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Practice inspection’s preliminary observations regarding the new review engagement standard

We contacted provincial practice inspectors to find out what they have seen in their inspections of review engagement files. Based on these preliminary observations, here are some reminders for practitioners when applying this new standard.

The new standard for review engagements in Canada was effective for reviews of financial statements for periods ending on or after December 14, 2017. CPA Canada worked with a task force of practitioners to build resources to support the effective application of this standard.

A few key pieces of guidance include:

There are many review engagements performed in Canada and we are committed to supporting practitioners in performing high quality reviews. It’s still early in the practice inspection process, but we heard some preliminary observations and want to provide reminders for practitioners in applying this new standard.

Practitioners should take extra care in the following areas:

1. Documenting the practitioner’s understanding

While the practitioner often has a thorough understanding of the entity, we remind you to document your understanding based on the requirement in paragraph 44 of CSRE 2400. Some specific items that practice inspection had noted were missing included:

  • the nature of the entity, including its operations (for example, what are the different ways that the entity earns revenue?)
  • the entity’s accounting systems and accounting records

2. Identifying areas in the financial statements where material misstatements are likely to arise

Documentation is required to support the practitioner’s conclusions and significant professional judgements made in reaching those conclusions (see paragraph 104 of CSRE 2400). When identifying the areas in the financial statements where material misstatements are likely to arise, as required by paragraph 45 of CSRE 2400, merely being immaterial is not always a sufficient reason for not addressing an area in the financial statements.

When making the decision to scope out an area, the practitioner may need to consider other factors as to whether the account balance could potentially have a risk of material misstatement; for example, as it relates to payable and accruals, or related party transactions and balances. It is helpful to document these judgements in the working papers.

In addition, we remind practitioners of the requirement in paragraph 46 of CSRE 2400 to design and perform inquiry and analytical procedures:

  • to address all material items in the financial statements, including disclosures
  • to focus on addressing areas in the financial statements where material misstatements are likely to arise

It is important to understand the following in order to comply with this requirement:

  • All material balances must be addressed, even if not identified as an area where material misstatements are likely to arise (due to the requirement in paragraph 46(a)).
  • For all inquiry and analytical procedures performed, the documentation should include what the procedures are designed to address (i.e., linking the procedure to the area of the financial statements that are either material or an area where material misstatements are likely to arise). Otherwise, it may appear that the practitioner has not performed procedures to address all relevant areas.

Don’t forget that there are also requirements to perform procedures to address specific circumstances, including related parties, fraud and non-compliance with laws and regulations, going concern, use of work performed by others and opening balances in initial review engagements (see paragraphs 49 - 55 of CSRE 2400).

3. Developing an expectation when performing analytical procedures

When performing analytical procedures an expectation must be developed, as explained in paragraph 15(a) of CSRE 2400.

4. Making inquiries of management and others within the entity

Practitioners are reminded of all of the inquiries of management and others within the entity, as appropriate, that are required and therefore must be documented in the working papers. Practitioners should review the requirements in paragraph 47 of CSRE 2400; some specific items that inspection has noted are:

  • whether there are significant, unusual or complex transactions, events or matters that have affected or may affect the entity’s financial statements
  • the existence of any actual, suspected or alleged fraud or illegal acts, or non-compliance with provisions of laws and regulations
  • whether management has identified and addressed events occurring between the date of the financial statements and the date of the practitioner’s report that require adjustment of, or disclosure in, the financial statements

For those practitioners using the PEG checklists, the checklists remind you to make these inquires in the relevant areas throughout the engagement, rather than all on one form. Therefore, it may be useful to review the requirements in CSRE 2400 to ensure that you’ve asked all the right questions (and documented the answers in your working papers).

5. Updating management representation letters

Some inspection findings note that practitioners are not including all relevant matters in the management representation letter and are not attaching the summary of unadjusted differences to the letter (see paragraph 70 of CSRE 2400 for the requirement to do so).

Next steps

We hope these reminders and the resources noted above will prove useful as you perform your upcoming review engagements. If you are looking for other guidance and support related to performing assurance engagements, please don’t hesitate to contact me.

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The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.