ARSC Meeting August 20, 2013

Transcription

1 ARSC Meeting August 20, 2013 Agenda Item 2C Summary of Comment Letters on Draft of the SSARSs, Review of Financial Statements and Review of Financial Statements Special Considerations Comment Letter No. Commenter 1 New York State Society of CPAs Accounting and Review Services Committee 2 Texas Society of CPAs Professional Standards Committee 3 North Carolina State Board of Certified Public Accountant Examiners 4 McGladrey LLP 5 State of Montana Legislative Audit Division 6 AICPA Technical Issues Committee 7 Eide Bailly LLP 8 Accounting Principles and Auditing Procedures Committee of the Massachusetts Society of CPAs 9 Emerging Standards Committee of the Kentucky Society of CPAs 10 Audit and Assurance Committee of the Illinois CPA Society 11 Georgia Society of CPAs Assurance Services Section 12 Accounting Principles and Auditing Standards Committee of the California Society of CPAs 13 Soren McAdam Christenson LLP 14 Grant Thornton LLP Prepared by: M. Glynn (August 2013) Page 1 of 83

2 Summary of Comment Letters on Draft of the SSARS, Review of Financial Statements 1 Overall #2 Texas The PSC supports the issuance of the two proposed Standards. We believe the guidance exposure draft is both relevant and appropriate, as well as consistent with existing professional literature. 2 Overall #6 TIC TIC understands that ARSC would like to simplify and shorten streamlining the codification of the review standards and might decide to of the transfer requirements and guidance for certain topics, as well as SSARSs the SSARS Interpretations, to other publications (such as the AICPA Compilation and Review Engagements Guide [the Guide]). Although this strategy shortens the standard and makes it easier to read, TIC prefers an approach that would codify all authoritative review guidance in one place, rather than segregating it into two publications. With last several years, other standard setters have trended toward consolidation and codification as the most user-friendly approach for their constituents. FASB, for example, eliminated the GAAP hierarchy and codified all authoritative guidance in one place. Most recently, the AICPA s Professional Ethics Executive Committee has exposed for public comment the Revised AICPA Code of Professional Conduct, which would include authoritative rules, interpretations and crossreferences to nonauthoritative guidance in one document. Agenda Item 2C Page 2 of 83

3 ARSC s planned approach (if TIC s understanding is correct) The ARSC believes that the overload of the would increase the amount of authoritative guidance and SSARSs with guidance is counterproductive nonauthoritative material (such as exhibits) that would be as practitioners lose sight of the requirements deleted from the SSARS codification. TIC believes this of the review service and thereby increase approach would be counterproductive. Important guidance could the risk of misapplication. be overlooked by practitioners, thereby increasing the risk of misapplication of the standards. The need to consider additional guidance outside the SSARS will also be an inconvenience to many practitioners. Many practitioners might not realize the importance or the authoritative status of the Guide. Some accountants continue to believe that if a requirement is not SSARS, it does not have to be followed. (Some TIC members have encountered this point of view when they perform peer reviews.) Guidance might be overlooked if it resides in a separate publication. If the SSARSs do not contain cross-references to the Guide, practitioners might not be aware that the Guide exists. Even if they are aware of its existence, they cannot look at the SSARS codification and readily determine what guidance the Guide contains. This would increase the time practitioners would need to research and comply with professional requirements. One TIC member, whose firm performs many compilations and reviews, pointed out that the partners who perform these engagements tend to be generalists. They know a little bit about All requirements will be in SSARSs. The only items that will be moved to the Guide (or to other publications) will be excessive illustrations and guidance. ARSC will work with the AICPA Publications Team to bundle the SSARSs Codification with the Comp and Review Guide (and maybe the OCBOA Practice Aid). Again, there would be no additional requirements Guide. Agenda Item 2C Page 3 of 83

4 everything (accounting, tax and client service) but do not have specialized knowledge about any one of those disciplines. Therefore, TIC believes partners and staff need the simplicity which comes with having all authoritative guidance in one place with sufficient cross references with guidance to readily find what they need least amount of time. TIC also believes that members may not understand when it may be appropriate to buy the Guide. Most of the other AICPA Guides address requirements and guidance specific to specialized industries, which members recognize as essential supplements to the basic standards, when they perform engagements in those industries. That is not the case with the Compilation and Review Guide. Many members mistakenly view the Guide as an optional, nonauthoritative resource which provides additional guidance (including sample reports) on matters that are already SSARS. If the Basic SSARS is limited to high-level summaries of requirements (such as the summary approach used engagement letter section), some practitioners may not realize that they should consult the Guide for specific requirements. Given the number of smaller practitioners that perform reviews, and the fact that they tend to be very budget conscious, TIC is concerned that they may forego the purchase of the Guide. If ARSC finalizes the SSARSs as proposed, certain requirements Not true all requirements will be in Agenda Item 2C Page 4 of 83

