance with accounting principles generally accepted in India …”

A129. When the applicable financial reporting framework encompasses financial reporting standards and legal or regulatory requirements, the framework is identified in terms such as “… in accordance with the Financial Reporting

Standards and the requirements of the applicable Act ….”

13 Accounting Standards issued by the ICAI or Accounting Standards notified by the Central Government under the Companies Act, 2013 or Accounting Standards for Local Bodies issued by the ICAI, as may be applicable. Basis for Modification Paragraph When the Conclusion is Modified (Ref: Para. 86(i)(ii))

A130. An adverse conclusion or a disclaimer of conclusion relating to a specific matter described in the basis for modification paragraph does not justify the omission of a description of other identified matters that would have otherwise required a modification of the practitioner’s conclusion. In such cases, the disclosure of such other matters of which the practitioner is aware may be relevant to users of the financial statements.

Signature of the Practitioner (Ref: Para. 86(l))

A131. The report is signed by the practitioner who is the partner/ proprietor in his personal name. Where the firm is appointed as the reviewer, the report is signed in the personal name of the partner/ proprietor and in the name of the firm. The partner/proprietor signing the review report also needs to mention the membership number assigned by the Institute of Chartered Accountants of India. They also include the registration number of the firm, wherever applicable, as allotted by ICAI, in the review reports signed by them14. Alerting Readers that the Financial Statements are Prepared in Accordance with a Special Purpose Framework (Ref: Para. 88)

A132. The special purpose financial statements may be used for purposes other than those for which they were intended. For example, a regulator may require certain entities to place the special purpose financial statements on public record. For avoidance of misunderstanding, it is important that the practitioner alert users of the practitioner’s report that the financial statements are prepared in accordance with a special purpose framework and, therefore, may not be suitable for another purpose.

Restriction on Distribution or Use

A133. In addition to the alert to the reader of the practitioner’s report that is required by this SRE when the financial statements are prepared using a special 14 The Council of the ICAI, at its 292nd meeting held in January 2010, decided to require the members of the ICAI to include, in addition to the other requirements relating to signature on the audit report, as prescribed under the relevant Standard on Auditing, the registration number of the firm as allotted by ICAI, in the audit reports signed by them, and ensure that the resolution passed by the company regarding appointment of the statutory auditor of the company under section 224 of the Companies Act, 1956, also contain the registration number of the firm of the auditor(s) with the ICAI. These requirements came into effect from April 1, 2010. Subsequently, the Council of the ICAI, at its 296th meeting held in June 2010, decided to extend the requirement to mention the firm registration number to all reports issued pursuant to any attestation engagement, including certificates, issued by the members as proprietor of/ partner in the said firm. The requirement applies where such firm registration number has been allotted by the ICAI. The Council further decided to make this requirement effective for all attestation reports/ certificates issued on or after 1st October, 2010.

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130 purpose framework, the practitioner may consider it appropriate to indicate that the practitioner’s report is intended solely for the specific users. Depending on the law or regulation applicable to the entity, this may be achieved by restricting the distribution or use of the practitioner’s report. In these circumstances, the paragraph containing the alert about the use of a special purpose framework may be expanded to include these other matters, and the heading modified accordingly.

Other Reporting Responsibilities (Ref: Para. 91)

A134. In some cases, the practitioner may have additional responsibilities under the relevant law or regulation to report on other matters that are supplementary to the practitioner’s responsibility under this SRE. For example, the practitioner may be asked to report certain matters if they come to the practitioner’s attention during the course of the review of the financial statements. Alternatively, the practitioner may be asked to perform and report on additional specified procedures, or to express a conclusion on specific matters, such as the adequacy of accounting books and records. Such law or regulation may provide guidance on the practitioner’s responsibilities with respect to specific additional reporting responsibilities.

A135. In some cases, the relevant law or regulation may require or permit the practitioner to report on these other responsibilities within the practitioner’s report on the financial statements. In other cases, the practitioner may be required or permitted to report on them in a separate report.

A136. These other reporting responsibilities are addressed in a separate section of the practitioner’s report, to clearly distinguish them from the practitioner’s responsibility under this SRE to report on the financial statements. Where relevant, this section may contain sub-heading(s) that describe(s) the content of the other reporting responsibility paragraph(s). In some cases, the additional reporting responsibilities may be addressed in a report that is separate from the practitioner’s report provided for the review of the financial statements.

