Review Engagements. Invitation to Comment. prepared by: Auditing and Assurance Standards Board. Comments are requested by April 11, 2011 AASB

Transcription

1 Invitation to Comment Review Engagements prepared by: Auditing and Assurance Standards Board Comments are requested by April 11, 2011 AASB

2 INVITATION TO COMMENT: REVIEW ENGAGEMENTS Introduction The Auditing and Assurance Standards Board (AASB) is issuing this Invitation to Comment to encourage Canadian stakeholders to provide input on the Exposure Draft of proposed International Standard on Review Engagements (ISRE) 2400 (Revised), Engagements to Review Historical Financial Statements, recently issued by the International Auditing and Assurance Standards Board (IAASB). Seeking input from Canadian stakeholders through this Invitation to Comment is an important step in the process of obtaining information to allow the AASB to make an informed decision about whether or not to adopt ISRE 2400 (Revised) in Canada. Background IAASB project A common theme in many countries is that the statutory requirement for the audit of annual financial statements of various types of entities has been removed and, as a result, many entities no longer require an audit, based on the type of entity, its size, or other public interest considerations. Although there may be no requirement for these entities to have any form of third-party assurance report on their financial statements, in some cases there is a continued demand by either regulators or markets in those countries for services that carry some level of credibility for the financial statements for the benefit of internal or external user groups. The IAASB s project to revise its extant review engagement standard ISRE 2400, Engagements to Review Financial Statements, was undertaken to address the increased demand of small and medium-sized entities and the users of their financial information for review engagement services where there is no mandatory audit requirement. The proposed ISRE 2400 (Revised) seeks to establish clear and robust requirements governing the practitioner s performance of a review engagement and, thus, serves to fulfill its purpose of enhancing users degree of confidence in an entity s financial statements. In Canada, laws that exempt certain types of incorporated entities from requiring audits have existed for many years and, hence, Canada has a well-established marketplace demand for review engagement services. The AASB has adopted the first set of clarified International Standards on Auditing (ISAs) as Canadian Auditing Standards (CASs) and will adopt any new or revised ISA. However, decisions on whether to adopt other international standards (including ISRE 2400 (Revised)) are made by the AASB on a case-by-case basis. For those other standards, the AASB performs an assessment involving consideration of a number of matters related to whether the proposed international standard would be in the Canadian public interest and would meet the needs of Canadian stakeholders. Background Canadian project In June 2009, the AASB approved a project to revise or replace the review engagement standards for financial statements and other historical financial information including: GENERAL REVIEW REVIEW ENGAGEMENTS 1

3 STANDARDS, Section 8100; PUBLIC ACCOUNTANT S REVIEW OF FINANCIAL STATEMENTS, Section 8200; and REVIEWS OF FINANCIAL INFORMATION OTHER THAN FINANCIAL STATEMENTS, Section (This document refers to these standards collectively as the 8000 series ). The AASB decided to undertake this project because Canadian practice for performing review engagements has evolved over the 20 years since the 8000 series was issued. A 2009 consultation with Canadian practitioners indicated that the 8000 series does not address all relevant areas of a review engagement. Common areas cited where additional guidance is needed include calculating and using materiality and determining whether, and if so, how, risks of material misstatement should be considered in the context of a review engagement. When practitioners seek guidance in areas not addressed in the 8000 series, they may look to the auditing standards for help and use professional judgment in deciding how to apply auditing concepts in the context of a review engagement. The AASB believes that the revised review engagement standard, or a set of standards, should be developed so that they stand alone (i.e., practitioners will be able to use them without reference to the CASs). Also, in adopting the ISAs as CASs, the AASB noted a number of areas where there are fundamental inconsistencies between the CASs and the 8000 series. In the short-term, the AASB addressed, to the extent possible, one such inconsistency related to the dating of the practitioner s report. In December 2010, the AASB issued ASSURANCE AND RELATED SERVICES GUIDELINE AuG-47, Dating the Review Engagement Report on Financial Statements. The approach to report dating described in AuG-47 is largely consistent with that required for dating auditor s reports under the CASs. The AASB concluded that allowing fundamental inconsistencies between the CASs and the 8000 series to persist is not in the public interest. The AASB believes that making conforming amendments to the 8000 series to align with the CASs would not be an effective response, given that it has a project underway to revise the 8000 series. Therefore, any further changes related to aligning the review engagement standards with the CASs will be integrated with other changes to the review engagement standards that will result from this project. To date, the AASB s main activities on this project include: forming a Canadian Review Engagement Task Force to assist the AASB with the analysis of complex issues and provide recommendations related to the development of the standard(s) for review engagements; seeking the views of Canadian practitioners, through an on-line survey and roundtable discussion sessions, on how review engagements are being performed in practice and what improvements practitioners would like to make to the 8000 series; and reviewing analysis of key issues pertaining to the development of ISRE 2400 (Revised) and providing comments to the CICA representative on the IAASB for him to consider raising at the IAASB meeting (The CICA representative on the IAASB is also the Chair of the IAASB Review Engagements Task Force). 2 INVITATION TO COMMENT FEBRUARY 2011