5 and application guidance will reside uniquely Guide and SSARSs. would address matters that potentially apply to many circumstances encountered in review engagements. If ARSC s objective is to remove from the SSARSs the guidance that builds off the basic mandatory and presumptively mandatory requirements, then the interpretive material (wherever it resides) needs to be linked in an obvious way to the requirements. TIC believes cross-references from the SSARS to interpretive guidance can be inserted without elevating its status SSARS hierarchy. Finally, TIC questions whether some of the proposed exclusions would improve the standard. As noted Explanatory Memorandum to the EDs, the major topic excluded from the Review SSARS concerns communications between predecessor and successor accountants. TIC does not support the exclusion of this topic, as discussed Specific Comments section below. TIC noted that the extant Interpretations to the Review SSARS have not been mentioned se proposals. The AICPA staff has advised TIC that the Interpretations will likely be moved to the Guide and will retair authoritative status. TIC questions whether this solution is optimal. TIC believes the Interpretations should be reviewed for continued relevance and either deleted, incorporated into the SSARS where appropriate or retained as separate interpretations SSARS codification. (This AR section 400 does not include a requirement that a successor accountant communicate with a predecessor accountant. The section is basically best practices for when a successor chooses to communicate with a predecessor. This is perfect Guide material. Agenda Item 2C Page 5 of 83

6 approach was followed by the Auditing Standards Board in its clarification/codification process, and it worked well.) TIC does not favor moving the Interpretations to the Guide. TIC was also uncertain why certain interpretative sections (i.e., appendices to the SSARS) have been retained EDs, while the Interpretations were excluded. During its review of the proposed SSARS, TIC found other material that is included in extant SSARS that has been omitted from the proposals. Each matter is discussed Specific Comments section below, including TIC s view on the exclusions. In some cases, TIC was unable to determine how ARSC decided what requirements and application material should stay SSARSs v. what should be excluded. In some cases, decisions to exclude or include specific material seemed somewhat arbitrary resulting in perceived inconsistencies between the content of the Guide and the SSARS. For example, the required elements for the engagement letter were excluded, but the required elements for the representation letter were retained. In summary, TIC believes the separation of application guidance from the SSARS requirements achieves sufficient simplification of the review standard and that having all requirements in one place is more important than shrinking the size of the standard Agenda Item 2C Page 6 of 83

7 The following suggestions would apply if the material excluded from the proposed SSARSs is moved to the Guide. TIC supports ARSC s intention to update the Compilation and Review Guide for all topics and exhibits in extant SSARS that will be excluded from the clarified SSARS and issuing the revised Guide concurrently with the clarified SSARS codification. Since the Guide represents authoritative, interpretive guidance, practitioners should be encouraged to purchase the Guide with the SSARS volume as a combined set. (Unfortunately, members who buy only the Professional Standards volumes may not be aware of the SSARS Codification or the Guide.) However, TIC understands that practitioners cannot be required to purchase interpretive material. Therefore, ARSC should take every possible step to ensure that practitioners understand the importance of the Guide. TIC recommends ARSC establish specific criteria for excluding topics from the SSARS and publish this information as part of the discussion on Interpretative Publications SSARS Framework (AR ) so that the process used is as transparent as possible. At a minimum, an explicit reference to the Guide should be mentioned Framework and the Preface to the SSARS codification. However, TIC would also ask ARSC to consider cross-referencing basic requirements SSARSs Agenda Item 2C Page 7 of 83

8 to the Guide. To avoid the misconception that the Guide has the same level of authority as the SSARSs, TIC recommends that the ARSC consider the approach followed by PEEC in its exposure draft of the Code of Conduct. Marketing campaigns and CPE courses for the Clarified SSARSs and the Guide should alert members to the geographical changes to minimize confusion. 3 Accountant association with financial statements TIC also requests that ARSC monitor the feedback received on the excluded material and undertake a periodic review of the exclusions to ensure that they were appropriate. #6 TIC The extant SSARS addresses the accountant s responsibility when a reviewed financial statement is presented with one or more other periods that have not been compiled, reviewed or audited. This guidance from extant AR has not been included proposed Basic Review SSARS. If the anticipated nonattest compilation proposal will include a paragraph on such association issues, TIC recommends that the Basic Review SSARS include similar, appropriate guidance that would apply context of a review engagement. That is, if requirements/guidance relating to association with unaudited financial statements will not be published as a separate SSARS, then the nonattest compilation SSARS and the review engagement SSARS, respectively, should each address association issues. The Task Force has added paragraph A77 which refers the accountant to the appropriate paragraph proposed SSARS Compilation Engagements. Agenda Item 2C Page 8 of 83