Date of the Practitioner’s Report (Ref: Para. 86(k), 92)

A137. The date of the practitioner’s report informs the user of the practitioner’s report that the practitioner has considered the effect of events and transactions of which the practitioner became aware and that occurred up to that date.

A138. The practitioner’s conclusion is provided on the financial statements and the financial statements are the responsibility of management. The practitioner is not in a position to conclude that sufficient appropriate evidence has been obtained until the practitioner is satisfied that all the statements that comprise the financial statements, including the related notes, have been prepared and management has accepted responsibility for them.

A139. In some entities, law or regulation identifies the individuals or bodies (for example, the directors) that are responsible for concluding that all the statements that comprise the financial statements, including the related notes, have been prepared, and specifies the necessary approval process. In such cases, evidence is obtained of that approval before dating the report on the financial statements. In some entities, however, the approval process is not prescribed in law or regulation. In such cases, the procedures the entity follows in preparing and finalizing its financial statements in view of its management and governance structures are considered in order to identify the individuals or body with the authority to conclude that all the statements that comprise the financial statements, including the related notes, have been prepared. In some cases, law or regulation may identify the point in the financial statement reporting process at which the review is expected to be complete.

A140. In some entities, final approval of the financial statements by shareholders is required before the financial statements are issued publicly. In these entities, final approval by shareholders is not necessary for the practitioner to conclude on the financial statements. The date of approval of the financial statements for purposes of this SRE is the earlier date on which those with the recognized authority determine that all the statements that comprise the financial statements, including the related notes, have been prepared and that those with the recognized authority have asserted that they have taken responsibility for them. Practitioner’s Report Prescribed by Law or Regulation (Ref: Para. 34-35, 86)

A141. Consistency in the practitioner’s report, when the review has been conducted in accordance with this SRE, promotes credibility in the global marketplace by making more readily identifiable those reviews of financial statements that have been conducted in accordance with globally recognized standards. The practitioner’s report may refer to this SRE when the differences between the legal or regulatory requirements and this SRE relate only to the layout or wording of the practitioner’s report and, at a minimum, the report complies with the requirements of paragraph 86 of this SRE. Accordingly, in such circumstances the practitioner is considered to have complied with the requirements of this SRE, even when the layout and wording used in the practitioner’s report are specified by legal or regulatory reporting requirements. Where specific requirements applicable to the entity do not conflict with this SRE,

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132 adoption of the layout and wording used in this SRE assists users of the practitioner’s report to more readily recognize the practitioner’s report as a report on a review of financial statements conducted in accordance with this SRE. Circumstances where law or regulation prescribes the layout or wording of the practitioner’s report in terms that are significantly different from the requirements of this SRE are addressed in the requirements of this SRE concerning acceptance of review engagements and continuance of client relationships.

Practitioner’s Report for Reviews Conducted in Accordance with Both

Relevant Legal or Regulatory Requirements and this SRE (Ref: Para. 86(f))

A142. When, in addition to complying with the requirements of this SRE, the practitioner also complies with other specific relevant legal or regulatory requirements, governing the review engagement, the report may refer to the review having been performed in accordance with both this SRE and such legal or regulatory requirements for engagements to review financial statements. However, a reference to both this SRE and such legal or regulatory requirements is not appropriate if there is a conflict between the requirements of this SRE and those legal or regulatory requirements that would lead the practitioner to form a different conclusion or not to include an Emphasis of Matter paragraph that, in the particular circumstances, would be required by this SRE. In such a case, the practitioner’s report refers only to the relevant standards (either this SRE or the relevant legal or regulatory requirements) in accordance with which the practitioner’s report has been prepared.

Illustrative Review Reports (Ref: Para. 86)

A143. Appendix 2 to this SRE contains illustrations of practitioners’ reports for a review of financial statements incorporating the reporting requirements of this SRE.

Documentation

Timeliness of Engagement Documentation (Ref: Para. 93)

A144. SQC 1 requires the firm to establish time limits that reflect the need to complete the assembly of final engagement files on a timely basis.

