Guide E-Book

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: AICPA
• Sprache: Englisch

Seitenzahl: 528

Veröffentlichungsjahr: 2017

Beschreibung

Issued under the authority of Accounting and Review Services Committee (ARSC) and a go-to guide for accountants performing preparation, compilation and review engagements, this version contains the most up-to-date guidance, including the recently issued Statement on Standards for Accounting and Review Services (SSARS) No. 22, Compilation of Pro Forma Financial Information, and SSARS No. 23, Omnibus Statement on Standards for Accounting and Review Services - 2016. This edition also contains some enhancive updates related to materiality in review engagements, professional skepticism, and more illustrative accountant's reports.

Leseprobe

Preface

(Updated as of June 1, 2017)

About AICPA Guides

This AICPA Guide is issued under the authority of the AICPA Accounting and Review Services Committee (ARSC) to assist accountants in performing preparation, compilation, and review engagements of financial statements in accordance with the Statements on Standards for Accounting and Review Services (SSARSs). ARSC is the senior committee of the AICPA that is designated by Council to issue pronouncements in connection with the unaudited financial statements or other unaudited financial information of a nonpublic entity. The “Compliance With Standards Rule” of the AICPA Code of Professional Conduct (AICPA, Professional Standards, ET sec. 1.310.001) requires a member who performs compilation, review, or other professional services addressed by SSARSs to comply with standards promulgated by ARSC.

AICPA Guides may include sections at the end of individual chapters or following the last chapter. These sections will be entitled either "Supplement" or "Appendix."

A supplement is a reproduction, in whole or in part, of authoritative guidance originally issued by a standard setting body (including regulatory bodies) and applicable to entities or engagements within the purview of that standard setter, independent of the authoritative status of the applicable AICPA Guide.

An appendix is included for informational purposes and has no authoritative status. However, any preparation, compilation, or review guidance in an appendix is considered other preparation, compilation, and review guidance. In applying other preparation, compilation, or review guidance, in accordance with paragraph .19 of AR-C section 60,

General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services

(AICPA,

Professional Standards

), the accountant should, exercising professional judgment, assess the relevance and appropriateness of such guidance to the circumstances of the engagement. Although the accountant determines the relevance of other preparation, compilation, and review guidance, such guidance in an appendix to a guide or a guide chapter has been reviewed by the AICPA Audit and Attest Standards staff and the accountant may presume that it is appropriate.

This guide is an interpretive publication pursuant to paragraph .07 of AR-C section 60. Interpretive publications are recommendations on the application of SSARSs in specific circumstances, including engagements for entities in specialized industries. Interpretive publications are issued under the authority of ARSC only after all ARSC members have been provided an opportunity to consider and comment on whether the proposed interpretative publication is consistent with SSARSs.

In accordance with paragraph .18 of AR-C section 60, an accountant should consider applicable interpretive publications in the performance of his or her engagement in accordance with SSARSs. If the accountant does not apply the guidance in this interpretive publication, the accountant should document how the requirements of SSARS were complied with in the circumstances addressed by such guidance.

Conforming changes made to the guidance contained in this guide are approved by the ARSC chair (or his or her designee) and the director of AICPA Audit and Attest Standards staff. Updates made to the guidance in this guide exceeding that of conforming changes are issued after all ARSC members have been provided an opportunity to consider and comment on whether the guide is consistent with the SSARSs.

An appendix and a glossary of terms have been included in this guide to provide the reader with additional sources of information related to engagements performed in accordance with SSARSs. The additional material includes the following:

Appendix A

, "Overview of Statements on Quality Control Standards," which discusses quality control standards as required by QC section 10,

A Firm’s System of Quality Control

(AICPA,

Professional Standards

)

Lastly, this guide also includes two indexes, "Index of Pronouncements and Other Technical Guidance" and "Subject Index," to assist readers in locating discussion of a specific topic within the guide.

Any guidance in a guide appendix, although not authoritative, is considered an “other preparation, compilation and review publication.” In applying such guidance, the accountant should, exercising professional judgment, assess the relevance and appropriateness of such guidance to the circumstances of the engagement. Although the accountant determines the relevance of other guidance, such guidance in an appendix to a guide or a guide chapter has been reviewed by the AICPA Audit and Attest Standards staff, and the accountant may presume that it is appropriate.

Recognition

Accounting and Review Services Committee

Mike Fleming, ChairDenny Ard Sheila Balzer Jimmy Burkes Jeremy Dillard David A. Johnson Dustin T. Verity

2017 Guide Edition

AICPA Staff

Michael P. Glynn Senior Technical ManagerAudit and Attest Standards and Staff Liaisonto the Accounting and Review Services Committee

Weiwei Tang Technical ManagerAccounting and Auditing – Member Learning & Competency

2015 Guide Edition

(Updates to this edition exceeded that of conforming changes.)

Michael Brand, ChairJoseph S. Beck Jeremy Dillard M. Aron Dunn Mike Fleming Janice Gray Kelly J. Hunter

The AICPA thanks Kelly J. Hunter for his invaluable assistance in developing the 2015 edition of the guide, completely revised by the issuance of SSARS No. 21, Statements on Standards for Accounting and Review Services: Clarification and Recodification (AICPA, Professional Standards).

The AICPA also acknowledges the contributions of the late Dr. Thomas A. Ratcliffe in the development of the previous editions of this guide—much of which is retained in this edition. We are forever grateful for his assistance.

Guidance Considered in This Edition

This edition of the guide has been modified by the AICPA staff to include certain changes necessary due to the issuance of authoritative guidance since the guide was originally issued, and other revisions as deemed appropriate. Authoritative guidance issued through June 1, 2017, has been considered in the development of this edition of the guide. However, this guide does not include all preparation, compilation, review, accounting, reporting, and other requirements applicable to an entity or a particular engagement. This guide is intended to be used in conjunction with all applicable sources of authoritative guidance.