9 4 1 #6 TIC 1 states that this SSARS may be applied to reviews of Staff to work with ASB staff to develop the Applicability other historical information, and paragraph A1 includes examples appropriate language that would be included of other historical financial information that an accountant may in both standards. be engaged to review. TIC believes it would be equally helpful if the scope section of this SSARS referred to other types of reviews that are excluded from SSARSs because they are addressed attestation standards. The application material could provide common examples of attestation review engagements in an effort to mitigate any confusion as to the scope of the SSARS. Examples would also provide helpful guidance for an accountant who is asked to perform a review but is not sure which standard applies. AU-C Section 930, Interim Financial Information, paragraph 2, and paragraph 3 of the Basic SSARS ED already include parallel cross-references to help practitioners understand when each standard would be applicable for a given engagement. TIC believes that the pending exposure draft of the clarified attestation standards will include a similar cross-reference back to the SSARS standards. To provide consistent referencing among all three sets of standards, TIC recommends the final Basic SSARS include the appropriate cross-reference to the attestation standards and provide suitable examples of review attestation engagements. 5 1 #10 Illinois We suggest that 1 reference the Special Considerations The Task Force has determined to consolidate Agenda Item 2C Page 9 of 83

10 6 1 Applicability 7 A2 Scope and Applicability 8 A4 Scope and Applicability 9 3 Applicability Applicability SSARS to direct accountants to that further guidance regarding the 2 proposed SSARSs so, a reference is review engagements. #14 GT This paragraph indicates that the proposed SSARS may also be applied to other historical financial information on which an accountant has been requested to issue a review report. We believe that this statement will cause confusion with regard to the applicability of SSARS and Statements on Standards for Attestation Engagements and request ARSC to discuss this matter with the Auditing Standards Board. #2 - Texas We believe a clarification is needed as to whether the guidance in A2 refers to a situation where only one of the financial statements (e.g., a balance sheet) was presented, or a situation where only one of the statements (e.g., a balance sheet) was reviewed while the other accompanying statements (e.g., income statement, statement of cash flows) are presented but not covered by the review report (i.e., marked as unaudited or covered by a compilation report). We encourage the ARSC to consider addressing this issue as the compilation and review literature is void of any guidance in this area, and practitioners are at a loss as to what constitutes acceptable presentation and reporting in such situations. #10 Illinois A4 might, for ease and clarity, describe whether the performance of these non-attest services impairs an accountant s independence. #2 Texas We encourage the ARSC to reword paragraph 3 to clearly emphasize that the three conditions identified in sub-paragraphs unnecessary. See disposition of TIC comment above. The Task Force revised paragraph A2 of the proposed SSARS to reference the accountant to paragraph 31 of the proposed SSARS Compilation Engagements in instances where a reviewed single financial statement or specific element is accompanied by financial statements or other financial information that the accountant did not compile, review, or audit. The Task Force does not believe that the SSARSs is the appropriate place for such independence guidance. 3 aligns with paragraph.02 of AU- C section 930, Interim Financial Information. Agenda Item 2C Page 10 of 83

11 10 3 Applicability 11 3 Applicability a, b, and c are all required to trigger the application of auditing standards. An easy way to accomplish this might be simply making the final sub-paragraph in this section the lead paragraph in this section. #4 McGladrey We do not understand the relevance of paragraph A5 context of paragraph 3.b.ii. because paragraph 3.b.ii. simply establishes a condition for determining whether an engagement is subject to this standard. We recommend that paragraph A5 be deleted. #14 GT In the last paragraph, we suggest replacing the should with are required to so as to eliminate the use of should outside of the requirements section. Task Force agrees and has deleted paragraph A5. The Task Force agrees that the word should should be removed from the paragraph and has revised to read: AU-C section 930, Interim Financial Information (AICPA, Professional Standards) provides guidance for review engagements when the conditions in (a) (c) are met Effective date #3 North Carolina The proposed standards would be effective for reviews of financial statements for periods ending on or after December 15, 2014, with early implementation not permitted. The Board would like to note that many accountants encountered peer review difficulties related to past standards updates, particularly due to The revised sentence is consistent with the wording used in paragraph.02 of AU-C section 930. The Task Force agrees with the commenter. Agenda Item 2C Page 11 of 83

