Unit
- Definition: A review engagement is a limited assurance engagement where the practitioner performs analytical procedures and inquiries to provide a basis for obtaining limited assurance that no material modifications are needed for the financial statements to be in accordance with the applicable financial reporting framework. Unlike an audit, it does not involve testing internal controls or substantive procedures.
- Objective: The objective is to express a conclusion on whether the practitioner is aware of any material modifications that should be made to the financial statements. This conclusion is communicated in a written report that states the review was performed in accordance with relevant standards.
- Standards: In the United States, review engagements are governed by SSARS No. 21, as amended, issued by the AICPA. Internationally, ISRE 2400 provides guidance for review engagements. Practitioners must comply with these standards to ensure consistency and quality.
- Scope limitation: The procedures are substantially less in scope than an audit. The practitioner relies heavily on management representations and analytical procedures. This makes the review more efficient but offers a lower level of assurance than an audit.
- Users: Review reports are often used by lenders, investors, and other stakeholders who need some assurance but do not require the full cost of an audit. Small and medium-sized entities frequently opt for review engagements to satisfy external reporting requirements.
- Level of assurance: A review provides limited assurance, expressed in negative form (e.g., 'I am not aware of any material modifications'). This contrasts with the positive assurance given in an audit opinion. Understanding this distinction is crucial for both preparers and users.
- Engagement letter: The practitioner must obtain an engagement letter signed by management that documents the scope, responsibilities, and limitations of the review. This letter serves as a contract and clarifies the terms of the engagement.
- Independence: The practitioner must be independent of the client, as required by the AICPA Code of Professional Conduct. If independence is impaired, the practitioner cannot perform a review engagement.
- Documentation requirements: The practitioner must prepare documentation that demonstrates compliance with SSARS No. 21, including the nature, timing, and extent of procedures performed, the evidence obtained, and the conclusions reached. This documentation serves as the basis for the review report and supports the limited assurance conclusion. It should be sufficient to enable an experienced reviewer to understand the work performed.
- Materiality: The practitioner considers materiality in planning and performing the review, using professional judgment to determine the nature and extent of analytical procedures and inquiries. Materiality is based on the needs of users of the financial statements and is applied in evaluating whether any modifications are needed to achieve fair presentation.
- Limitations: A review engagement does not provide assurance that the practitioner will detect all material misstatements, as procedures are limited to inquiries and analytical procedures. This limitation is communicated in the review report, which explicitly states that the review does not provide absolute assurance and that the procedures are less in scope than an audit.
Regulatory Requirement
Regulation: AICPA SSARS No. 21
SSARS No. 21 establishes the performance and reporting requirements for review engagements in the United States. It requires the practitioner to obtain an understanding of the entity's accounting principles and practices, perform analytical procedures, and make inquiries of management. The standard also specifies the content of the review report, including the need for a separate paragraph describing the nature of the review and the level of assurance provided.
Quick Revision
- A review engagement provides limited assurance through analytical procedures and inquiries, not substantive testing.
- The objective is to conclude whether the practitioner is aware of any material modifications needed for the financial statements.
- SSARS No. 21 and ISRE 2400 are the primary standards governing review engagements.
- The review report expresses assurance in negative form, offering a lower cost alternative to an audit.