4 The AASB is not proposing to adopt ISRE 2400 (Revised) for use in Canada at this time. Responses from stakeholders to this Invitation to Comment will be an important source of information to the AASB in making a decision on whether to adopt the ISRE. Set out below are specific questions on which the AASB is seeking input on from interested stakeholders. To assist stakeholders in considering these questions, the Appendix to this Invitation to Comment compares key aspects of proposed ISRE 2400 (Revised) and the 8000 series. The AASB will continue to monitor the development of proposed ISRE 2400 (Revised) and the IAASB s discussions and decisions. Any proposed revisions to, or replacement of, the existing Canadian review engagement standards would be made by the AASB following its due process, including public exposure for comment by stakeholders. Responding to the IAASB Exposure Draft The IAASB s Exposure Draft of proposed ISRE 2400 (Revised) is available on the IAASB website. Canadian stakeholders are encouraged to provide comments to the IAASB on its Exposure Draft since the development of ISRE 2400 (Revised) will provide useful information for the AASB to consider in deciding on the nature and extent of revisions needed to the Canadian standards on review engagements and whether adopting ISRE 2400 (Revised) is in the Canadian public interest and meets the needs of Canadian stakeholders. Please refer to the Guide for Respondents contained in the IAASB s Exposure Draft and respond to the specific questions asked therein. Comments should be sent directly to the IAASB, with a copy of the response to the AASB. If copies of responses to the IAASB are received before April 11, 2011, the AASB will be able to take Canadian stakeholders comments into account in formulating its own response to the IAASB s Exposure Draft. Comments are most helpful if they are related to a specific paragraph or group of paragraphs, and when expressing disagreement with the Exposure Draft, they clearly explain the problem and include a suggestion for alternative wording, supported by specific reasoning. When a respondent agrees with proposals in the Exposure Draft, it will be helpful for the AASB to be made aware of this view. Stakeholders are asked not to include comments on matters unique to the Canadian environment in their responses to the IAASB; however, such comments should be provided to the AASB. Providing comments to the AASB re: standards for review engagements in Canada The AASB would appreciate receiving responses to the following questions, in addition to receiving a copy of the response to the IAASB s Exposure Draft. 1. The attached Appendix notes how proposed ISRE 2400 (Revised) and the 8000 series differ regarding their approach to the level of assurance associated with a review. Do you believe that it is important that the revised Canadian review engagement standard mirror REVIEW ENGAGEMENTS 3