12 13 4 Effective Date early implementation of those updated standards. The fact that early implementation will not be permitted must be emphasized and sufficiently communicated in an effort to prevent such issues going forward. #6 - TIC The AICPA s Financial Reporting Center recently publicized the following announcement from ARSC about a planned change to the effective date of the clarified SSARSs to converge with the effective date set by PEEC for its revisions to Activities Related to Attest Services in Interpretation 101-3, Nonattest Services: ARSC plans to finalize the clarified compilation and review standards by the end of 2013 with an effective date for compilations and reviews of financial statements for periods beginning on or after December 15, 2014 (that is, for engagements performed for calendar 2015 financial statements). The Task Force is recommending an effective date as follows: This proposed SSARS is effective for reviews of financial statements for fiscal years (and interim periods within those years) beginning after December 15, The proposed revision will be consistent with the proposed effective date of the nonattest compilation standard Effective Date #12 CalCPA TIC supports ARSC s proposed change to the effective date since the extended transition time will benefit practitioners. TIC also agrees that all clarified SSARS should become effective at the same time. Why the delay in being effective on or after December 15, 2014? These standards do not need this amount of lead time to implement. The significant change to the SSARSs literature is with respect to the compilation literature. The ARSC directed that all clarified SSARSs be effective as of the same date. Agenda Item 2C Page 12 of 83

13 15 5 Objective #4 McGladrey We believe the phrase primarily through the performance of inquiry and analytical procedures should be deleted because that phrase describes how the accountant achieves the objective rather than the objective itself. The Task Force compared the objective proposed SSARS with that in AU-C section 930 Interim Financial Information, which reads as follows: 16 A6 #14 GT This paragraph indicates that, in an audit, the auditor obtains a high level of assurance. We believe that this paragraph needs to align with the language used SASs in that the auditor.05 The objective of the auditor when performing an engagement to review interim financial information is to obtain a basis for reporting whether the auditor is aware of any material modifications that should be made to the interim financial information for it to be in accordance with the applicable financial reporting framework through performing limited procedures. (Ref: par..a4.a5) The proposed SSARS uses the term limited assurance objective and spells out the limited procedures as inquiry and analytical procedures. The Task Force believes that the objective in the proposed SSARS is appropriate. The Task Force agrees with the commenter and has made the suggested change. Agenda Item 2C Page 13 of 83

14 17 A8 Objective 18 6 Definitions obtains reasonable assurance, which is a high, but not absolute, level of assurance. #10 Illinois A8 should refer to 37c instead of 38. The Task Force agrees with the commenter that the reference is not correct. However, the Task Force has determined that the appropriate reference is to paragraph 27. #4 - McGladrey The term engagement risk often is used to describe an accountant s or auditor s exposure to professional liability claims arising context of performing professional services. Accordingly, we believe another term, for example review risk, should be used to describe the risk that the accountant might express an inappropriate conclusion when performing a review engagement. The Task Force concluded since the term engagement risk is not used proposed SSARS, that it should be deleted from the list of defined terms. Because the term misstatement is used throughout the proposed standard, paragraph 6 should be expanded to include a definition of misstatement that is the same as the definition in paragraph.04 of AU-C 450, Evaluation of Misstatements Identified During the Audit: Misstatement. A difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be presented fairly in accordance with the applicable financial reporting framework. Misstatements can arise from fraud or error. Misstatements also include those adjustments of The Task Force agrees and has included the term misstatement list of defined terms. Agenda Item 2C Page 14 of 83

15 amounts, classifications, presentations, or disclosures that, in the auditor s professional judgment, are necessary for the financial statements to be presented fairly, in all material respects. 1 states that this standard may be applied to other The Task Force agrees and has included the historical financial information. However, historical financial term historical financial information information is not defined in paragraph 6. We recommend that a list of defined terms. definition of historical financial information be added to paragraph 6 and suggest using the same language used in paragraph.14 of AU-C 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards, which is: 19 6 Definitions #7 Eide Bailly Historical financial information. Information expressed in financial terms regarding a particular entity, derived primarily from that entity s accounting system, about economic events occurring in past time periods or about economic conditions or circumstances at points in time past. Definition of Experienced Accountant suggest that the reference to review processes be changed to review procedures, as the latter is a term defined proposed standard. Definition of Updated Report the definition, as drafted, is limited to situations involving a continuing accountant, which suggests that the standard does not allow a prior accountant to The definition of updated report is from paragraph.07 of AR section 200. The commenter is referring to a reissued report. Agenda Item 2C Page 15 of 83