Authoritative guidance that is issued and effective on or before June 1, 2017, is incorporated directly in the text of this guide. Authoritative guidance issued but not yet effective as of June 1, 2017, but becoming effective on or before December 31, 2017, is also presented directly in the text of the guide, but shaded gray and accompanied by a footnote indicating the effective date of the new guidance. The distinct presentation of this content is intended to aid the reader in differentiating content that may not be effective for the reader’s purposes.

Authoritative guidance issued but not yet effective as of the date of the guide and not becoming effective until after December 31, 2017, is referenced in a "guidance update" box; that is, a gray shaded box that contains summary information on the guidance issued but not yet effective.

In updating this guide, all guidance issued up to and including the following was considered, but not necessarily incorporated, as determined based on applicability:

SSARS No. 23,

Omnibus Statement on Standards for Accounting and Review Services—2016

(AICPA,

Professional Standards

)

Users of this guide should consider authoritative guidance issued subsequent to the authoritative guidance previously listed to determine the effect of such guidance on their preparation, compilation, and review engagements. In determining the applicability of recently issued guidance, consider the effective date of such guidance.

FASB standards quoted are from the FASB Accounting Standards Codification® 2015, Financial Accounting Foundation. All rights reserved. Used by permission.

GASB standards quoted are from the GASB Statements, Concepts Statements, Interpretations, and Technical Bulletins© 2015, Governmental Accounting Standards Board. All rights reserved. Used by permission.

References to AICPA Professional Standards

In citing SSARSs and their related interpretations, references use AR-C section numbers, as appropriate, within AICPA Professional Standards and not the original statement number.

Applicability of Quality Control Standards

QC section 10 addresses a CPA firm’s responsibilities for its system of quality control for its accounting and auditing practice. A system of quality control consists of policies that a firm establishes and maintains to provide it with reasonable assurance that the firm and its personnel comply with professional standards, as well as applicable legal and regulatory requirements. The policies also provide the firm with reasonable assurance that reports issued by the firm are appropriate in the circumstances. This section applies to all CPA firms with respect to engagements in their accounting and auditing practice.

Paragraphs .20–.21 of AR-C section 60 address the accountant’s specific responsibilities regarding engagement level quality control procedures for preparation, compilation, and review engagements. Because of the importance of engagement quality, appendix A has been added to this guide. Appendix A summarizes key aspects of the quality control standard. This summarization should be read in conjunction with QC section 10 and paragraphs .20–.21 of AR-C section 60, as applicable.

Defining Professional Responsibilities in AICPA Professional Standards

Pursuant to paragraph .15 of AR-C section 60, SSARSs use the following two categories of professional requirements, identified by specific terms, to describe the degree of responsibility they impose on an accountant:

Unconditional requirements.

The accountant must comply with an unconditional requirement in all cases in which such requirement is relevant. SSARSs use the word

must

to indicate an unconditional requirement.

Presumptively mandatory requirements.

The accountant must comply with a presumptively mandatory requirement in all cases in which such a requirement is relevant, except in rare circumstances. In such rare circumstances, the accountant should perform alternative procedures to achieve the intent of the requirement. The need for an accountant to depart from a relevant, presumptively mandatory requirement is expected to arise only when the requirement is for a specific procedure to be performed and, in the specific circumstances of the engagement, that procedure would be ineffective in achieving the intent of the requirement. SSARSs use the word

should

to indicate a presumptively mandatory requirement.

If a SSARS provides that a procedure or an action is one that the accountant should consider, the consideration of the procedure or action is presumptively required. Whether the accountant performs the procedure or action is based upon the outcome of the accountant’s consideration and the accountant’s professional judgment. The professional requirements of a SSARS are to be understood and applied in the context of the explanatory material that provides guidance for their application. The specific terms used to define professional requirements are not intended to apply to interpretative publications issued under the authority of ARSC because interpretative publications are not SSARSs.

AICPA.org Website

The AICPA encourages you to visit its website at www.aicpa.org and the Financial Reporting Center (FRC) at www.aicpa.org/frc. The FRC supports members in the execution of high-quality financial reporting. Whether you are a financial statement preparer or a member in public practice, this center provides exclusive member-only resources for the entire financial reporting process and provides timely and relevant news, guidance, and examples relevant to accounting, preparation, compilation, and review engagements, as well as audit, attest, assurance, and advisory engagements. Certain content on the AICPA’s websites referenced in this guide may be restricted to AICPA members only.

Selected Recent Developments Significant to This Guide

On September 14, 2017, the ARSC exposed for public comment a proposed SSARS Omnibus Statement on Standards for Accounting and Review Services (www.aicpa.org/research/exposuredrafts/compilationreview/downloadabledocuments/20170914a-ed-omnibus-ssars-2018.pdf). If the proposed standard is issued as a final standard, the 2018 edition of this guide will be updated to reflect the requirements of the standard, as applicable. The following summarizes the proposed standard:

The proposed standard would result in a new AR-C section that provides requirements and guidance when an accountant is engaged to perform a compilation or review of financial statements prepared in accordance with a financial reporting framework generally accepted in another country or in accordance with both SSARSs and another set of compilation or review standards.

The proposed standard would result in revisions to AR-C section 90,

Review of Financial Statements

, to substantially harmonize the requirements with respect to the accountant’s consideration of an entity’s ability to continue as a going concern with those in AU-C section 930,

Interim Financial Information

, resulting from the issuance of SAS No. 132 and to include a specific written representation regarding disclosure of all information relevant to the use of the going concern assumption in the financial statements.

The proposed standard would result in revisions to AR-C section 90 with respect to using the work of other accountants as part of the accountant’s review of financial statements.