5 the existing Canadian standard by including an explicit reference to the concept of plausibility as the basis for considering whether the practitioner has performed enough work to support his or her conclusion? Please provide reasons for your response. 2. Assuming that ISRE 2400 (Revised) is approved as proposed in the Exposure Draft, do you believe that it would be appropriate for the AASB to adopt ISRE 2400 (Revised) to replace the 8000 series? Please provide reasons supporting your response, including the types of amendments to ISRE 2400 (Revised) you consider would be necessary for the standard to be appropriate for use in the Canadian reporting context. A PDF response form has been posted with this document to assist you in submitting your comments to the AASB. Alternatively, you may send comments by (in Word format), to: ed.assurancestds@cica.ca To be considered, comments must be received by April 11, 2011, addressed to: Greg Shields, CA Director, Auditing and Assurance Standards The Canadian Institute of Chartered Accountants 277 Wellington Street West Toronto, ON. M5V 3H2 4 INVITATION TO COMMENT FEBRUARY 2011

6 Comparison of Key Aspects of Proposed ISRE 2400 (Revised) and the 8000 Series Appendix For information purposes, this Appendix compares key aspects of proposed ISRE 2400 (Revised), Engagements to Review Historical Financial Statements, and the 8000 series. It is not a complete comparison of the two standards. To fully understand how the two standards compare, readers are encouraged to read the full text of each. Regardless of whether ISRE 2400 (Revised) is adopted in Canada, or the AASB develops a unique Canadian standard(s) for review engagements, the effort required by practitioners to implement the new standard(s) would likely vary. The AASB understands that today there is considerable inconsistency in practice. Therefore, for some practitioners there might be little change from their current approach and work effort, while for others the changes might be significant. Level of assurance associated with a review Paragraph 5 of proposed ISRE 2400 (Revised) refers to a review of historical financial statements as a limited assurance engagement. There are other proposed international standards currently being drafted by the IAASB that also refer to limited assurance engagements, such as proposed International Standard on Assurance Engagements (ISAE) 3410, Assurance Engagements on Greenhouse Gas Statements, and ISAE 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information. The IAASB believes that, depending on the subject matter being reviewed, the level of assurance in a limited assurance engagement can range from a low, but still meaningful, level of assurance to a level that is just below that obtained from a reasonable assurance. For example, a practitioner may obtain a considerably different level of assurance in a review under proposed ISRE 2400 (Revised) than he or she would obtain under proposed ISAE 3410, as the subject matter being reviewed is significantly different. However, the assurance obtained on an engagement performed under a particular standard is intended to have a narrower range. As a result, the IAASB determined that it is not practicable to describe the level of assurance in a limited assurance engagement in any of the proposed standards. Proposed ISRE 2400 (Revised) is drafted on the basis that when the practitioner has met the requirements of this ISRE (through performing primarily inquiry and analytical procedures, and evaluating the sufficiency and appropriateness of evidence obtained), he or she will be in a position to form an appropriate conclusion, conveying limited assurance, on the financial statements. GENERAL REVIEW STANDARDS, Section 8100, uses the concept of plausibility to describe how the practitioner comes to the view that the evidence obtained provides the level of assurance associated with a review engagement. Paragraph notes that a review consists primarily of inquiry, analytical procedures and discussion related to information supplied to the public accountant by the enterprise with the limited objective of assessing whether the information REVIEW ENGAGEMENTS 5