16 20 6 Definitions 21 6 Definitions update and reissue a review report. While we do not believe this will be a common occurrence, we do not believe that the standard should prohibit such a reissuance when it may be deemed appropriate by the prior accountant. #11 Georgia #12 CalCPA 6 defines engagement risk as the risk that the accountant expresses an inappropriate conclusion when the financial statements are materially misstated. This is a new expression for the SSARS literature. Since any conclusion formed is subject to the risk of incorrect acceptance or rejection, we encourage ARSC to reevaluate the definition, and possibly expand it to include both type I and type II errors on the part of the accountant, or delete the expression entirely. We believe the definitions should include a) materiality b) internal control c) significant The Task Force revised to refer to review risk. The Task Force is comfortable with the definition. The Task Force believes that the proposed SSARSs adequately discusses the concept of materiality in a review engagement in paragraphs A7-A11 and that a definition is not necessary. Other than a statement that a review engagement does not contemplate the consideration of internal control, the Task Force does not believe that the SSARS should reference internal control. The Task Force does not see a benefit to defining significant. Agenda Item 2C Page 16 of 83

17 22 7 Acceptance #6 TIC One of the new sections proposed SSARS is a listing of See discussion memorandum. preconditions for accepting a review engagement. TIC is very supportive of this section because it explicitly states what the preconditions are and what to do if they are not met Engagement Letter #4 McGladrey However, TIC believes some additional guidance may be needed. The precondition in paragraph 7(b) states that the accountant should determine whether the financial reporting framework to be applied preparation of the financial statements is acceptable. TIC believes the implications of this requirement may not be obvious to practitioners, especially to those who do not perform audit engagements and may not be familiar with a similar requirement that exists clarified auditing standards (AU-C ). TIC therefore recommends that ARSC consider adding one or more application paragraphs to this requirement adapted from AU-C 210.A2-.A8, as appropriate. ARSC may also wish to consider additional application paragraphs for other preconditions. 9 of the proposed standard lists certain matters that should be included engagement letter in a manner similar to the audit engagement letter requirements stated in paragraph.10 of AU-C 210, Terms of Engagement. However, paragraphs.a23 and.a24 of AU-C 210 also include an explicit list of matters to which an audit engagement letter may make reference in addition to the items required by paragraph.10. We suggest the Application and Other Explanatory Material section of the See discussion memorandum. Agenda Item 2C Page 17 of 83

18 24 9 Engagement Letter proposed standard for the review of financial statements include an explicit list of matters to which an engagement letter may make reference in addition to the items required by paragraph 9, following the style of AU-C 210 paragraphs.a23 and.a24. #6 TIC Exclusions TIC disagrees with a number of changes made to this section because a number of paragraphs from the extant review SSARS have been excluded from the proposed Basic SSARS. At least some of the changes appear to be convergence changes to align the proposed SSARS with the writing style used in AU-C Section 930, Interim Financial Information. Details regarding the excluded items and TIC s views are discussed paragraphs below. TIC noticed that the list of the required elements of an engagement letter (paragraph 9) is presented in summary form, without providing a complete list of all the individual elements that should be included letter. As a result, most of the required elements from extant AR are completely omitted from the proposed SSARS. TIC believes dropping detailed requirements in favor of a high-level summary diminishes the usefulness of this section of the Basic SSARS ED, compared to the extant SSARS. See discussion memorandum. In this case, condensing requirements does not represent an Agenda Item 2C Page 18 of 83

19 improvement standard. The engagement letter is one of the most important pieces of documentation in a review engagement. Therefore, it is critical that all required elements are presented together in one place standard, without having to refer to another publication. Otherwise, practitioners may place too much reliance on the illustrative engagement letter, which is not meant to provide examples of all required elements. The proposed approach also could confuse some third-party providers of technical guidance, who may believe that omission of specific requirements from the SSARS is an indication that ARSC intends to provide more flexibility standard by allowing practitioners to exercise professional judgment regarding the elements to be included letter. Of the various matters that have been omitted from the requirements section, TIC believes this one is the most important: Management s Responsibilities Management is responsible to prevent and detect fraud. Management is responsible for identifying and ensuring that the entity complies with the laws and regulations applicable to its activities. TIC believes management s responsibilities for the detection and prevention of fraud and for compliance with applicable laws and regulations are critical to ensuring that management does not Agenda Item 2C Page 19 of 83

20 inappropriately rely on the accountant to protect the entity from these risks. TIC realizes that these matters will be intuitive to those who have been practicing for many years, but if they are omitted standard, they may also be omitted from future editions of third-party practice aids. Less-experienced members of the profession may not realize their importance and also exclude them. Cross-referencing from paragraph 9(b) to paragraph 7(c) does not seem appropriate. TIC believes these management responsibilities are required elements of the engagement letter but are not required preconditions for accepting a review engagement. (TIC noted that paragraph 7[c] is consistent with the relevant paragraphs from AU-C [b] and AU-C [b].) If the above cross-reference is retained, then paragraph 9(b) will be incomplete because it would exclude these management responsibilities. TIC recommends that paragraph 9 explicitly identify all of the detailed matters that should be included engagement letter. TIC suggests retaining subparagraphs 9(a) through 9(e) and listing each bullet item from AR under the appropriate subparagraph. A separate paragraph extant review standard (AR 90.06) includes a requirement to address two additional matters Agenda Item 2C Page 20 of 83