The proposed standard would result in a technical correction to the requirements in paragraph .39 of AR-C section 90 regarding the content of the accountant’s review report in order to make the requirements consistent with the illustrative accountant’s review reports included in Exhibit C to AR-C section 90.

FRF for SMEs™ Accounting Framework

Users of this guide are encouraged to consider the benefits of the AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities. More than 20 million privately owned small- and medium-sized entities (SMEs) in the United States that are not currently required to prepare U.S. generally accepted accounting principles (GAAP)-based financial statements now have a streamlined and cost effective financial reporting framework available to them. Released in June 2013, the FRF for SMEs accounting framework is a special purpose framework which offers SMEs a reliable, relevant, and simplified financial reporting solution that addresses marketplace demands.

The AICPA’s FRF for SMEs accounting framework is a less complicated and less costly system of accounting for SMEs that do not need GAAP-based financial statements. The framework is a cost-beneficial solution for owner-managers and others who need financial statements that are prepared in a consistent and reliable manner in accordance with a framework that has undergone public comment and professional scrutiny. The accounting principles composing the FRF for SMEs reporting option are intended to be the most appropriate for the preparation of SME financial statements based on the needs of the financial statement users and cost-benefit considerations. Accounting principles in the framework are responsive to the well-documented issues and concerns stakeholders currently encounter when preparing financial statements for SMEs. For more information on Financial Reporting Framework for Small- and Medium-Sized Entities, visit www.aicpa.org/frf-smes.

__________________________

Table of Contents

Chapter

1

Review of Financial Statements

Introduction

Applicability

Consideration of Materiality in a Review Engagement

Requirements

General Principles for Performing and Reporting on Review Engagements

Professional Skepticism in a Review Engagement

Engagement Level Quality Control in a Review Engagement

Independence

Preconditions for Accepting a Review Engagement

Communications With Predecessor Accountants

Agreement on Engagement Terms

Understanding of the Industry

Knowledge of the Entity

Designing and Performing Review Procedures

Analytical Procedures

Illustrative Analytics

Inquiries and Other Review Procedures

Illustrative Inquiries

Reading the Financial Statements

Reconciling the Financial Statements to the Underlying Accounting Records

Evaluating Evidence Obtained From the Procedures Performed

Written Representations

Communicating to Management and Others Regarding Fraud or Noncompliance With Laws and Regulations

Reporting on the Financial Statements—General

Reporting on Financial Statements Prepared in Accordance With a Special Purpose Framework

Reporting on Comparative Financial Statements

Reporting on Known Departures From the Applicable Financial Reporting Framework

Emphasis-of-Matter and Other-Matter Paragraphs in the Accountant’s Review Report

Alert That Restricts the Use of the Accountant’s Review Report

Reporting on Financial Statements Prepared in Accordance With a Financial Reporting Framework Generally Accepted in Another Country

The Accountant’s Consideration of an Entity’s Ability to Continue as a Going Concern

Subsequent Events and Subsequently Discovered Facts

Initial Review Engagements—Opening Balances

Reference to the Work of Other Accountants in an Accountant’s Review Report

Supplementary Information That Accompanies Reviewed Financial Statements

Required Supplementary Information

Change in Engagement From Audit to Review

Review Documentation

Illustrative Engagement Letters

Illustrative Representation Letter

Illustrative Accountant’s Review Reports on Financial Statements

2

Compilation of Financial Statements

Introduction

Applicability

Requirements

General Principles for Performing and Reporting on Compilations of Financial Statements

Engagement Level Quality Control in a Compilation Engagement

Independence

Preconditions for Accepting a Compilation Engagement

Agreement on Engagement Terms

Knowledge and Understanding of the Entity’s Financial Reporting Framework

Reading the Financial Statements

Other Compilation Procedures

Reporting—General

Reporting—Financial Statements Prepared in Accordance With a Special Purpose Framework

Reporting—Financial Statements that Omit Substantially All the Disclosures Required by the Applicable Financial Reporting Framework

Reporting—Comparative Financial Statements

Reporting—When the Accountant Is Not Independent

Reporting—Known Departures From the Applicable Financial Reporting Framework

Reporting—Supplementary Information That Accompanies Financial Statements and the Accountant’s Compilation Report Thereon

Reporting—Required Supplementary Information

Reporting—Alert That Restricts the Use of the Accountant’s Compilation Report

Reporting—Emphasis-of-Matter or Other-Matter Paragraphs

Reporting—Financial Statements Prepared in Accordance With a Prescribed Format

Compilation of Specified Elements, Accounts, or Items of a Financial Statement

Change in Engagement From Audit or Review to a Compilation Engagement

Documentation Requirements

Illustrative Engagement Letters

Illustrative Examples of the Accountant’s Compilation Report on Financial Statements

Exhibit — Compilation Reporting Requirements When Independence Is Impaired

3

Preparation of Financial Statements

Introduction

Applicability

Independence

Requirements

General Principles for Performing Engagements to Prepare Financial Statements

Engagement Level Quality Control in an Engagement to Prepare Financial Statements

Preconditions for Accepting an Engagement to Prepare Financial Statements

Agreement on Engagement Terms

Knowledge and Understanding of the Entity’s Financial Reporting Framework

Preparing the Financial Statements

Preparation of Financial Statements in Accordance With a Special Purpose Framework

Preparation of Financial Statements That Contain a Known Departure or Departures From the Applicable Financial Reporting Framework

Preparation of Financial Statements That Omit Substantially All Disclosures Required by the Applicable Financial Reporting Framework

Preparation of Financial Statements Included in a Prescribed Form

Communication With Management

Documentation Requirements

Illustrative Engagement Letters

4

Compilation of Pro Forma Financial Information

Introduction

Applicability

Requirements

General Principles for Compilations of Pro Forma Financial Information

Acceptance and Continuance of Client Relationships

Agreement on Engagement Terms

The Accountant’s Knowledge and Understanding of the Entity’s Financial Reporting Framework