7 being reported on is plausible within the framework of appropriate criteria. The word plausible is used in the sense of appearing to be worthy of belief based on the information obtained by the public accountant in connection with the review. In Canada, this phrase figuratively represents the floor of the level of assurance appropriate in a review engagement. This floor is the level of evidential support the practitioner must obtain, as a minimum, to be able to form an appropriate conclusion on the financial statements. Anecdotal evidence suggests that Canadian practitioners are comfortable with the concept of plausibility, and use it in practice as a driver of the work effort required to form a conclusion on financial statements following the 8000 series. Also, it appears that the concept of plausibility is understood within Canada's business community and it provides a basis for practitioners to explain the value and meaning of a review engagement service to other stakeholders. Financial reporting framework Proposed ISRE 2400 (Revised) provides for a range of options for reviewing both general purpose financial statements (designed to meet the common information needs of a wide range of users) and special purpose financial statements (designed to meet the financial information needs of specific users). Paragraph 30(a) requires the practitioner to determine, prior to accepting the engagement, that the financial reporting framework applied in the preparation of the financial statements is acceptable. In doing so, the practitioner would evaluate the basis of preparation of the financial statements against the factors that are relevant to the determination of the acceptability of the framework. Paragraph A46 indicates that such factors include the nature of the entity, the nature and purpose of the financial statements, and whether law or regulation prescribes the applicable financial reporting framework. This model is consistent with the approach required by Canadian Auditing Standards (CASs). PUBLIC ACCOUNTANT S REVIEW OF FINANCIAL STATEMENTS, Section 8200, provides for a narrower range of possible financial reporting frameworks on which it is acceptable for practitioners to report. Paragraphs provides Recommendations and guidance to a public accountant engaged to report on general purpose financial statements that are prepared in accordance with generally accepted accounting principles (GAAP). Paragraphs provide Recommendations and guidance to a public accountant engaged to report on financial statements that are prepared using a basis of accounting other than GAAP when such financial statements are prepared: (a) in accordance with regulatory or legislative requirements to meet the specific needs of a regulator or a legislator; or (b) in accordance with written contractual requirements such as may be set out in trust indentures or buy/sell agreements. Canadian practitioners performing review engagements currently do not have the same flexibility to report on different frameworks as auditors performing audits under the CASs. As previously noted, the AASB concluded that allowing fundamental inconsistencies between the CASs and the 8000 series to persist is not in the public interest. Therefore, the revised review 6 INVITATION TO COMMENT FEBRUARY 2011

8 engagement standard(s) will align, as practicable, with the CASs. The AASB anticipates that this change will not have a significant impact on practice because, in most circumstances, Canadian entities will continue to prepare their general purpose financial statements in accordance with the standards set out in the CICA Handbook Accounting in order to meet their incorporating and other governing legislation requirements. Acceptance and continuance of client relationships and review engagements Paragraphs 29 and 30 of proposed ISRE 2400 (Revised) note factors and preconditions that provide a meaningful basis for performing a review engagement. These proposed requirements aim to strengthen practice surrounding performance of reviews by making clear to practitioners that there are circumstances when it is not appropriate to perform a review and, accordingly, a request for a review cannot be accepted. The 8000 series acceptance of engagement requirements are less rigorous than those proposed in ISRE 2400 (Revised). Paragraph requires the public accountant, before accepting the engagement, to be satisfied that the subject matter is within the professional expertise of public accountants and that there are appropriate criteria against which the subject matter can be evaluated. Materiality Paragraphs 41 and 42 of proposed ISRE 2400 (Revised) require the practitioner to make an initial determination of materiality and to revise it in the event of becoming aware of information that would have caused the practitioner to have determined a different amount initially. The 8000 series does not include any Recommendations that address materiality. Practitioner s consideration of risks of material misstatement Proposed ISRE 2400 (Revised) deals with the concept of risk by referring to areas in the financial statements where material misstatements are likely to arise. The term risk is not explicitly used because such a reference could be misinterpreted to mean that review engagements entail risk assessments similar to audit engagements. This phrasing is intended to assist in differentiating review engagements from audit engagements. Requirements dealing with the concept of risk include those noted below: Paragraph 43 states that the practitioner shall obtain an understanding of: (a) The entity and its environment, including the entity s accounting system and accounting records relevant to the review; and (b) The applicable financial reporting framework, including its application in the industry in which it operates; sufficient to identify areas in the financial statements where material misstatements as a likely to arise, and to be able to design procedures to address those areas. REVIEW ENGAGEMENTS 7