21 engagement letter, if applicable. This paragraph has been omitted from the requirements section for engagement letters Basic SSARS ED and from the applicable requirements Special Considerations SSARS ED. Additional Matters, if applicable Material departures from the applicable financial reporting framework may exist, and the effects of those departures, if any, on the financial statements may not be disclosed. Reference to supplementary information. TIC believes this omission may have been unintentional and suggests that these requirements be restored to the final standard. Inconsistencies The Task Force believes that the additional matters were included in extant SSARSs as a carry-over from AR section 80. AR section 80 addresses those issues from a prescpective of compiled financial statements that are not intended to be used by third parties. 9 of the Basic SSARS ED is also internally inconsistent. 9(b) includes a cross-reference to paragraph 7(c) for a list of applicable management responsibilities which must be included letter, but no such cross-references are provided for paragraphs 9(a), objectives of the engagement; 9(c), the responsibilities of the accountant; and 9(d), the limitations of a review engagement. As mentioned above, TIC believes all of the subparagraphs within paragraph 9 should include detailed requirements. Agenda Item 2C Page 21 of 83

22 The conventions used in paragraph 9 are also inconsistent with those used in paragraph 32, which does provide a detailed list of the specific representations that should be included management representation letter. TIC believes the approach taken in paragraph 32 will be much more useful to practitioners Engagement Letter Certain required elements from paragraph 7(c) (i.e., paragraph 7[c][iii][3] and 7[c][iv]) do not appear engagement letter. TIC recommends that a consistency review be performed between the engagement letter requirements and the illustrative letter to ensure completeness, accuracy and consistency between the requirements and the illustration. #10 - Illinois 9 includes requirements on the terms of the engagement. We request guidance be added for multiyear engagements including whether an engagement letter can cover multiple periods and whether an annual written signed engagement letter is necessary if the accountant documents that the underlying conditions remain unchanged from the prior engagement (similar to the guidance described in AU-C for example). The Task Force concluded that additional guidance is not needed as such guidance is provided AICPA Guide Compilation and Review Engagements. However, the Task Force has included a specific discussion item discussion memorandum with respect to the comment. In addition, we noted that the first sentence in 9 only refers to management. We would suggest that this sentence be modified to read management and those charged with governance, as appropriate. The Task Force agrees with the commenter and has made the suggested revision. Agenda Item 2C Page 22 of 83

23 26 10 Engagement Letter Engagement Letter Engagement Letter Engagement Letter Engagement Letter 31 A90 Illustrative #1 - The Task Force agrees with the commenter. NYSSCPA #3 North Carolina #4 McGladrey #9 Kentucky The explicit requirement to obtain a signed engagement letter for review engagements helps to document the understanding between the accountant and a client clearly with mutual acknowledgements of each party s responsibilities under the review engagement. In addition, the signatures of both parties signify their agreement to fulfill the tasks and the terms as written engagement letter. The Board strongly supports the requirement of obtaining a signed engagement letter. An engagement letter establishes the scope of the engagement and ensures that services to be performed are correctly specified at the outset to avoid misunderstandings later on engagement. We fully support the new requirement to have the agreed-upon terms of the engagement documented in an engagement letter or other suitable form of written agreement that is signed by the accountant or the accountant s firm and management or those charged with governance, as appropriate. We also support the requirement to obtain a signed engagement letter. These letters should be signed to document the understanding with the client about the services to be performed. #14 GT Although this is ordinarily the case, we believe that it is unnecessary to include a specific requirement for the engagement letter or other suitable form of contract to be signed by the accountant and management or those charged with governance. The Task Force agrees with the commenter. The Task Force agrees with the commenter. The Task Force agrees with the commenter. The Task Force disagrees with the commenter and has determined to make the requirement explicit. #6 TIC Exclusions See discussion memorandum. Agenda Item 2C Page 23 of 83

24 Exhibit A Illustrative Engagement Letter (paragraph A90, pages 45-47) omits the following required management responsibilities that are included illustrative engagement letter at extant AR 90.70: Engagement Letter Preventing and detecting fraud. Identifying and ensuring that the entity complies with the laws and regulations applicable to its activities. The bullet points listed under extant AR have been omitted from the application paragraphs of the ED and should be restored. The points discuss the other matters that an accountant may include engagement letter. Fees and indemnification paragraphs are mentioned illustrative engagement letter. However, TIC believes the application paragraphs should include a complete list of the most common other matters. TIC requests that all of the above exclusions be restored to the final Basic SSARS. Inconsistencies TIC believes that some of the wording used last paragraph on page 45, which continues at the top of page 46, should be revised for consistency with the related requirements for communicating fraud or noncompliance with laws and Agenda Item 2C Page 24 of 83

