In many countries, listed companies are required to publish a half-yearly interim report containing a summarised statement of profit or loss for the first six months of the financial year as well as certain statement of financial position information and notes.
Companies may choose to, or be required to, have this report reviewed by the company’s auditors.
Objective of a Review of interim financial information
ISRE 2410 Performed by the
Independent Auditor of the Entity states that:
‘The objective of an engagement to review interim financial information is to enable the auditor to express a conclusion whether, on the basis of the review, anything has come to the auditor’s attention that causes the auditor to believe that the interim financial information is not prepared, in all material respects, in accordance with an applicable financial framework.’ [para 7]
2 Acceptance considerations
In order to express a conclusion on the interim financial information the assurance provider will require a good understanding of the company.
The external auditor is likely to have the greatest understanding of the entity therefore would be best placed to provide this service. Therefore if the company approaches a different firm to provide this service the firm should consider reasons for this.
The engagement is likely to be a recurring engagement. Therefore the engagement fees will need to be considered when assessing fee dependency.
The acceptance matters covered in 6 should also be considered.
3 Planning and performing the engagement
Main principles of the review engagement
To ensure an appropriate standard of work is performed, practitioners should:
Comply with the ethical requirements of ACCA’s code of conduct. Implement appropriate procedures.
Consider whether the engagement should be accepted such as whether the practitioner has the necessary competence and available resources.
Plan and perform the review with an attitude of professional scepticism. [ISRE 2410, 4 – 6]
Procedures
The accountant must carry out sufficient work to enable them to express limited assurance on the interim financial information.
This involves:
Identifying the types of potential material misstatements and the likelihood of them occurring.
Performing procedures such as:
– Enquiries of relevant parties (usually management)
– Analytical procedures
– Other review procedures to obtain sufficient appropriate . [ISRE 2410, 12]
Analytical procedures should be designed to identify relationships and individual items that appear unusual. Such procedures might include:
Comparison of the current financial statements vs. prior periods.
Comparison of the current financial statements vs. forecasts or budgets.
Review for any relationships within the financial statements that would be expected to conform to a predictable pattern based on previous patterns for the entity or industry norms:
– Gross profit margin
– Net profit margin
– Interest cover
– Receivables days
– Payables days
– Inventory days.
ISRE 2410 Detailed procedures
ISRE 2410 procedures:
Reading prior year files relating to the audit and interim financial statement review to enable the auditor to identify matters that may affect the current period interim financial information.
Considering any significant risks, including the risk of management override of controls that were identified in the audit of the prior year’s financial statements.
Reading the most recent annual and comparable prior period interim financial information.
Considering materiality with reference to the applicable financial framework as it relates to interim financial information to assist in determining the nature and extent of the procedures to be performed and evaluating the effect of misstatements.
Considering the nature of any corrected material misstatements and any identified uncorrected immaterial misstatements in the prior year’s financial statements.
Considering significant financial accounting and matters that may be of continuing significance such as significant deficiencies in internal control.
Considering the results of any audit procedures performed with respect to the current year’s financial statements.
Considering the results of any internal audit performed and the subsequent actions taken by management.
Enquiring of management about the results of management’s assessment of the risk that the interim financial information may be materially misstated as a result of fraud.
Enquiring of management about the effect of changes in the entity’s business activities.
Enquiring of management about any significant changes in internal control and the potential effect of any such changes on the preparation of interim financial information.
Enquiring of management of the process by which the interim financial information has been prepared and the reliability of the underlying accounting records to which the interim financial information is agreed or reconciled.
[ISRE 2410, para 15]
Written representations
A written representation should be obtained which confirms management:
Is responsible for internal control to prevent and detect fraud and error.
Have prepared the interim financial information in accordance with the applicable financial framework.
Believe that the uncorrected misstatements are immaterial. Has disclosed to the auditor:
– all significant facts relating to fraud or suspected fraud to the auditor.
– results of its assessment of risk of material misstatement of the interim financial information.
– any known or possible non-compliance with laws and regulations.
– all significant subsequent events that may require adjustment or disclosure.
[ISRE 2410, para 34]
Illustration 1 – Example of an unmodified review report
Report on
(Appropriate addressee)
Introduction
We have reviewed the accompanying balance sheet of ABC Entity as of March 31, 20X1 and the related statements of income, changes in equity and cash flows for the three-month period then ended, and a summary of significant accounting policies and other explanatory notes.
Management is responsible for the preparation and fair presentation of this interim financial information in accordance with International Financial Standards. Our responsibility is to express a conclusion on this interim financial information based on our review.
Scope of review
We conducted our review in accordance with the International Standard on Review Engagements 2410 Performed by the Independent Auditor of the Entity. A consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim financial information does not give a true and fair view (or ‘does not present fairly, in all material respects’), the financial position of the entity as at March 31, 20X1, and of its financial performance and its cash flows for the three-month period then ended in accordance with International Financial Standards.
Signature
Date
Address
[International Standard on Review Engagements 2410 Performed by the Independent Auditor of the Entity, Appendix 4]
Test your understanding 1
Describe the procedures that should be performed when reviewing interim financial statements.
(5 marks)
4 summary
Test your understanding 1
Compare the interim financial information to the prior year interim financial information.
Calculate key ratios such as receivables days, payables days, inventory days, etc and compare with the ratios calculated from the last audited financial statements.
Compare the accounting policies used in the interim information with the accounting policies used in the audited financial statements to ensure they are consistent.
Enquire of management if there have been any significant control deficiencies during the period which could affect the reliability of the figures.
Review the audit file from the year-end audit to identify issues arising in the subsequent events review which could impact the figures.
Enquire of management of any significant changes that have happened to update understanding of the entity.
