A small private company needs financial statements its bank will accept, but a full audit costs more than the loan covenants require. The bank will accept a review. The accountant signs an engagement letter, performs inquiries and analytical procedures, and issues a report giving limited assurance. Pick the wrong procedure, the wrong report wording, or the wrong response to a scope limitation, and the answer is wrong.
HIGH-FREQUENCY: Review engagements on historical financial statements of nonissuers are governed by AR-C Section 90, part of the Statements on Standards for Accounting and Review Services (SSARSs) issued by the AICPA. The objective is to obtain limited assurance about whether material modifications should be made for the statements to conform with the applicable financial reporting framework, primarily through inquiries of management and analytical procedures.
The review is the middle tier of the SSARS hierarchy. Below it sits preparation (AR-C 70, no report, no assurance, independence not required) and compilation (AR-C 80, report issued, no assurance, independence not required but lack must be disclosed).
Common mistakes
- Treating a review like a small audit. The exam offers choices pairing a review with audit procedures (confirmation of receivables, observation of inventory, test of controls, test of details on cash). All wrong. A review uses inquiry and analytical procedures only.
- Forgetting that independence is required. Because compilations do not require independence (only disclosure if absent), some test takers extend that rule to reviews. Reviews are assurance engagements. Independence is required. If the accountant is not independent, decline the review and offer a compilation with the lack disclosed.
- Issuing a disclaimer for a scope limitation. Disclaimers exist under AU-C 705 for audits. A review under AR-C 90 has no disclaimer mechanism. The response to a scope limitation is withdrawal or non-issuance. Any "review report disclaiming an opinion" answer is wrong.
Bottom line
- SSARS 21 (AR-C 90) governs review engagements on historical financial statements of nonissuers.
- A review provides limited (negative) assurance: "we are not aware of any material modifications that should be made," substantially less in scope than an audit.
- Procedures are limited to inquiry of management and analytical procedures: no test of details, no test of controls, no observation, no confirmation.
- Independence is required because a review is an assurance engagement; a compilation only discloses when independence is absent.
Exam shortcut
When the question describes a procedure that includes confirmation, observation, test of details, or test of controls inside a "review" fact pattern, the procedure is wrong. A review uses inquiry and analytics only. Pick the answer that limits procedures to those two types.
The full lesson (about 2,349 words, 16 min read) adds 1 worked example, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- IV.C3
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