25 regulations to management and those charged with governance. For example, paragraph 47 limits the requirement to communicate identified or suspected noncompliance with laws and regulations to those whose effects should be considered when preparing financial statements. In contrast, page 46 of the engagement letter implies a broader communication requirement, since it does not limit the communication to instances of noncompliance whose effects should be considered when preparing financial statements. In addition, the last sentence of the communication paragraph at the top of page 46 is inconsistent with the related requirement in paragraph states that instances of noncompliance with laws and regulations should be communicated other than when matters are clearly inconsequential. The engagement letter (page 46) uses the phrase unless they are not material. TIC prefers the phrase other than when matters are clearly inconsequential and recommends that the engagement letter be revised accordingly. Editorial Matter The illustrative engagement letter (paragraph A90 page 45) includes a sentence that states the review engagement will be conducted in accordance with SSARS. TIC believes the acronym should not be used by itself since this is the only mention of Agenda Item 2C Page 25 of 83

26 SSARS letter. In addition, to be consistent with the illustrative engagement letter in extant AR 90.70, TIC recommends that SSARS be expanded to: 32 A90 Illustrative Engagement Letter 33 A90 Illustrative Engagement Letter #7 Eide Bailly Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. Responsibilities of the Accountant Heading - The second sentence of the second paragraph currently reads A review engagement is substantially less in scope that an audit. We believe this should be than, rather than that. The third paragraph reads Our engagement cannot be relied upon to disclose errors, fraud, or noncompliance with laws and regulations. We recommend replacing the word disclose, perhaps with identify or discover. #10 Illinois We believe that the last two sentences of the third paragraph of the responsibilities of the accountant section (starting However, we will inform ) should be noted as optional sentences. 9 of the proposal and even auditing standards do not require this communication engagement letter. Some firms believe these sentences may increase the accountant s legal liability by putting the accountant position of proving why a fraudulent act or a violation of law or regulation did not come to his or her attention. Some firms are simply omitting these sentences. The Task Force agrees with the commenter and has made the revision. Task Force agrees with the commenter and has revised to state that the engagement cannot be relied upon to identify errors, fraud, or noncompliance with laws and regulations. The proposed SSARS requires the accountant to disclose material errors and known fraud to management/those charged with governance. Therefore, the Task Force feels that the illustrative engagement letter is appropriate in this regard. Agenda Item 2C Page 26 of 83

27 To avoid any possible misunderstandings and potential litigation, consideration should be given to adding a sentence illustrative engagement letter specifically stating that the accountant has no responsibility to identify and communicate deficiencies in internal control as part of the review engagement. The illustrative engagement letter includes a statement that the review does not contemplate obtaining an understanding of the entity s internal control. The Task Force believes that this is sufficient. 34 A90 Illustrative Engagement Letter Professional Judgment Consideration should also be given to include illustrative engagement letter the engagement partner s identity and role in the review engagement. This sentence would then document the required communication to the client s management and those charged with governance, in accordance with Statement of Quality Control Standards No. 8, A Firm s System of Quality Control (Redrafted). #14 GT Since this is an illustrative engagement letter, we recommend referring to Statements on Standards for Accounting and Review Services in lieu of SSARS with illustrative letter. #4 McGladrey The language in paragraph 11 is similar to the definition of professional skepticism in AU-C 200. We believe this may cause confusion between the requirements for the auditor to exercise professional skepticism when conducting an audit engagement and the requirement review standard to apply professional judgment. We believe paragraphs 12 and A18-A21 adequately address the accountants responsibilities to apply professional judgment in a review engagement and paragraph 11 should be The Task Force believes that the identification of the engagement partner s name would not be appropriate in a review engagement especially since such identification is not required in an audit engagement (for nonpublic entities). The Task Force agrees with the commenter and has made the suggested revision. The Task Force agrees with the commenter and has deleted the paragraph Agenda Item 2C Page 27 of 83