Compilation Procedures

The Accountant’s Compilation Report on Pro Forma Financial Information

Documentation

Illustrative Engagement Letter for a Compilation of Pro Forma Financial Information

Illustrative Accountant’s Compilation Report on Pro Forma Financial Information

5

Preparing or Performing a Compilation or Review of Personal Financial Statements

Introduction

Accounting Considerations

Internal Control With Respect to Personal Financial Statements

Agreement on Engagement Terms

Fraud and Illegal Acts in an Engagement to Prepare or in a Compilation or Review of Personal Financial Statements

Representation Letters

Compilation and Review Reports on Personal Financial Statements

Departures From the Applicable Financial Reporting Framework

Illustrative Engagement Letters

Illustrative Representation Letter

Illustrations of Accountant’s Compilation and Review Reports on Personal Financial Statements

Appendix

A

Overview of Statements on Quality Control Standards

Glossary

EULA

Guide

Cover

Table of Contents

Preface

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Chapter 1Review of Financial Statements

Introduction

1.01 AR-C section 90, Review of Financial Statements (AICPA, Professional Standards), applies when the accountant is engaged to review financial statements. When performing a review of financial statements, the accountant’s objective is to obtain limited assurance as a basis for reporting whether the accountant is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework, primarily through the performance of inquiry and analytical procedures. AR-C section 90 may also be applied, as necessary in the circumstances, to engagements to review other historical financial information, excluding pro forma financial information. Reviews of pro forma financial information are to be performed in accordance with AT-C section 310,Reporting on Pro Forma Financial Information, of Statements on Standards for Attestation Engagements No. 18, Attestation Standards, Clarification and Recodification (AICPA, Professional Standards). Examples of other historical information that an accountant may be engaged to review include, but are not limited to, the following:

A single financial statement

Specified elements, accounts, or items of a financial statement such as schedules of rentals, royalties, profit participation, or provision for income taxes

Supplementary information

Required supplementary information

Financial information contained in a tax return

1.02 A review engagement is substantially less in scope than an audit engagement, the objective of which is the expression of an opinion regarding the financial statements as a whole. A review engagement does not contemplate obtaining an understanding of the entity's internal control; assessing fraud risk; testing accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, or the examination of source documents; or other procedures ordinarily performed in an audit engagement. Therefore, the accountant does not express an opinion in the accountant’s review report regarding the financial statements.

Applicability

1.03 An accountant performing a review of financial statements of a U.S. entity is required to follow the review standards as promulgated by the AICPA Accounting and Review Services Committee. However, those standards do not prohibit an accountant from indicating in the accountant’s review report that the review also was conducted in accordance with another set of review standards (for example, International Standard on Review Engagements (ISRE) 2400 (Revised), Engagements to Review Historical Financial Statements, issued by the International Auditing and Assurance Standards Board). In circumstances in which the accountant’s review report states that the review was conducted in accordance with Statements on Standards for Accounting and Review Services (SSARSs) and another set of review standards, the accountant should comply with both sets of standards. An example review report in which the review was conducted in accordance with both SSARSs and ISRE 2400 (Revised) is included in paragraph 1.239.

Consideration of Materiality in a Review Engagement

1.04 As a practical matter, an accountant cannot perform a review engagement without determining materiality for the financial statements as a whole and applying this materiality in designing the procedures and evaluating the results from those procedures. As stated in paragraph 1.01, the accountant’s objective in a review engagement is to obtain limited assurance as a basis for reporting whether the accountant is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework, primarily through the performance of inquiry and analytical procedures. Without a determination of materiality, the accountant is unable to meet the objective of the review engagement. For example, the accountant is required to consider materiality when,

in accordance with paragraph .17 of AR-C section 90, designing and performing analytical procedures and making inquiries and performing other procedures, as appropriate, to obtain limited assurance as a basis for reporting whether the accountant is aware of any material modifications that should be made to the financial statements in order for the statements to be in accordance with the applicable financial reporting framework.

in accordance with paragraph .28 of AR-C section 90, evaluating whether the practitioner is aware of any material modifications that should be made to the subject matter in order for it to be in accordance with (or based on) the criteria or the assertion in order for it to be fairly stated.

1.05 The accountant’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.

1.06 If present in the applicable financial reporting framework, a discussion of the concept of materiality provides a frame of reference to the accountant in determining, as required by paragraph .28 of AR-C section 90, whether there are any material modifications that should be made to the financial statements in order for the statements to be in accordance with the applicable financial reporting framework. If the applicable financial reporting framework does not include a discussion of the concept of materiality, the characteristics referred to in paragraph 1.05 provide the accountant with such a frame of reference.

1.07 The accountant’s determination of materiality is a matter of professional judgment and is affected by the accountant’s perception of the needs of the financial statements’ intended users. In this context, it is reasonable for the accountant 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.

1.08 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.

1.09 The accountant’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 the accountant as a basis for expressing a conclusion on the financial statements. That is, for the same intended users, materiality for a review engagement is the same as it is for an audit engagement because materiality is based on the information needs of intended users and not the level of assurance.

1.10 The accountant’s determination of materiality for the financial statements as a whole may need to be revised during the engagement as a result of one or both of the following:

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)

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

Requirements

General Principles for Performing and Reporting on Review Engagements

1.11 In addition to complying with AR-C section 90, an accountant is required to comply with AR-C section 60, General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services (AICPA, Professional Standards). AR-C section 60 requires

the accountant to comply with relevant ethical requirements;

the accountant to exercise professional judgment in the performance of the engagement;

the accountant to perform the engagement in accordance with SSARSs;

the engagement partner to possess the competence and capabilities to perform the engagement and competence in financial reporting, appropriate to the engagement circumstances; and

the engagement partner to take responsibility for certain quality control matters.

