904.1 An entity may request a review of its financial
statements. The following paragraph summarizes the general guidance relating to
reviews of financial statements.
904.2 SSARS No. 19 (AR 90) contains the performance requirements
for a review. The accountant engaged to review financial statements should:
Establish an understanding with the entity regarding the services to be
performed and document the understanding through a written communication with
management. The general requirements for engagement letters are discussed in
Possess a level of knowledge of the accounting principles and practices of the
industry in which the entity operates and a general understanding of certain
matters related to the entity itself (AR 90.08-.13). Knowledge of the industry
and understanding of the entity are discussed in section 902.
Design and perform review procedures based on the accountant's understanding of
the industry, knowledge of the client, and awareness of the risk of unknowingly
failing to modify the review report on financial statements that are materially
misstated (AR 90.14-.15). (See the discussion beginning at paragraph 904.3.)
Perform appropriate inquiry, analytical, and other procedures (AR 90.16-.20).
(See paragraph 904.6.)
the financial statements and consider whether they conform with GAAP (or an
OCBOA) based on the information the accountant acquires while performing the
review (AR 90.19c). (See paragraph 903.5 for a discussion of the meaning of reading
the financial statements.)
Prepare appropriate documentation (AR 90.25-.26). (See paragraph 904.14.)
Obtain a representation letter (AR 90.22-.24). (See paragraph 904.15.)
and Performing Review Procedures. SSARS No. 19 (AR 90.07) states that the
accountant should perform procedures designed to accumulate
review evidence that will provide a reasonable basis for
obtaining limited assurance that there are no material modifications that
should be made to the financial statements in order for the statements to be in
conformity with GAAP (or an OCBOA). That review evidence is ordinarily obtained
through analytical procedures and inquiries
904.4 The use of analytical
procedures in a review is different than the use of analytical procedures in an
In an audit, analytical
procedures are used both in planning the audit and as part of the final or
overall review stage of the audit. In addition, they are frequently, although
not required to be, used as substantive procedures. In a review, the accountant
is not required to perform analytical procedures when designing review
procedures (i.e., planning the engagement) or as a final review procedure.
Accountants are required to use analytical procedures when performing the
review procedures as part of gathering review evidence.
904.5 The analytical
procedures, inquiries, and other procedures performed should be designed based
on the accountant's understanding of the
industry, knowledge of the client, and
awareness of the risk that the financial statements may be materially
misstated, with focus placed in those areas in which the accountant believes
there are increased risks of material misstatements. That concept of risk
awareness is not the same in a review engagement as it is in an audit engagement.
In an audit engagement, the auditor is required to perform procedures to assess
risks. In a review, the work performed by the accountant is to obtain a limited
level of assurance. Consequently, sufficient review evidence is obtained
primarily through analytical procedures and inquiries.
and Analytical Procedures. SSARS No. 19 (AR 90.19) states
that the accountant should consider making the following inquiries:
a. Inquiries of members of
management having responsibility for financial and accounting matters (for
example, the CIRA's bookkeeper, treasurer, or other equivalent governing
individual; the managing agent, if any; and members of the board of directors)
(1) Whether the financial statements have
been prepared in conformity with the applicable reporting framework (i.e., GAAP
or an OCBOA).
(2) The entity's accounting principles and
practices and the methods followed in applying them; procedures for recording,
classifying, and summarizing transactions; and accumulating information for
disclosure in the financial statements.
(3) Unusual or complex situations that may
have an effect on the financial statements.
(4) Significant transactions occurring or
recognized near the end of the reporting period.
(5) The status of uncorrected misstatements
identified during the prior engagement.
(6) Matters about which questions have
arisen in the course of applying the review procedures.
(7) Events subsequent to the date of the
financial statements that could have a material effect on the financial
(8) Knowledge of any fraud or suspected
fraud affecting the entity involving management or others where the fraud could
have a material effect on the financial statements, for example, communications
received from employees, former employees, or others.
(9) Significant journal entries and other
(10) Communications from regulatory
b. Inquiries concerning actions taken at
meetings of the governing board, committees of the governing board, or comparable
meetings that may affect the financial statements.