Material

Modifications

vis-a-vis

ISRE

2400 (Revised), “Engagements to Review Historical Financial Statements” There are no material modifications in SRE 2400 (Revised) vis-à-vis ISRE 2400 (Revised), “Engagements to Review Historical Financial Statements”

Appendix 1

(Ref: Para. A55)

Illustrative Engagement Letter for an Engagement to

Review Historical Financial Statements

The following is an example of an engagement letter for a review of general purpose financial statements (prepared in accordance with the applicable fair presentation Financial Reporting Framework), which illustrates the relevant requirements and guidance contained in this SRE. This letter is not authoritative but is intended only to be a guide that may be used in conjunction with the considerations outlined in this SRE. It will need to be varied according to individual requirements and circumstances. It is drafted to refer to the review of financial statements for a single reporting period and would require adaptation if intended or expected to apply to recurring reviews. It may be appropriate to seek legal advice that any proposed letter is suitable.

To the appropriate representative of management or those charged with

governance of ABC Company:15 [The objective and scope of the review] You16 have requested that we review the general purpose financial statements of ABC Company, which comprise the Balance Sheet as at March 31, 20XX, and the Statement of Profit and Loss and Cash Flow Statement for the year then ended, and a summary of significant accounting policies and other explanatory information. We are pleased to confirm our acceptance and our understanding of this review engagement by means of this letter. Our review will be conducted with the objective of expressing our conclusion on the financial statements. Our conclusion, if unmodified, will be in the form “Based on our review, nothing has come to our attention that causes us to believe that these financial statements do not give a true and fair view of (or do not present fairly, in all material respects,) the financial position of the company as at [date] and of its financial performance and cash flows for the year then ended in accordance with [indicate the applicable financial reporting framework].” [The practitioner’s responsibilities] 15 The addressees and references in the letter would be those that are appropriate in the circumstances of the engagement. It is important to refer to the appropriate persons ― see paragraph 36 of this SRE. 16 Throughout this letter, references to “you,” “we,” “us,” “management,” “those charged with governance” and “practitioner” would be used or amended as appropriate in the circumstances.

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134 We will conduct our review in accordance with Standard on Review

Engagements (SRE) 2400 (Revised), Engagements to Review Historical

Financial Statements. SRE 2400 (Revised) requires us to conclude whether anything has come to our attention that causes us to believe that the financial statements, taken as a whole, are not prepared in all material respects in accordance with the applicable financial reporting framework. SRE 2400 also requires us to comply with relevant ethical requirements. A review of financial statements in accordance with SRE 2400(Revised) is a limited assurance engagement. We will perform procedures, primarily consisting of making inquiries of management and others within the entity, as appropriate, and applying analytical procedures, and evaluate the evidence obtained. We will also perform additional procedures if we become aware of matters that cause us to believe the financial statements as a whole may be materially misstated. These procedures are performed to enable us to express our conclusion on the financial statements in accordance with SRE 2400(Revised). The procedures selected will depend on what we consider necessary applying our professional judgment, based on our understanding of ABC Company and its environment, and our understanding of the applicable financial reporting framework and its application in the industry context. A review is not an audit of the financial statements, therefore:

(c)

To provide us with:

(i)

Access to all information of which management is aware that is relevant to the preparation and fair presentation of the financial statements, such as records, documentation and other matters;

(ii)

Additional information that we may request from management for the

purpose of the review; and

(iii)

Unrestricted access to persons within ABC Company from whom we determine it necessary to obtain evidence. As part of our review, we will request from [management and, where appropriate, those charged with governance], written confirmation concerning representations made to us in connection with the review. We look forward to full cooperation from your staff during our review. [Other relevant information] [Insert other information, such as fee arrangements, billings and other specific terms, as appropriate.] [Reporting] [Insert appropriate reference to the expected form and content of the practitioner’s report.] The form and content of our report may need to be amended in the light of our findings obtained from the review. Please sign and return the attached copy of this letter to indicate your acknowledgement of, and agreement with, the arrangements for our review of the financial statements including our respective responsibilities. For XYZ and Co.,

Chartered Accountants

Firm’s Registration Number

18 Or, if appropriate, “For preparation and fair presentation of the financial statements in accordance with [indicate the applicable financial reporting framework]”

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136

Signature

(Name of Member signing the Review Report) (Designation19)

Membership Number

Place of Signature

Date

Acknowledged on behalf of ABC Company by

(Signature)

Name and Designation

Date

19 Partner or proprietor, as the case may be.

Appendix 2

(Ref: Para. A143)

Illustrative Practitioners’ Review Reports

Review Reports on General Purpose Financial Statements

Illustrative Review Reports with Unmodified Conclusions

Illustration 1: A practitioner’s report on financial statements prepared in accordance with a fair presentation framework designed to meet the common financial information needs of a wide range of users (for example, Accounting Standards referred to in the Companies Act, 2013).

