Accounting standards for review engagements have been established and utilized for over 25 years. However, the current set of standards in use for review engagements is set to change for entities with financial statement dates ending December 14, 2017 or later. In order to better align Canadian financial statements with international standards, enabling better, more consistent reporting domestically and abroad, our governing bodies have taken steps to expand the review standards to fit better with International Standard on Review Engagements (ISRE). The result is the new Canadian Standard on Review Engagements (CSRE 2400).
What are some of the largest changes?
The biggest changes relate specifically to how the assurance engagement will be performed, rather than the accounting standards on how the financial statements and related disclosures are presented. While both standards emphasize professional judgement and discretion by the practitioner, the new standard explicitly outlines additional prescribed procedures, which require the practitioner to:
- Design and perform the review engagement procedures on all material balances, Design and perform the review engagement procedures on all material balances,
- Identify and focus on areas with a higher likeliness of material misstatement,
- Inquire with management and/or those charged with governance (TCWG) about specific items that were previously not prescribed in the old review engagement standard including the going concern assumption, significant accounting estimates, related parties, and fraud and non-compliance with laws and regulations,
- Expand documentation on the understanding of the entity by increasing the amount of inquiry related to accounting systems and processes, information systems, business operations and other knowledge of the entity.
- Communicate specific items to management and TCWG, including:
- Financial statement misstatements along with the request that they be corrected,
- Any other significant matters that should be brought to the attention of management and TCWG
This expanded set of requirements leads to much more rigorous and in-depth processes conducted by the practitioner along with an increased emphasis on timely two-way communication between management/those charged with governance and the practitioner.
You may note that your practitioner has increased the scope of the work performed and modified how the review engagement is completed as a result of implementing these new CSRE 2400 standards.
The New CSRE 2400 standard has a New Independent Practitioner’s Review Engagement Report
Users of the financial statements will notice the review engagement report has substantially changed. It is now referred to as the Independent Practitioner’s Review Engagement Report, comes with prescribed paragraphs with headings that now outline management responsibilities, and practitioner responsibilities in addition to the practitioner’s conclusion on the fair presentation of the entity’s financial statements.
The concept of limited assurance has been introduced to the new standard. This is a lesser level of assurance than the reasonable assurance, which is attached to the Independent Auditor’s Report but is more than no assurance at all.
See the APPENDIX at the bottom.
What does this mean for my engagements?
There will be more inquiry which could be quite different from the inquiry in prior years. You will be asked more questions and could be asked to provide more documentation and in greater detail. For example, you could be asked, in preparation for the upcoming review engagement, to:
- Provide documentation on how the accounting systems operate in your entity. This includes how revenue is recorded, how all expenditures and payroll are recorded, what is done when payments go out, and how all of this is tracked and authorized
- Provide policy and procedure documents for other parts of the operations, including governance, decision making, hiring and HR processes, inventory costing, financial reporting, use of estimates, risk assessment and strategic planning, or other governing policies
- Provide IT information such as what software is used, who is responsible for managing IT infrastructure, what physical locks are used to safeguard systems, what sort of back up procedures are used, what data is stored with a third party, if passwords are required and on what, and policies surrounding remote access
The nature of the inquiry will be tailored to your company. Please be prepared for more questions than usual, especially during this transition year which will be more rigorous and have a much deeper scope than last year. Be prepared to be asked questions you may never have heard before and do not hesitate to ask for clarity. Give your organization more time to complete the review process and be ready to potentially provide more information than you have in the past.
Illustrative example of the new Practitioner’s Review Engagement Report (with an Unmodified Conclusion)
To the shareholders of Review Engagement Company
We have reviewed the accompanying financial statements of Review Engagement Company that comprise the balance sheet as at December 31, 2017 and the statements of earnings and retained earnings and cash flows for the year then ended and a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian accounting standards for private enterprises 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.
Our responsibility is to express a conclusion on the accompanying financial statements based on our review. We conducted our review in accordance with Canadian generally accepted standards for review engagements, which require us to comply with relevant ethical requirements.
A review of the financial statements in accordance with Canadian generally accepted standards for review engagements 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 in extent than, and vary in nature from, those performed in an audit conducted in accordance with Canadian generally accepted auditing standards. Accordingly, we do not express an audit opinion on these financial statements.
Based on our review, nothing has come to our attention that causes us to believe that the financial statements do not present fairly, in all material respects, the financial position of Review Engagement Company as at December 31, 2017 and the results of its operations and its cash flows for the year then ended in accordance with Canadian accounting standards for private enterprises.