AR-C section 60 also includes certain preconditions for the performance of the engagement.

Professional Skepticism in a Review Engagement

1.12 As a practical matter, an accountant would exercise professional skepticism in a review engagement.

1.13 Professional skepticism is necessary for the critical assessment of evidence in a review engagement. 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 review evidence obtained in light of the engagement circumstances.

1.14 Professional skepticism includes being alert to, for example,

evidence that is inconsistent with other evidence obtained.

information that calls into question the reliability of review evidence.

any other circumstances that suggest the need for additional procedures.

1.15 Maintaining professional skepticism throughout the review engagement reduces the risk of

overlooking unusual circumstances.

overgeneralizing when drawing conclusions from evidence obtained.

using inappropriate assumptions or developing unrealistic expectations in determining the extent of analytical or other procedures performed and in evaluating the results thereof.

1.16 The practitioner cannot be expected to disregard past experience concerning 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 engagement.

Engagement Level Quality Control in a Review Engagement

1.17 In a review engagement performed in accordance with SSARSs, the engagement partner is required to possess the competence and capabilities to perform the engagement and competence in financial reporting, appropriate to the engagement circumstances.

1.18 In a review engagement performed in accordance with SSARSs, the engagement partner is required to take responsibility for the following:

a.  The overall quality of the engagement

b. The direction, supervision, planning, and performance of the engagement in compliance with professional standards and applicable legal and regulatory requirements

c.  The accountant’s report being appropriate in the circumstances

d. The engagement being performed in accordance with the firm’s quality control policies and procedures, 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

ii. Being satisfied that the engagement team collectively has the appropriate competence and capabilities to perform the engagement and expertise in financial reporting to

(1) perform the engagement in accordance with professional standards and applicable legal and regulatory requirements and

(2) enable a report that is appropriate in the circumstances to be issued, if applicable

iii. Taking responsibility for appropriate engagement documentation being maintained

1.19 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 is required to communicate that information promptly to the firm, so that the firm and the engagement partner can take the necessary action.

1.20 Throughout the engagement, the engagement partner is required to remain alert, through observation and making inquiries as necessary, for evidence of noncompliance 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, is required to determine the appropriate action.

1.21 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 operating effectively. The engagement partner is required to 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 engagement.

Independence

1.22 The accountant must be independent of the entity when performing a review of financial statements in accordance with SSARSs. If, during the performance of the review engagement, the accountant determines that the accountant’s independence is impaired, the accountant should withdraw from the review engagement. The interpretations of the "Independence Rule" (AICPA, Professional Standards, ET sec. 1.200.001) of the AICPA Code of Professional Conduct provide authoritative guidance with respect to independence. In the absence of an interpretation of the "Independence Rule" that addresses a particular relationship or circumstance, a member should apply the "Conceptual Framework for Independence" interpretation (AICPA, Professional Standards, ET sec. 1.210.010).

1.23 Although an accountant can prepare the financial statements that are the subject of the review engagement, the preparation of financial statements (in whole or in part) is a nonattest service separate from the review engagement. The preparation of financial statements is subject to the requirements of the "Nonattest Services" subtopic (AICPA, Professional Standards, ET sec. 1.295) of the "Independence Rule." When an accountant prepares financial statements for an attest client, threats to compliance with the "Independence Rule" may exist. Pursuant to paragraph .01 of the "General Requirements for Performing Nonattest Services" subtopic (AICPA, Professional Standards, ET sec. 1.295.040) of the "Independence Rule," these threats would be at an acceptable level and independence would not be impaired when all of the following safeguards are met:

Management agrees to

— assume all management responsibilities as described in the "Management Responsibilities" interpretation (AICPA, Professional Standards, ET sec. 1.295.030).

— oversee the service by designating an individual (preferably within senior management) who possesses suitable skill, knowledge, or experience (or all of these traits). The member should assess and be satisfied that such an individual understands the services to be performed sufficiently to oversee them. However, the individual is not required to possess the expertise to perform or re-perform the services.

— evaluate the adequacy and results of the nonattest services performed.

— accept responsibility for the results of the services.

The accountant does not assume management responsibilities when providing nonattest services and is satisfied that the entity and management will

— be able to meet all of the criteria listed in the aforementioned "management agrees to" section;

— make an informed judgment on the results of the accountant’s nonattest services; and

— accept responsibility for making the significant judgments and decisions that are the proper responsibility of management.

If management is unable or unwilling to assume these responsibilities (for example, management cannot oversee the nonattest services provided or is unwilling to carry out such responsibilities due to lack of time or desire), the accountant’s performance of nonattest services would impair independence.

Before performing nonattest services, the accountant establishes and documents in writing his or her understanding with management regarding

— objectives of the engagement,

— services to be performed,

— the client’s acceptance of its responsibilities,

— accountant’s responsibilities, and

— any limitations of the engagement.

1.24 Nothing prohibits an accountant who is unable to complete a review engagement due to a determination that the accountant’s independence is impaired from performing a compilation engagement on those financial statements.

Preconditions for Accepting a Review Engagement

1.25 In accordance with paragraph .25 of AR-C section 60 and paragraph .08 of AR-C section 90, the accountant is precluded from accepting a review engagement if

a. the accountant has reason to believe that relevant ethical requirements will not be satisfied;

b. the accountant’s preliminary understanding of the engagement circumstances indicates that information needed to perform the engagement is likely to be unavailable or unreliable;

c. the accountant has cause to doubt management’s integrity such that it is likely to affect the performance of the engagement; or

d. management or those charged with governance impose a limitation on the scope of the accountant’s work in terms of a proposed review engagement such that the accountant believes the limitation will result in the accountant being unable to perform review procedures to provide an adequate basis for issuing a review report.