Illustrative Review Reports with Modified Conclusions

Illustration 2: A practitioner’s report containing a qualified conclusion due to an apparent material misstatement of the financial statements. Financial statements prepared in accordance with a compliance framework designed to meet the common information needs of a wide range of users. (Financial statements prepared using a compliance framework) Illustration 3: A practitioner’s report containing a qualified conclusion due to the practitioner’s inability to obtain sufficient appropriate evidence. (Financial statements prepared using a fair presentation framework) Illustration 4:

A practitioner’s report containing an adverse conclusion due to

material misstatement of the financial statements. (Financial statements prepared using a fair presentation framework) Illustration 5: A practitioner’s report containing a disclaimer of conclusion due to the practitioner’s inability to obtain sufficient appropriate evidence about multiple elements of the financial statements resulting in inability to complete the review. (Financial statements prepared using a fair presentation framework)

Review Reports on Special Purpose Financial Statements

Illustration 6: A practitioner’s report on financial statements prepared in accordance with the financial reporting provisions of a contract (for purposes of this illustration, a compliance framework). Illustration 7: A practitioner’s report on a single financial statement prepared in accordance with the cash receipts and disbursements basis of accounting (for purposes of this illustration, a fair presentation framework).

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138

Illustration 1

Circumstances include the following:  Review of a complete set of financial statements. 

The financial statements are prepared for a general purpose by

management of the entity under the Companies Act, 2013 financial reporting framework, designed to achieve fair presentation 

The terms of the review engagement reflect the description of

management’s responsibility for the financial statements in paragraph 30(b) of this SRE.  In addition to the review of the financial statements, the practitioner has other reporting responsibilities under the law.

INDEPENDENT PRACTITIONER’S REVIEW REPORT

[Appropriate Addressee]

Report on the Financial Statements20

We have reviewed the accompanying financial statements of ABC Company, which comprise the Balance Sheet as at March 31, 20XX, and the Statement of Profit and Loss and Cash Flow Statement for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management’s21 Responsibility for the Financial Statements

Practitioner’s Responsibility

Our responsibility is to express a conclusion on the accompanying financial 20 The sub-title “Report on the Financial Statements” is unnecessary in circumstances when the second sub-title “Report on Other Legal and Regulatory Requirements” is not applicable. 21 Or other term that is appropriate in the context of the legal framework applicable to the particular entity. 22 Where management is responsible for the preparation and fair presentation of financial statements, this may read: “Management is responsible for the preparation and fair presentation of these financial statements in accordance with the Accounting Standards referred to in the Companies Act, 2013 (the Act) and other accounting principles generally accepted in India, and for such …” statements. We conducted our review in accordance with Standard on Review

Engagements (SRE) 2400 (Revised), Engagements to Review Historical

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that these financial statements do not give a true and fair view of (or present fairly, in all material respects,) the financial position of ABC Company as at March 31, 20XX, and of its financial performance and cash flows for the year then ended, in accordance with the Accounting Standards referred to in the Companies Act, 2013 and other accounting principles generally accepted in India.

Report on Other Legal and Regulatory Requirements

[Form and content of this section of the practitioner’s report will vary depending on the nature of the practitioner’s other reporting responsibilities.] For XYZ and Co.,

Chartered Accountants

Firm’s Registration Number

Signature

(Name of Member signing the Review Report) (Designation23)

Membership Number

Place of Signature

Date

23 Partner or proprietor, as the case may be.

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140

Illustration 2

Circumstances include the following:  Review of a complete set of financial statements required by law or regulation. 

The financial statements are prepared for a general purpose by

management of the entity in accordance with the Financial Reporting Framework (DEF Law) (that is, a financial reporting framework, encompassing law or regulation, designed to meet the common financial information needs of a wide range of users, but which is not a fair presentation framework). 

