Which of the following statements is correct regarding a review engagement of a non public entity

How It Works

A review engagement is preferred when the company’s financial statements have already been prepared and certified to be accurate, and the company engages an external accountant to review the financial statements. Since the financial statements have already been certified as accurate, the external accountant is required to provide negative assurance that the financial statements are free of material misstatements.

During the review, the accountant performs analytical procedures to gain a better understanding of the figures. A review engagement is less intensive in terms of the procedures performed by the accountant. Therefore, the accountant cannot express an opinion on the fairness of the financial statements.

Main Parties in a Review Engagement

The following are the main parties in a review engagement and the roles they place in the process:

1. Management

The management is responsible for preparing the main financial statements, i.e., balance sheet, income statement, and cash flow statement, in accordance with the financial reporting framework.

Also, the management is required to implement internal control systems to help in preparing financial statements that are free of material misstatement. They should also provide the relevant financial data to help the accountant prepare the financial statements in a timely manner.

2. Practitioner

The individual performing a review engagement must be a licensed practitioner. The practitioner is required to obtain evidence directly rather than rely on evidence provided by third parties. He/she must also perform procedures to reach a conclusion on whether anything came to their attention that causes them to believe that the financial statements are not prepared in accordance with the applicable financial reporting framework. The review procedures that the practitioner is required to perform include:

  • Inquiries on the accounting practices used by the company
  • Representations from management on the accuracy of the financial statements
  • Management responsibility for internal control systems
  • Management responsibility to detect and prevent fraud
  • Information on subsequent events
  • Knowledge of fraud
  • Ratios and relationships of recorded amounts
  • Analytical procedures on comparisons
  • Receipt of appropriate financial information
  • Procedures for recording financial information

3. Intended users

The intended users of the financial statements can be shareholders, investors, creditors, etc. The review engagement is conducted with the goal of enhancing the user’s confidence in the financial statements.

Since the financial statements have already been audited and certified, the auditor’s role is to provide negative assurance on whether the reviewed financial statements comply with the applicable reporting standards, and whether they are free from material misstatement. The financial statements are considered materially misstated if they contain errors, fraud, or omissions that can potentially influence the user’s economic decisions.

Review Engagement vs. Audit Engagement

A review engagement is considered weaker than an audit engagement. In an audit engagement, the auditor is required to perform more rigorous procedures before issuing a positive assurance. The auditor must understand the company’s internal control systems and perform verification, substantiation, inquiries, and analytical procedures.

After gathering the appropriate evidence through the abovementioned procedures, the auditor expresses an opinion on whether the financial statements are prepared in accordance with the applicable financial reporting framework, and if they paint a true picture of the financial position of the company.

Depending on the findings of the audit, the auditor may provide an unqualified opinion, qualified opinion, or an adverse opinion. An unqualified opinion means that the auditor is satisfied that the financial statement reflects a true and fair view of the company’s position and that they are free from material errors or fraud.

A qualified opinion is issued when the auditor is unable to issue an unqualified opinion due to a departure from the financial reporting framework or scope of limitation. The auditor must disclose specific issues related to the qualification, or where there is a material departure from GAAP rules.

An adverse opinion is issued when the auditor concludes that the departures from the financial reporting framework are so significant that he/she believes the financial statements are not fairly stated.

Additional Resources

Thank you for reading CFI’s guide to Review Engagement. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

Which of the following statements is correct regarding a review of a nonpublic entity's financial statements inaccordance withStatements on Standards for Accounting and Review Services(SSARS)?a.The accountant must be independent to issue the review report.b. An opinion is expressed in the review report.c. The accountant is required to assess the risk of fraud.d. It is not necessary for the accountant to obtain a management representation letter.

Statements on Standards for Accounting and Review Services (SSARS) clearly states that;

1. Accountant must Posses level of knowledge of the accounting principles and practice of the industry in which the entity operates and an understanding of the entity's business.

2. Do NOT obtain an understanding of internal controls, assess control risk, or tests of details of balances. However, cannot ignore potential misstatements and should perform procedures appropriate to pursue issues that arise.

3. provide negative / Limited assurance on FS