1.26 An example of when the accountant may determine that information needed to perform the review engagement is likely to be unavailable or unreliable is when financial statements or accounting records necessary to perform the review are suspected to be substantially inaccurate and incomplete.

1.27 As a precondition for accepting a review engagement to be performed in accordance with SSARSs, certain items are to be considered. In accordance with paragraph .26 of AR-C section 60 and paragraph .09 of AR-C section 90, the accountant is required to do the following:

a. Determine whether preliminary knowledge of the engagement circumstances indicate that ethical requirements regarding professional competence will be satisfied.

b. Determine whether the financial reporting framework selected by management to be applied in the preparation of the financial statements is acceptable.

Application to a Review of a Single Financial Statement or a Specified Element, Account, or Item of a Financial Statement

In a review of a single financial statement or a specific element, account, or item of a financial statement, the accountant’s determination about whether the financial reporting framework selected by management to be applied in the preparation of the single financial statement, account, or item of a financial statement includes consideration of whether the application of the financial reporting framework will result in a presentation that provides adequate disclosure to enable the intended users to understand the information conveyed in the financial statement or the specific element and the effect of material transactions and events on the information conveyed in the financial statement or the specific element.

1.28 Accounting principles generally accepted in the United States of America (GAAP) and International Financial Reporting Standards (IFRS) are general purpose frameworks and are presumed to be acceptable. In determining whether the financial reporting framework selected by management to be applied in the preparation of the financial statements is acceptable, the accountant may consider whether the financial reporting framework exhibits the characteristics of suitable criteria. Suitable criteria exhibit all of the following characteristics:

Relevance

. Criteria are relevant to the subject matter.

Objectivity

. Criteria are free from bias.

Measurability

. Criteria permit reasonably consistent measurements, qualitative or quantitative, of subject matter.

Completeness

. Criteria are complete when subject matter prepared in accordance with them does not omit relevant factors that could reasonably be expected to affect decisions of the intended users made on the basis of that subject matter.

The relative importance of each characteristic to a particular engagement is a matter of professional judgment. For example, even though a financial reporting framework designed for a special purpose may not result in the preparation of financial statements that is free from bias, that financial reporting framework may be acceptable in the circumstances.

1.29 Additionally, the accountant’s determination of the acceptability for the financial reporting framework to be applied in the preparation of financial statements would include a consideration of the nature of the entity and the intended purpose and users of the financial statements. Financial statements prepared in accordance with a special purpose framework may not be suitable for general purposes, as the users may not understand the financial reporting framework.

1.30 Additionally, as a precondition for accepting a review engagement, in accordance with paragraph .25c of AR-C section 60, the accountant is required to obtain the agreement of management that it acknowledges and understands its responsibility

a. for the selection of the financial reporting framework to be applied in the preparation of financial statements.

b. for the preparation and fair presentation of financial statements in accordance with the applicable financial reporting framework and the inclusion of all informative disclosures that are appropriate for the applicable financial reporting framework used to prepare the entity’s financial statements. If the financial statements are prepared in accordance with a special purpose framework, this includes

i. a description of the special purpose framework, including a summary of significant accounting policies, and how the framework differs from GAAP, the effect of which need not be quantified, and informative disclosures similar to those required by GAAP, in the case of special purpose financial statements that contain items that are the same as, or similar to, those in financial statements prepared in accordance with GAAP,

ii. a description of any significant interpretations of the contract on which the special purpose financial statements are prepared, in the case of financial statements prepared in accordance with a contractual-basis of accounting, and

iii. additional disclosures beyond those specifically required by the framework that may be necessary for the special purpose framework to achieve fair presentation.

c. for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error, unless the accountant decides to accept responsibility for such internal control.

Practice Reminder

AR-C section 60 acknowledges that an accountant may decide to accept responsibility for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error. However, in such instances, the accountant is precluded from performing a review in those circumstances because the accountant’s independence would be impaired.

d.  for preventing and detecting fraud.

e. for ensuring that the entity complies with laws and regulations applicable to its activities.

f. for the accuracy and completeness of the records, documents, explanations, and other information, including significant judgments provided by management for the preparation of financial statements.

g.  to provide the accountant

i. with 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. with additional information that the accountant may request from management for the purpose of the engagement.

iii. with unrestricted access to persons within the entity of whom the accountant determines it necessary to make inquiries.

iv. at the conclusion of the engagement, with a letter that confirms certain representations made during the review.

h. to include the accountant’s review report in any document containing financial statements that indicates that such financial statements have been reviewed by the entity’s accountant, unless a different understanding is reached.

Communications With Predecessor Accountants

1.31 SSARSs do not require a successor accountant to communicate with a predecessor accountant in connection with acceptance of a review engagement, but he or she may believe it is beneficial to obtain information that will assist in determining whether to accept the engagement. The successor accountant may consider making inquiries of the predecessor accountant when circumstances such as the following exist:

a. The information obtained about the prospective client and its management and principals is limited or appears to require special attention.

b. The change in accountants takes place substantially after the end of the accounting period for which statements are to be reviewed.

c.  There have been frequent changes in accountants.

The predecessor accountant and the prospective client may have disagreed about accounting principles, procedures applied by the predecessor accountant, or similarly significant matters.

1.32 Except as permitted by the AICPA Code of Professional Conduct, an accountant is precluded from disclosing any confidential information obtained in the course of an engagement unless the client specifically consents. Accordingly, if the successor accountant decides to communicate with the predecessor, it is important that the successor accountant request the client to (a) permit the successor accountant to make inquiries of the predecessor accountant and (b) authorize the predecessor accountant to respond fully to those inquiries. If the prospective client refuses to permit the predecessor accountant to respond or limits the response, the successor accountant may want to inquire about the reasons and consider the implications of that refusal in connection with acceptance of the engagement.