The terms of the review engagement reflect the description of

management’s responsibility for the financial statements in paragraph 30(b) of this SRE. 

Based on the review, inventories are misstated. The misstatement is

material but not pervasive to the financial statements.  In addition to the review of the financial statements, the practitioner has other reporting responsibilities under the law.

INDEPENDENT PRACTITIONER’S REVIEW REPORT

[Appropriate Addressee]

Report on the Financial Statements24

Management’s25 Responsibility for the Financial Statements

Management is responsible for the preparation of these financial statements in accordance with DEF Law, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. 24 The sub-title “Report on the Financial Statements” is unnecessary in circumstances when the second sub-title “Report on Other Legal and Regulatory Requirements” is not applicable. 25 Or other term that is appropriate in the context of the legal framework applicable to the particular entity.

Practitioner’s Responsibility

Our responsibility is to express a conclusion on the accompanying financial statements. We conducted our review in accordance with Standard on Review

Engagements (SRE) 2400 (Revised), Engagements to Review Historical

Basis for Qualified Conclusion

The company’s inventories are carried in the Balance Sheet at Rs. XXX. Management has not stated the inventories at the lower of cost and net realizable value but has stated them solely at cost, which constitutes a departure from the requirements of the Financial Reporting Framework (DEF Law). The company’s records indicate that, had management stated the inventories at the lower of cost and net realizable value, an amount of Rs. XXX would have been required to write the inventories down to their net realizable value. Accordingly, cost of sales would have been increased by Rs. XXX, and income tax, net income and shareholders’ equity would have been reduced by Rs. XXX, XXX and XXX, respectively.

Qualified Conclusion

Based on our review, except for the effects of the matter described in the Basis for Qualified Conclusion paragraph, nothing has come to our attention that causes us to believe that the financial statements of ABC Company are not prepared, in all material respects, in accordance with the Financial Reporting Framework (DEF Law).

Report on Other Legal and Regulatory Requirements

[Form and content of this section of the practitioner’s report will vary depending on the nature of the practitioner’s other reporting responsibilities.]

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142 For XYZ and Co.,

Chartered Accountants

Firm’s Registration Number

Signature

(Name of Member signing the Review Report) (Designation26)

Membership Number

Place of Signature

Date

26 Partner or proprietor, as the case may be.

Illustration 3

Circumstances include the following:  Review of a complete set of general purpose financial statements prepared by management of the entity under the Companies Act, 2013 financial reporting framework, designed to achieve fair presentation. 

The terms of the review engagement reflect the description of

management’s responsibility for the financial statements in paragraph 30(b) of this SRE. 

The practitioner was unable to obtain sufficient appropriate evidence

regarding an investment in a foreign affiliate. The possible effects of the inability to obtain sufficient appropriate evidence are deemed to be material but not pervasive to the financial statements.  The practitioner does not have other reporting responsibilities under the law in addition to the review of the consolidated financial statements.

INDEPENDENT PRACTITIONER’S REVIEW REPORT

[Appropriate Addressee] We have reviewed the accompanying financial statements of ABC Company, which comprise the Balance Sheet as at March 31, 20XX, and the Statement of Profit and Loss and Cash Flow Statement for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management’s27 Responsibility for the Financial Statements

Management is responsible for the preparation of financial statements that give a true and fair view in accordance with the Accounting Standards referred to in the Companies Act, 2013 (the Act) and other accounting principles generally accepted in India,28 and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. 27 Or other term that is appropriate in the context of the legal framework applicable to the particular entity. 28 Where management is responsible for the preparation and fair presentation of financial statements, this may read: “Management is responsible for the preparation and fair presentation of these financial statements in accordance with the Accounting Standards referred to in Companies Act, 2013 (the Act) and other accounting principles generally accepted in India, and for such …”

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144

Practitioner’s Responsibility

Our responsibility is to express a conclusion on the accompanying financial statements. We conducted our review in accordance with Standard on Review

Engagements (SRE) 2400 (Revised), Engagements to Review Historical

Basis for Qualified Conclusion

ABC Company’s investment in DEF Company, a foreign associate acquired

during the year and accounted for by the equity method, is carried at Rs. XXX on the Balance Sheet as at March 31, 20XX, and ABC’s share of DEF ’s net income of Rs. XXX is included in ABC’s income for the year then ended. We were unable to obtain access to the relevant financial information of DEF concerning the carrying amount of ABC’s investment in DEF as at March 31, 20XX and ABC’s share of DEF’s net income for the year. Consequently, we were unable to perform the procedures we considered necessary.

