When it comes to the performance of an audit, there are frequently updates and changes to standards and guidelines. However, this is not always the case for review and compilation engagements, which tend to require more professional judgement, as there is less guidance available in their respective standards.
The ambiguity in these standards have led to inconsistent practices across CPA firms and as a result, the Auditing and Assurance Standards Board (AASB) decided to set new and revised standards for review and compilation engagements.
So what exactly are these new standards? Let’s take a look.
The new standard for review engagements is the Canadian Standard on Review Engagements (CSRE) 2400, which was issued in April 2016 and will be effective in 2017. This new standard will replace the following:
- Section 8100 – General Review Standards
- Section 8200 – Public Accountant’s Review of Financial Statements
- Section 8500 – Reviews of Financial Information other than Financial Statements
The new standard will include all necessary guidance to conduct a review engagement, compared to the old standards that did not cover sufficient depth, which reverted users to audit standards for guidance.
Specifically, the key issues that the AASB wanted to address with this initiative include:
- The need for a set of comprehensive “stand alone” review engagement standards
- The nature and extent of review engagement procedures
- The form and content of the practitioner’s report
Though the new standard provides more guidance on review engagements (ex. paragraph 47 sets out specific inquiries that the practitioner required to make of management and others within the entity), the standards are also more rigorous. For example, paragraphs 41-42 of the new standard require the practitioner to determine materiality and to revise it in the event of becoming aware of information that would have caused a different amount initially. As well, the practitioner is required to communicate with management or those charged with governance on a timely basis all matters concerning the engagement, and the practitioner is to obtain evidence that the financial statements agree with, or reconcile to, the entity’s underlying accounting records, for which there is no comparable requirements in the 8000 Series
If you are interested in reading exactly how the new standards differ from the previous standards, the June 2016 issue of the Audit and Assurance Alert by CPA Canada includes a summarized comparison between the CSRE 2400 and former 8000 Series. The article can be accessed through the following link: https://www.cpacanada.ca/en/business-and-accounting-resources/audit-and-assurance/standards-other-than-cas/publications/alert-csre-2400-vs-the-8000-series
The new standards also bring about additional implications to firms including:
- New review engagement reports
- New engagement letters to be obtained
- New file documentation
With the additional requirements in the new standards, adequate preparation will be essential to ensuring all parties are aware of the potential impact on future engagements.
Here’s what parker simone is doing to prepare:
- Reading and understanding CSRE 2400
- Training staff and partners on CSRE 2400
- Considering a timetable for engagements that will be performed under CSRE 2400 (effective for periods ending on or after December 14, 2017)
- Discussing the new standard with clients
- Preparing amendments to engagement letters, representation letters and other communications
Although a new standard has not been formally prepared, surveys of compilation report users – primarily bankers – indicate that greater reliance is being placed on CPA firm compiled financial statements. However, given the gaps in the current standards, there are major inconsistencies between firms.
As a result, the AASB is in the process of conducting research on examples of compiled financial statements issued by public accountants and will hold consultations with bankers and other lenders to formalize a clarified standard. This project will include determining the nature and extent of revisions that should be made to the current standard – Section 9200: Compilation Engagements, and may involve the adoption of International Standards on Related Services (ISRS 4400).
Some of the changes that are anticipated include:
- The definition of a compilation engagement (does the report need to include brighter red flags to draw attention to the limited nature of the practitioner’s involvement with the financial statements?)
- The intended scope of the standard
- Whether there is a need for requirements dealing with quality control
- Practitioner’s work effort (and the link between the practitioner’s ethical responsibility not to be associated with misleading information)
- Reporting requirements
Similar to review engagements, the changes to compilation requirements are expected to be more rigorous than the current standards, which will aim to decrease the information gaps and provide more guidance.
Have you made an assessment as to how these proposed changes will impact your company’s annual financial statements and interactions with your public accountant as part of the year end compilation? Have you communicated with lenders and other external users? Reach out to a parker simone advisor to learn more about how these changes may impact you and your business.
Paula Ramirez, CPA, CA, is a Senior Accountant at parker simone LLP. Before joining the parker simone team, she attended the University of Waterloo where she obtained a Bachelor of Accounting and Financial Management and a Master of Accounting. She enjoys new experiences and is always up to an adventure; whether it’s travelling to a new city or exploring the diverse art and culture in Toronto.
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