904.7 Analytical procedures
should assist the accountant in identifying relationships and individual items
that appear unusual. Often, the analytical procedures can identify problem
areas in the financial statements that are not always evident when the
financial statements are merely read by the accountant. The results of
analytical procedures should be used
as a basis for making
additional inquiries when appropriate. Together with the accountant's knowledge
of the industry, an understanding of the entity's business, and inquiries, the
analytical procedures provide the basis for the limited assurance given in the
accountant's review report.
904.8 SSARS No. 19 (AR 90.17-.18) states that analytical procedures
a. Developing expectations by identifying
and using relationships that are expected to exist based on the understanding
of the entity and the industry in which the entity operates.
b. Comparing recorded amounts, or ratios
developed from recorded amounts, to expectations.
c. Inquiring of management regarding
fluctuations or relationships that differ from expectations or other relevant
information by a significant amount.
904.9 Developing Expectations. SSARS No. 19 requires the accountant to develop
and document expectations. Forming an expectation is a critical phase of the
analytical procedures process since the expectation represents the accountant's
prediction of recorded amounts or ratios developed from recorded amounts. Once
expectations are developed,
the accountant will often find when performing
analytical procedures that differences exist between the expectation and the
recorded amount or ratio. If such differences are significant, they may be
indicative of possible material misstatements and the accountant should obtain
explanations for such differences. The following paragraphs discuss developing
904.10 Expectations are developed by identifying plausible
relationships that are reasonably expected to exist based on the accountant's
understanding of the CIRA. The accountant selects from a variety of data
sources to form expectations:
• Prior period information.
• Management's budgets or forecasts.
• Industry data.
• Non-financial data.
• Relationships of financial statement
amounts within the period.
904.11 When developing expectations, the accountant should
consider the following:
• Economic and competitive conditions.
• Changes in the organization.
• The type of account involved.
• The number of expectations needed for an
904.12 Documenting Expectations. SSARS No. 19 (AR 90.26) states that the
accountant should document the analytical procedures performed, the
expectations (where significant expectations are not otherwise readily
determinable from the documentation of the work performed), and factors
considered in the development of those expectations. Peer review comments
continue to note that
accountants are having difficulty complying with the SSARS analytical
procedures documentation requirements, including documenting expectations.
Appendix 4G of PPC's Guide to Compilation and Review Engagements
contains an optional form that may be used to comply with these documentation
904.13 Although not
specifically stated in the SSARS, the authors believe that an expectation
should be developed for each analytic. However, there does not necessarily need
a one-to-one correlation
between the expectations formed and the analytics performed, as one expectation
may apply to multiple analytics. In addition, because the objective of a review
is to provide the accountant with a reasonable basis for expressing limited
assurance that there are no material modifications that should be made to the
financial statements, the authors believe that expectations need only be
developed in terms of a range (for example, assessments are expected to
increase between 10% and 15%) and that analytics do not necessarily need to be
developed for each financial statement item. The accounts to which accountants apply
analytical procedures is a matter of professional judgment based on materiality
and the accountant's knowledge of the client and the industry in which the
client operates. The accountant should apply analytical procedures to the
financial statements to identify and provide a reasonable basis for inquiry
about the relationships and individual items that appear to be unusual and that
may indicate a material misstatement. The AICPA CAR Guide assists accountants
in understanding the requirements related to the use of analytical procedures
in review engagements and how the use of analytical procedures should be
documented. HOA-CX-9.2 includes common ratios that may be used when performing
analytical procedures for CIRAs.
904.14 Appropriate Workpaper
Paragraph 905.6 lists the
documentation requirements for review engagements.
904.15 Use of Representation
Letters. SSARS No. 19 (AR 90.22)
requires accountants to obtain a written representation from management for all
financial statements and periods covered by the accountant's review report
Management normally includes the officers of the CIRA and the
managing agent, if any. The specific representations will vary depending on the
circumstances of the engagement and nature and basis of the presentation.