Qualified Conclusion

Based on our review, except for the possible effects of the matter described in the Basis for Qualified Conclusion paragraph, nothing has come to our attention that causes us to believe that the accompanying financial statements do not give a true and fair view of (or do not present fairly, in all material respects ) the financial position of ABC Company as at March 31, 20XX, and of its financial performance and cash flows for the year then ended in accordance with the Accounting Standards referred to in Companies Act, 2013 and other accounting principles generally accepted in India. For XYZ and Co.,

Chartered Accountants

Firm’s Registration Number

Signature

(Name of Member signing the Review Report) (Designation29)

Membership Number

Place of Signature

Date

29 Partner or proprietor, as the case may be.

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146

Illustration 4

Circumstances include the following:  Review of consolidated general purpose financial statements prepared by management of the parent under the accounting principles generally accepted in India (as required for compliance with SEBI’s regulatory requirements), designed to achieve fair presentation . 

The terms of the review engagement reflect the description of

management’s responsibility for the financial statements in paragraph 30(b) of this SRE. 

The financial statements are materially misstated due to the non-

consolidation of a subsidiary. The material misstatement is deemed to be pervasive to the financial statements. The effects of the misstatement on the financial statements have not been determined because it was not practicable to do so.  The practitioner does not have other reporting responsibilities under the law in addition to the review of the consolidated financial statements.

INDEPENDENT PRACTITIONER’S REVIEW REPORT

[Appropriate Addressee] We have reviewed the accompanying consolidated financial statements of ABC Company, which comprise the consolidated Balance Sheet as at March 31, 20XX, and the consolidated Statement of Profit and Loss and Cash Flow Statement for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management’s30 Responsibility for the Financial Statements

Management is responsible for the preparation of these consolidated financial statements that give a true and fair view in accordance with the accounting principles generally accepted in India,31 and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. 30 Or other term that is appropriate in the context of the legal framework applicable to the particular entity. 31 Where management is responsible for the preparation and fair presentation of financial statements, this may read: “Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with the accounting principles generally accepted in India , and for such …”

Practitioner’s Responsibility

Our responsibility is to express a conclusion on the accompanying consolidated financial statements. We conducted our review in accordance with Standard on Review Engagements (SRE) 2400 (Revised), Engagements to Review Historical Financial Statements. SRE 2400 (Revised) requires us to conclude whether anything has come to our attention that causes us to believe that the consolidated financial statements, taken as a whole, are not prepared in all material respects in accordance with the applicable financial reporting framework. This Standard also requires us to comply with relevant ethical requirements. A review of consolidated financial statements in accordance with SRE 2400 (Revised) is a limited assurance engagement. The practitioner performs procedures, primarily consisting of making inquiries of management and others within the entity, as appropriate, and applying analytical procedures, and evaluates the evidence obtained. The procedures performed in a review are substantially less than those performed in an audit conducted in accordance with Standards on Auditing. Accordingly, we do not express an audit opinion on these consolidated financial statements.

Basis for Adverse Conclusion

As explained in Note X to the Financial Statements, the company has not consolidated the financial statements of subsidiary DEF Company it acquired during 20XX because the financial statements of this subsidiary company have not been prepared by its management. This investment is therefore accounted for on a cost basis. Under the accounting principles generally accepted in India, the subsidiary should have been consolidated because it is controlled by the company. Had DEF been consolidated, many elements in the accompanying financial statements would have been materially affected.

Adverse Conclusion

Based on our review, due to the significance of the matter discussed in the Basis for Adverse Conclusion paragraph, the consolidated financial statements do not give a true and fair view of (or do not present fairly) the financial position of ABC Company and its subsidiaries as at March 31, 20XX, and of their financial performance and cash flows for the year then ended in accordance with the accounting principles generally accepted in India. For XYZ and Co.,

Chartered Accountants

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148

Firm’s Registration Number

Signature

(Name of Member signing the Review Report) (Designation32)

Membership Number

Place of Signature

Date

32 Partner or proprietor, as the case may be.

Illustration 5

The terms of the review engagement reflect the description of

management’s responsibility for the financial statements in paragraph 30(b) of this SRE.  The practitioner was unable to form a conclusion on the financial statements, due to inability to obtain sufficient appropriate evidence about multiple elements of the financial statements, and the practitioner believes the effect is material and pervasive to the financial statements. Specifically, the practitioner was unable to obtain evidence about the entity’s physical inventory and accounts receivable.