1.33 When the successor accountant decides to communicate with the predecessor accountant, the inquiries may be oral or written. The inquiries are most useful if they are specific and reasonable regarding matters that will assist the successor accountant in determining whether to accept the engagement. Matters subject to inquiry would include (a) information that might bear on the integrity of management (owners), (b) disagreements with management (owners) about accounting principles or the necessity for the performance of certain procedures or similarly significant matters, (c) the cooperation of management (owners) in providing additional or revised information, if necessary, (d) the predecessor’s knowledge of any fraud or illegal acts perpetrated within the client, and (e) the predecessor’s understanding of the reason for the change of accountants.

1.34 It is considered good practice for the predecessor accountant to respond promptly and fully to the inquiries, on the basis of known facts. However, the predecessor accountant may decide, due to unusual circumstances such as impending, threatened, or potential litigation; disciplinary proceedings; or other unusual circumstances, to not respond fully to the inquiries and instead indicate that the response is limited. A limited response may have implications in connection with acceptance of the engagement.

Agreement on Engagement Terms

1.35 Paragraph .11 of AR-C section 90 states that the accountant should agree upon the terms of the engagement with management or those charged with governance, as appropriate. The agreed-upon terms of the engagement should be documented in an engagement letter or other suitable form of written agreement between the parties that is signed by both the accountant or the accountant’s firm and management or those charged with governance as appropriate.

1.36 Such an understanding reduces the risk that the accountant or the client may misinterpret the needs or expectations of the other party. For example, it reduces the risk that management may inappropriately rely on the accountant to protect the entity against certain risks or to perform certain functions that are management’s responsibility.

1.37 The accountant should ensure that the engagement letter includes the objectives of the engagement, management’s responsibilities as set forth in paragraph 1.30, the accountant’s responsibilities, the limitations of the review engagement, identification of the applicable financial reporting framework for the preparation of the financial statements, and the expected form and content of the accountant’s review report and a statement that there may be circumstances in which the report may differ from its expected form and content.

Observations and Suggestions

Obtaining an engagement letter at least annually is considered a best practice. The engagement letter can cover multiple services and address both nonattest and attest services (for example, an engagement to prepare monthly financial statements and review the annual financial statements for an entity).

1.38 Illustrations of engagement letters for review engagements are included in paragraph 1.235.

Understanding of the Industry

1.39 According to paragraph .14 of AR-C section 90, to perform the review engagement, the accountant should possess or obtain an understanding of the industry in which the entity operates, including the accounting principles and practices generally used in the industry, sufficient to enable the accountant to review financial statements that are appropriate for an entity operating in that industry. Review procedures can be performed effectively only if the accountant is familiar with the industry-specific accounting principles used by the entity. For example, if the entity is a real estate developer, the accountant should be aware of the existence and application of specialized accounting methods for real estate developers. For many review engagements, the entity does not use specialized or unique accounting practices. In this case, the knowledge the accountant obtains related to accounting principles generally applicable to all entities is sufficient background to successfully execute a review.

Knowledge of the Entity

1.40 Pursuant to paragraph .15 of AR-C section 90, the accountant is required to obtain knowledge about the entity sufficient to identify areas in the financial statements where there is a greater likelihood that material misstatements may arise and to be able to design procedures to address those areas. The knowledge should include an understanding of (a) the entity’s business and (b) the accounting principles and practices used by the entity.

1.41 However, when the entity operates in an industry characterized by specialized accounting principles, the accountant should be familiar with that industry’s specialized accounting principles, practices, and methods. If the accountant is not already knowledgeable about the industry-specific principles, he or she may obtain an understanding of such principles by referring to appropriate material. For example, the accountant may

review relevant AICPA Audit and Accounting Guides;

review industry publications;

review financial statements of other entities in the same industry;

consult with other individuals familiar with accounting practices in the industry;

read periodicals, textbooks, and other publications that discuss financial accounting and reporting practices;

attend seminars conducted by accounting and industry groups; and

take continuing professional education courses on the subject matter.

1.42 The accountant should understand the accounting principles and practices used by the entity in measuring, recognizing, recording, and disclosing all significant accounts and disclosures in the financial statements. The accountant may obtain an understanding of the accounting policies and procedures used by management through inquiry, the review of entity prepared documents, or experience with the entity.

1.43 The accountant’s understanding may include, for example, the entity’s policies and procedures related to the following:

Inventory valuation

Fixed asset depreciation

Revenue recognition, including whether the entity has a unique revenue recognition policy

Estimates

Asset impairment

1.44 The accountant’s understanding also may include matters such as changes in accounting practices and principles and differences in the entity’s business model as compared with normal practices within the industry. The accountant’s review procedures will be affected if unusual accounting policies and procedures come to the accountant’s attention.

1.45 According to paragraph .A32 of AR-C section 90, the accountant’s understanding of the entity’s business encompasses a general understanding of the entity’s organization; its operating characteristics; and the nature of its assets, liabilities, revenues, and expenses. The accountant’s understanding of the entity’s business is fundamental to a successful review.

1.46 Factors to consider in understanding the organization include the form of business organization, the entity’s history, and the management structure.

1.47 A general understanding of the entity’s organization is part of the accountant’s knowledge of the entity’s business. Some of the factors the accountant might consider include the following:

Form of business organization

Principals involved in the organization

Organizational chart

Related party transactions

Form of Business Organization

1.48 The business may be set up as a corporation, a partnership, a sole proprietorship, or some other business form allowed by the state in which the organization is located. Knowledge of the form of business allows the accountant to anticipate how transactions, especially capital transactions, should be recorded and classified. For example, property or cash distributions may be treated as a dividend or withdrawal, depending on whether the organization is a corporation or sole proprietorship. In addition, the business form dictates the form of the equity section of the financial statements.