However, in connection with a review of financial statements presented in
accordance with generally accepted accounting principles (or an OCBOA), the
management representation letter should address the following matters:
• Management's acknowledgment of its
responsibility for the preparation and fair presentation of the financial
statements in conformity with the applicable reporting framework (GAAP or an
• Management's belief that the financial
statements are fairly presented in conformity with the applicable reporting
framework (GAAP or an OCBOA).
• Management's acknowledgment of its
responsibility for designing, implementing, and maintaining internal control
relevant to the preparation and fair presentation of the financial statements.
• Management's acknowledgment of its
responsibility to prevent and detect fraud.
• Knowledge of any fraud or suspected fraud
affecting the entity involving management or others where the fraud could have
a material effect on the financial statements, including any communications
received from employees, former employees, or others.
• Management's acknowledgment of full and
truthful responses to all inquiries.
• The completeness of information provided
• Information concerning subsequent events.
Accountants should also consider obtaining additional
representations in certain areas, as discussed in paragraph 806.5.
If the client refuses to provide a representation letter, SSARS No. 19 states
that the review will be incomplete and that there will not be an adequate basis
for issuing a review report. The SSARS notes that, in this case, the accountant
should consider whether or not it would be appropriate to instead issue a
compilation report. SSARS No. 19 (AR 80.59) notes that a step-down to a
compilation report for the client's refusal to provide a signed representation
letter ordinarily is not appropriate. Even though a compilation report offers
no assurance, the accountant should not be associated with statements that may
be misleading and, thus, should resign from the engagement.
904.17 According to SSARS
No. 19 (AR 90.22), representation letters should include all periods covered by
the accountant's report. In other words,
if comparative financial
statements are being reported on, the representations obtained at the
completion of the most recent review should address all periods being reported
on. If management changed during or after the period or periods being reported
on, the current management may be hesitant to provide this assurance. The
accountant may point out that the first paragraph of the letter limits the
confirmant's response to his or her best knowledge and belief. SSARS No. 19
requires the accountant to obtain representations for all periods covered by
the review report from the current management.
904.18 The representation letter should be dated
as of the date that the letter is presented and signed by the client. In no
event should the letter be presented and signed prior to the date of the
accountant's review report. 7
The SSARS make it clear
that the review report should be dated as of the date of completion of the
accountant's review procedures, and that the review procedures include
obtaining written representations from management. However, the accountant need
not be in physical receipt of the management representation letter as of the
date of the accountant's review report provided that management has
acknowledged that they will sign the representation letter without
modification. The accountant should be in receipt of the letter prior to
releasing the accountant's report.
904.19 There are
circumstances in which accountants should consider obtaining updating
representation letters from management. For instance, significant time may
lapse between when the accountant obtains a management representation letter
after completion of the review procedures and when the accountant issues his or
or a material subsequent event may occur after the
representation letter is obtained but prior to issuance of the report. In
addition, if a predecessor accountant is asked by a former client to reissue
his or her report on a comparative basis with reviewed financial statements of
a subsequent period, the predecessor accountant should obtain an updated
representation letter before reissuing a report on financial statements of a
prior period. The requirements for updating representation letters and an
illustrative example are included in PPC's Guide to Compilation and Review
An illustrative management representation letter adapted from SSARS No. 19 (AR
90.71) and modified for a CIRA is presented at HOA-CR-9. Representation letters
should be tailored to fit individual client circumstances. The example representation
letters in SSARS No. 19 and at HOA-CR-9 of this Guide are for
illustrative purposes only and should be modified to meet the circumstances of
and Practice Aids
904.21 Exhibit 9-2 lists the checklists and practice aids developed
by the authors for a typical review engagement for a nonprofit organization.
or Practice Aid
of Checklist or Practice Aid
1. Engagement Planning and
Engagement Acceptance Form
Illustrative Engagement Letter—Review
Client Information Form
2. Financial Statement
Preparation and Review Procedures
Trial Balance Preparation Checklist
Inquiry and Analytical Procedures Program
Review Procedures, Review, and Approval Form
Review Reporting Checklist
Illustrative Representation Letter—Review
CIRA Disclosure Checklist
3. Administrative and Review
Checklist for a Step-down Engagement (Audit to Review or Compilation/Review