INDEPENDENT PRACTITIONER’S REVIEW REPORT

[Appropriate Addressee] We were engaged to review the accompanying financial statements of ABC Company, which comprise the Balance Sheet as at March 31, 20XX, and the Statement of Profit and Loss and Cash Flow Statement for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management’s33 Responsibility for the Financial Statements

Practitioner’s Responsibility

Our responsibility is to express a conclusion on the accompanying financial 33 Or other term that is appropriate in the context of the legal framework applicable to the particular entity. 34 Where management is responsible for the preparation and fair presentation of financial statements, this may read: “Management is responsible for the preparation and fair presentation of these financial statements in accordance with the Accounting Standards referred to in the Companies Act, 2013 and other accounting principles generally accepted in India, and for such …”

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150 statements. Because of the matter(s) described in the Basis for Disclaimer of Conclusion paragraph, however, we were not able to obtain sufficient appropriate evidence as a basis for expressing a conclusion on the financial statements.

Basis for Disclaimer of Conclusion

Management did not conduct a count of physical inventory on hand at the end of the year. We were unable to perform the procedures we considered necessary concerning the inventory quantities held at March 31, 20XX, which are stated at Rs. XXX in the Balance Sheet at March 31, 20XX. In addition, the introduction of a new computerized accounts receivable system in January 20XX resulted in numerous errors in accounts receivable and inventory. As of the date of our report, management was still in the process of rectifying the system deficiencies and correcting the errors. As a result of these matters, we were unable to determine whether any adjustments might have been found necessary in respect of recorded or unrecorded inventories and accounts receivable, and the elements making up the Statement of Profit and Loss and Cash Flow Statement.

Disclaimer of Conclusion

Due to the significance of the matters described in the Basis for Disclaimer of Conclusion paragraph, we were unable to obtain sufficient appropriate evidence to form a conclusion on the accompanying financial statements. Accordingly, we do not express a conclusion on these financial statements. For XYZ and Co.,

Chartered Accountants

Firm’s Registration Number

Signature

(Name of Member signing the Review Report) (Designation35)

Membership Number

Place of Signature

Date

35 Partner or proprietor, as the case may be.

Illustration 6

Circumstances include the following:  The financial statements have been prepared by management of the entity in accordance with the financial reporting provisions of a contract (that is, a special purpose framework), to comply with the provisions of the contract. Management does not have a choice of financial reporting frameworks.  The applicable financial reporting framework is a compliance framework. 

The terms of the review engagement reflect the description of

management’s responsibility for the financial statements in paragraph 30(b) of this SRE.  Distribution or use of the practitioner’s report is restricted.

INDEPENDENT PRACTITIONER’S REVIEW REPORT

[Appropriate Addressee] We have reviewed the accompanying financial statements of ABC Company, which comprise the balance sheet as at March 31, 20XX, and the Statement of Profit and Loss and Cash Flow Statement for the year then ended, and a summary of significant accounting policies and other explanatory information. The financial statements have been prepared by management of ABC Company based on the financial reporting provisions of Section Z of the contract dated January 1, 20XX between ABC Company and DEF Company (“the contract”).

Management’s36 Responsibility for the Financial Statements

Management is responsible for the preparation of these financial statements in accordance with the financial reporting provisions of Section Z of the contract, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Practitioner’s Responsibility

Our responsibility is to express a conclusion on the accompanying financial statements. We conducted our review in accordance with Standard on Review

Engagements (SRE) 2400(Revised), Engagements to Review Historical

Financial Statements. SRE 2400 (Revised) requires us to conclude whether anything has come to our attention that causes us to believe that the financial statements, taken as a whole, are not prepared in all material respects in 36 Or other term that is appropriate in the context of the legal framework applicable to the particular entity.