1.49 In a similar fashion, whether the organization is a taxpaying entity or simply files tax returns for informational purposes may affect the financial statements. For example, for a taxpaying entity, certain transactions are required to be presented net of tax effects, but an entity that does not pay taxes (such as a partnership) would not present those transactions net of tax.

1.50 The legal form and tax status of an entity also are important when the entity is one of several entities owned by a single investor or the same group of investors. If the accountant is reviewing the financial statements of one of several commonly owned entities, it is imperative that the concept of an accounting entity be clearly identified before financial statements are prepared. For example, the reporting entity may include all businesses owned by the same group of investors, and even though there is no equity interest among the entities, many of the practices used in accounting for consolidating entities must nonetheless be used.

Principals and Key Personnel

1.51 For some engagements, the principals involved and the key personnel may be the same. Knowledge of the principals and key personnel of the organization allows the accountant to assess the level of sophistication those people have with respect to financial reporting. This information also enables the accountant to be alert to related party transactions or conflicts of interest that may affect the financial statements.

Related Party Transactions

1.52 Understanding an entity’s organization helps the accountant identify any related party transactions. Related party transactions occur when one party to a transaction can impose on the other party contract terms that would not have been acceptable in an arm’s length transaction.

1.53 Factors that may assist the accountant in identifying potential related party transactions include, but are not limited to, the following:

Major sources of financing

Significant vendors and customers

Relationships (if any) of key employees to the entity

Relationships (if any) of the entity to affiliated companies (through equity investments, common ownership, family ties, and so on)

Understanding the Entity’s Operating Characteristics

1.54 The accountant’s knowledge of the entity’s business includes a general understanding of the entity’s operating characteristics. This understanding may include the following:

Understanding the entity’s products and services

Identifying the entity’s operating locations

Understanding the entity’s production methods

Understanding the entity’s distribution system

Understanding the entity’s compensation methods

1.55 An understanding of an entity’s operating characteristics can be obtained by making inquiries of the entity’s principals and key personnel and by observing the entity’s operations.

Products and Services

1.56 The accountant may want to obtain a list of products sold or services provided and develop knowledge of special accounting or disclosure problems related to the entity’s products or services.

1.57 For example, some products may be sensitive to technological or style changes and would require the entity to consider periodic write-downs based on the lower of cost or market test. Other products may be sold with warranty commitments that require the entity to estimate the amount of liability to be recorded. If the entity custom builds products for its customers and the products require an extended period of time to complete, then revenue recognition methods specific to long-term contracts (that is, contract accounting) may apply.

Operating Locations

1.58 The accountant may want to request a list of business locations and the business activity that occurs at each location (the accountant would be interested in the accounting related to the activities conducted at each location).

1.59 With respect to physical assets, such as fixed assets and inventories, the entity should have adequate controls to reasonably ensure the existence and valuation of such assets. If transactions are authorized or executed (or both) at a location, accounting controls should be in place to record the transactions on a timely basis.

Production Methods

1.60 If the entity is a manufacturer, knowledge of production methods is an important part of the accountant’s development of an understanding of the entity’s business. Familiarity with the production process might help the accountant identify factors affecting the financial statements, such as a high level of spoiled goods, the use of returnable containers, the need to estimate the percentage of completion of unfinished goods, and the accounting for by-products. Each of these factors has accounting implications that might be considered in determining whether the entity has the capabilities to prepare financial statements that conform to the applicable financial reporting framework.

Distribution System

1.61 A general understanding of the entity’s distribution system allows the accountant to consider whether there are inventory control problems. For example, the entity could be in an industry characterized by consignment contracts. Whether the entity is the consignor or the consignee, its accounting system generally should be capable of identifying inventory ownership. On the other hand, if the entity has multiple outlets and warehouses, the inventory system generally should be capable of identifying goods in transit at the end of the year in order to execute a proper cutoff.

1.62 In addition, understanding the distribution system gives the accountant insight regarding the location of property, plant, and equipment and accrual procedures for various sales transactions that occur during the period.

Compensation Methods

1.63 Employees may be compensated in a variety of ways other than simple periodic cash payments. For example, key employees may receive stock options or direct distributions of stock. Additionally, some or all employees may be involved in qualified or nonqualified pension plans. Knowledge of the compensation methods the entity uses would provide a basis for the accountant to raise questions about whether the entity has properly valued and disclosed its compensation methods and, when appropriate, satisfied tax regulations and filed appropriate tax forms.

Understanding the Entity’s Assets, Liabilities, Revenues, and Expenses

1.64 Developing an understanding of the accounting principles used in the entity’s industry and a general understanding of the entity’s business (entity’s organization and operating characteristics) provides a basis for understanding the nature of the entity’s assets, liabilities, revenues, and expenses. For example, if the entity is in an industry characterized by significant sales returns, the accountant would expect to see not only a sales return and allowance account but also supporting control procedures and methodology that suggest a reasonable estimate of the year-end sales returns the entity expects to make after the balance sheet date.

Assets

1.65 Routine accounting procedures are used to properly record and measure an entity’s assets and, if appropriate, allocate the cost of certain assets to the income statement. For example, routine cash procedures include the preparation of bank reconciliations on a timely basis and the surprise counting (by entity personnel) of cash funds on-hand. Also, less routine procedures would have to be adopted if cosignees hold a considerable amount of the entity’s inventory.

Liabilities

1.66 Routine procedures for accounting for liabilities might include using a voucher system to control cash disbursements and record liabilities on a timely basis. Less routine procedures may include an assessment of contract liabilities, such as threatened litigation or accounting for finance (capital) leases.

Revenues

1.67