Assurance Services: Reviews of Financial Statements | Auditing and Attestation | CPA Exam

In this session, I discuss assurance services such as review of financial statements.
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Review Services
A review service (SSARS review) engagement allows the accountant to express limited assurance that the financial statements are in accordance with applicable accounting standards, including appropriate informative disclosures, or other comprehensive basis of accounting (OCBOA), such as the cash basis of accounting. CPAs must be independent of the client for review service engagements.

Procedures Suggested for Reviews
The evidence for a review engagement consists primarily of inquiries of management and analytical procedures, substantially fewer procedures than those required for an audit. For reviews, accountants do not obtain an understanding of internal control, test controls, assess fraud risk, or do substantive tests of transactions or tests of balances, such as confirmation of receivables or physical examination of inventory.

SSARS require the accountant to obtain evidence that consists of the following for a review engagement:

Obtain agreement on engagement terms. The accountant should agree upon the terms of the engagement with management or those charged with governance. SSARS require that the agreement of terms be documented in an engagement letter or other suitable form of written agreement.

Obtain knowledge of the accounting principles and practices of the client’s industry. The accountant can study AICPA industry guides or other sources to obtain industry knowledge. The level of knowledge for reviews can be somewhat less than for an audit.

Obtain knowledge of the client. The information should be about the nature of the client’s business transactions, its ownership structure, key personnel, accounting records and employees, the accounting principles and practices used by the client, and the content of the financial statements. The level of knowledge can be less than for an audit.

The standards for preparation, compilation, and review engagements of financial statements, called Statements on Standards for Accounting and Review Services (SSARS), are issued by the Accounting and Review Services Committee of the AICPA. This committee has authority equivalent to the Auditing Standards Board for services involving unaudited financial statements of nonpublic companies. Because they are not doing audits, SSARS refer to CPAs performing review, compilation, and preparation services as accountants, not auditors.
ecause review, compilation, and preparation services provide less assurance than audits, the accountant should establish an understanding with the client about the services to be provided through a written engagement letter. The understanding should include a description of the objectives of the engagement, management’s responsibilities, the accountant’s responsibilities, the type and limitations of the service to be provided, and a description of the type of compilation or review report expected to be issued. As described in the vignette below, the Accounting and Review Services Committee (ARSC) has recently completed a Clarity Project similar to the Auditing Standards Board Clarity Project for auditing standards. The requirements for review, compilation, and preparation services are now discussed in greater detail.