Handbook on Auditing Pronouncements-I.B

SRE 2400(Revised)

152 accordance with the applicable financial reporting framework. This Standard also requires us to comply with relevant ethical requirements. A review of financial statements in accordance with SRE 2400(Revised) is a limited assurance engagement. The practitioner performs procedures, primarily consisting of making inquiries of management and others within the entity, as appropriate, and applying analytical procedures, and evaluates the evidence obtained. The procedures performed in a review are substantially less than those performed in an audit conducted in accordance with Standards on Auditing. Accordingly, we do not express an audit opinion on these financial statements.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that these financial statements are not prepared, in all material respects, in accordance with the financial reporting provisions of Section Z of the contract.

Basis of Accounting, and Restriction on Distribution and Use

Without modifying our conclusion, we draw attention to Note X to the financial statements, which describes the basis of accounting. The financial statements are prepared to assist ABC Company to comply with the financial reporting provisions of the contract referred to above. As a result, the financial statements may not be suitable for another purpose. Our report is intended solely for ABC Company and DEF Company and should not be distributed to or used by parties other than ABC Company or DEF Company. For XYZ and Co.,

Chartered Accountants

Firm’s Registration Number

Signature

(Name of Member signing the Review Report) (Designation37)

Membership Number

Place of Signature

Date

37 Partner or proprietor, as the case may be.

Illustration 7

Circumstances include the following:  Review of a statement of cash receipts and disbursements.  The financial statement has been prepared by management of the entity in accordance with the cash receipts and disbursements basis of accounting to respond to a request for cash flow information received from a creditor. The basis of accounting applied to prepare the financial statement has been agreed between the entity and the creditor.  The applicable financial reporting framework is a fair presentation framework designed to meet the financial information needs of specific users.  The practitioner has determined that it is appropriate to use the phrase “presents fairly, in all material respects,” in the practitioner’s conclusion. 

The terms of the review engagement reflect the description of

management’s responsibility for the financial statement in paragraph 30(b) of this SRE.  Distribution or use of the practitioner’s report is not restricted.

INDEPENDENT PRACTITIONER’S REVIEW REPORT

[Appropriate Addressee]

We have reviewed the accompanying statement of cash receipts and

disbursements of ABC Company for the year ended March 31, 20XX, and a summary of significant accounting policies and other explanatory information (together “the financial statement”). The financial statement has been prepared by management of ABC Company using the cash receipts and disbursements basis of accounting described in Note X to the financial statement.

Management’s38 Responsibility for the Financial Statement

Management is responsible for the preparation and fair presentation of this financial statement in accordance with the cash receipts and disbursements basis of accounting described in Note X, and for such internal control as management determines is necessary to enable the preparation of the financial statement that is free from material misstatement, whether due to fraud or error.

Practitioner’s Responsibility

Our responsibility is to express a conclusion on the accompanying financial statement. We conducted our review in accordance with Standard on Review 38 Or other term that is appropriate in the context of the legal framework applicable to the particular entity.

Handbook on Auditing Pronouncements-I.B

SRE 2400(Revised)

154

Engagements (SRE) 2400 (Revised), Engagements to Review Historical

Financial Statements. SRE 2400 (Revised) requires us to conclude whether anything has come to our attention that causes us to believe that the financial statement is not prepared in all material respects in accordance with the applicable financial reporting framework. This Standard also requires us to comply with relevant ethical requirements. A review of financial statements in accordance with SRE 2400 (Revised) is a limited assurance engagement. The practitioner performs procedures, primarily consisting of making inquiries of management and others within the entity, as appropriate, and applying analytical procedures, and evaluates the evidence obtained. The procedures performed in a review are substantially less than those performed in an audit conducted in accordance with Standards on Auditing. Accordingly, we do not express an audit opinion on this financial statement.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the financial statement does not present fairly, in all material respects, (or does not give a true and fair view of) the cash receipts and disbursements of ABC Company for the year ended March 31, 20XX in accordance with the cash receipts and disbursements basis of accounting described in Note X.

Basis of Accounting

Without modifying our conclusion, we draw attention to Note X to the financial statement, which describes the basis of accounting. The financial statement is prepared to provide information to DEF Creditor. As a result, the financial statement may not be suitable for another purpose. For XYZ and Co.,

Chartered Accountants

Firm’s Registration Number

Signature

(Name of Member signing the Review Report) (Designation39)

Membership Number

Place of Signature

Date

39 Partner or proprietor, as the case may be.