In this video, 7.07 – Review Engagements – Lesson 4, Roger Philipp, CPA, CGMA, continues the discussion of specific requirements under AR-C 90 of SSARS for an engagement to review financial statements of a nonissuer entity. To obtain sufficient review evidence, an accountant performs analytical procedures and makes inquiries of management.
Roger provides a detailed overview of analytical procedures and inquiries while also describing the relationship between the two – often, that inquiries of management arise from the results of analytical procedures performed by the accountant. Throughout the video, Roger Philipp, CPA, continually provides a big-picture view by comparing and contrasting review engagements with audits, and also with compilations and financial statement preparation engagements (two other engagements under the purview of SSARS which was newly updated by SSARS 21).
Roger also provides an overview of reading the financial statements, dealing with the work of other accountants, evaluating the relationship of the financial statements to the underlying accounting records, and obtaining review evidence. In the next video, Roger will go over written representations, specifically the management representation letter that is required in a review.
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Video Transcript Sneak Peek:
It says, "Analytical procedures generally provide the primary form of review evidence obtained by the accountant. The accountant uses an understanding of the industry, client knowledge, and general knowledge about business, accounting, and economy, and the economy, to develop expectations as to information that might appear. Expectations may in the form of an amount, such as ranges of amounts, it could be in the form of ratios of relationships," like receivables to sales, right, normally let's say, my receivables to sales is a certain percent, then I will look at that to see if it's year to year to year, it's consistent, it looks reasonable.
"The accountant will compare the client's data expectations to determine if variances are reasonable. Any difference should be investigated further. Some analytical procedures that the accountant is required to perform include: comparing current period," so current year and prior year, "CY," current year. "PY," prior year.
"Considering plausible relationships between financial and non-financial," I mentioned that a number of employees and payroll data. "Comparing amounts reported by the financial statements or ratio amounts, and derive those amounts that you expected, making comparisons using disaggregated revenue data," that would be like revenue month-to-month, or by product line.
"When fluctuations or differences are expected, amounts exceed what the accountant considers acceptable, the accountant will investigate the differences" by then making what? Inquiries. So this is what leads us into the inquiries, so a lot of times you'll do your analytical procedures, and we call inquiries and... And then we'll go back and go, "hey! I need some clarification here, these things don't look right."
What are the inquiries? Certain inquiries, "the preparation and fair presentation of the statements, any unusual or complex transactions, significant transactions, especially those occurring near the end of the year." What about that? At the end of the year, maybe they pay off a loan, so their debt goes down. But then their cash goes bye-bye, and then they borrow the money back three days later, after year-end, just so their debt is lower, so their ratios get affected. You've gotta look at that stuff, you've gotta ask them questions, so you're making inquiries of management about all of these things.
"Uncorrected errors in the prior year statements. Results of analytical procedures requiring further clarification. Subsequent event," that's an event that occurs after the balance sheet date but before you issue the report. "Any suspicion of fraud. Noncompliance with laws and regulations. Significant journal entries," or AJEs, adjusting journal entries, reclassifying journal entries, things like that.
"Applicable communications from regulators, related party transactions, litigations, claims, and assessments," things that we ask about in an attorney's letter, called the letter about an inquiry, which we don't get. "The reasonableness of management's estimates, actions taken at board meetings, other matters," all of these are things that we are doing with inquiries, and again, a lot of the inquiries come from your analytical procedures.