9 Paragraph 44 states that the practitioner shall design and perform inquiry and analytical procedures to address all material items in the financial statements, including disclosures, and focus on addressing areas of the financial statements where material misstatements are likely to arise. The 8000 series makes no reference to the need for the public accountant to consider the risks that the financial statements may be materially misstated. A review engagement is based primarily on performance of limited review procedures. However, this approach is not consistent with that required under the umbrella standard to the 8000 series, STANDARDS FOR ASSURANCE ENGAGEMENT OTHER THAN AUDITS OF FINANCIAL STATEMENTS, paragraph , which states that the practitioner should consider the relevant components of engagement risk when planning and performing the assurance engagement (including the review engagement). This inconsistency between the approach in the 8000 series and Section 5025 has existed since Section 5025 first became effective many years ago. In the past, a project was proposed to deal with this inconsistency but was not undertaken due to other priorities. Procedures related to specific circumstances Paragraphs 49 to 54 of proposed ISRE 2400 (Revised) contain requirements dealing with the practitioner s responsibilities related to specific circumstances, such as the existence of related party relationships and transactions, indications that fraud or non-compliance with laws or regulations have occurred, and conditions that may cast significant doubt about the entity s ability to continue as a going concern. The 8000 series does not include Recommendations that address these circumstances. Level of evidence to support expression of a modified conclusion Paragraph 57 of proposed ISRE 2400 (Revised) states that if the practitioner becomes aware of a matter(s) that causes the practitioner to believe the financial statements may be materially misstated, the practitioner shall design and perform additional procedures sufficient to enable the practitioner to: (a) Conclude that the matter(s) is not likely to cause the financial statements as a whole to be materially misstated; or (b) Determine that the matter(s) causes the financial statements as a whole to be materially misstated. The use of the word determine in (b) above is meant to convey that, before expressing a modified conclusion in the practitioner s report on the financial statements, the practitioner has to obtain sufficient appropriate evidence to support that the financial statements are in fact materially misstated. The IAASB considers this position to be in the public interest since, if a qualification is to be expressed, the practitioner should have sufficient appropriate evidence to support the conclusion; it is not sufficiently clear for users if they only know that the condition is 8 INVITATION TO COMMENT FEBRUARY 2011

10 likely. The word conclude in (a) above is meant to convey the level of evidence required to support an unqualified conclusion on the financial statements as whole. Paragraph states that the reservation paragraph needs to be worded so that it does not imply that the public accountant has verified the matter giving rise to the reservation. Practitioner s report Proposed ISRE 2400 (Revised) contains requirements for the structure and form of the practitioner s report that are not in the 8000 series. For example, paragraphs 82 and 83 of the proposed ISRE requires the practitioner s report to contain: A description of the responsibility of management for the preparation of the financial statements in accordance with the applicable financial reporting framework. A description of the nature of a review and its limitation, including a statement that: o The practitioner performs procedures to obtain sufficient appropriate evidence as the basis for concluding on the financial statements as a whole; o A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing, and consequently does not enable the practitioner to obtain assurance that the practitioner would become aware of all significant matters that might be identified in an audit and, accordingly, the practitioner does not express an audit opinion on the financial statements; o An audit has not been performed, and had an audit been performed the practitioner may have uncovered material misstatements that could exist in the financial statements reviewed. A statement of the practitioner s belief that the practitioner has obtained sufficient appropriate evidence as the basis for the conclusion expressed. Also, paragraphs 84 to 87 of proposed ISRE 2400 (Revised) provide guidance on the use of Emphasis of Matter and Other Matter paragraphs in the practitioner s report. An Emphasis of Matter paragraph in the practitioner s report may be used to draw users attention to a matter presented or disclosed in the financial statements that, in the practitioner s judgment, is of such importance that it is fundamental to users understanding of the financial statements. An Other Matter paragraph in the practitioner s report may be used to communicate a matter other than those that are presented or disclosed in the financial statements that, in the practitioner s judgment, is relevant to users understanding of the review, the practitioner s responsibilities or the practitioner s report. The 8000 series does not separately distinguish between these two types of paragraphs. Paragraph requires that if the public accountant expands the review engagement report to include information and explanations not intended as a reservation, the additional information and explanations should follow the negative assurance paragraph. The practitioner s report under proposed ISRE 2400 (Revised) has a title that clearly indicates that it is the report of an independent practitioner, Independent Practitioner s Review Report. Under the 8000 series the title of the report is Review Engagement Report. REVIEW ENGAGEMENTS 9