28 36 12 Professional Judgment Professional Judgment and A23- A24 Knowledge of the Entity Knowledge of the Entity 40 16b Designing and Performing Designing and Performing #3 North Carolina #9 Kentucky deleted to avoid potential confusion. By explicitly stating that an accountant should exercise professional judgment, the proposal clarifies the expectation of the accountant prior to engaging performance of any review services. We are in agreement with the explicit statement to exercise professional judgment performance of a review engagement; this statement eliminates any uncertainty in practice. #10 Illinois s A23 and A24 would better align with the bullet points in 14 if the content of the second bullet of A23 was exchanged with the content of A24. #12 CalCPA Consider adding modifications as well as material misstatements. #14 GT We suggest replacing the term client with the term management or entity, as applicable. #4 McGladrey 14 states, The accountant should obtain knowledge about the entity sufficient to identify areas financial statements where there is a greater likelihood that material misstatements may arise Similarly, paragraph 17 states, The accountant should focus the analytical procedures and inquiries in those areas in which the accountant believes there are increased risks of misstatements. While we understand the accountant The Task Force agrees with the commenter. The Task Force agrees with the commenter. The Task Force determined to move the references to the application material to the end of paragraph 14. The Task Force does not believe that the proposed revision would be appropriate. The Task Force agrees with the commenter and has made the proposed revision. See discussion memorandum. Agenda Item 2C Page 28 of 83

29 42 17 Designing and Performing Analytical Procedures Analytical Procedures Analytical Procedures should focus increased attention on areas where there is a greater risk of material misstatement, we are concerned these two sentences imply that the accountant only needs to focus on the higher risk areas rather than on all areas where a risk of material misstatement has been identified. We recommend paragraph 17 clarify that review procedures should be performed for all areas where a risk of material misstatement has been identified, not just those where there is a greater likelihood of material misstatement. #7 Eide Bailly Is the intent to require the accountant to focus analytical procedures and inquiries in all areas in which there is an increased risk of misstatement, or should this requirement also reference material misstatements? #5 Montana 18a requires a comparison of the financial statements to comparable information for the prior period. Clarify whether this is required only when the prior period has been audited. #14 GT We recommend including a requirement to compare disaggregated revenue data. This would be consistent with the analytical procedures performed in a review of interim financial information in accordance with Statements on Auditing Standards ( SAS ). #6 TIC 19(b) discusses the factors that should be considered when assessing the reliability of the data to be used in performing analytical procedures. One of the stated factors to be considered is controls over preparation. TIC believes this factor would be relevant only in an audit context. Including controls over preparation in paragraph 19(b) would contradict the statement Task Force has added the word material to paragraph 17. There is no requirement that the prior period amounts be audited. See Discussion Memorandum. Task Force agrees with the commenter that controls over preparation should be deleted. Agenda Item 2C Page 29 of 83

30 46 19 Analytical Procedures 47 19c Analytical Procedures ; A29- A23; and Appendix A Analytical Procedures made in paragraph A6 that: A review does not contemplate obtaining an understanding of the entity s internal control. TIC therefore recommends that the phrase be deleted. #4 McGladrey #12 CalCPA We believe paragraph 19.c. should be modified to state, may cause the financial statements to be materially misstated. [emphasis added] Should read material misstatement, not just misstatement #10 Illinois Guidance presented on analytical procedures for review engagements in s 18-20, s A29-A33 and Appendix A is very similar to the substantive analytical procedures guidance found clarified auditing standards (AU-C ). The audit standards are intended to produce substantive audit evidence to support an audit opinion. In a review, we expect less involved analytical procedures because a review is a lower level of assurance than an audit. For example, the terms material misstatement, controls over preparation, and expectation is sufficiently precise would seem to imply a level of testing and internal control analysis not typically contemplated in a review engagement. Because the audit and proposed review analytical procedure requirements are so similar, it is not clear if the analytical procedures expected to be performed in a review are intended to result same level of assurance as those performed in an audit. While we acknowledge Task Force agrees with the commenter and has made the proposed edit. The Task Force believes that the revision made to the proposed standard as suggested in comment #39 would address the commenter s concern. The Task Force has deleted the phrase controls over preparation but believe that the remainder of the requirements and guidance are appropriate for review engagements. Agenda Item 2C Page 30 of 83

31 the differences presented in s A28 and A33, we request similar adjustments to the analytical review requirements, including the elimination of the terms quoted previously. In The AICPA Compilation and Review Guide addition, we request the Board to consider adding some specific includes a detailed illustration of analytical examples of analytical procedures and ways to complete them to procedures performed in review engagements. the application guidance. Such examples may, among other things, provide necessary clarification whether the analytical procedure expectation is sufficiently precise ( 19c) given the guidance that the expectation can be less precise than those developed in an audit ( A28). 49 Analytical Procedures Application Material specific to government entities Inquiries s 18 and 19 refer to s A27-A28 and A30- A32, respectively. However, paragraph A28 appears to more closely relate to 19c and s A30 and A31 appear to more closely relate to 18. #6 TIC TIC noted that ARSC decided not to provide application guidance for reviews of governmental entities. However, some states, such as Wisconsin, do not require financial statement audits of all of the various governmental entities, and some of these entities choose to engage an accountant to perform a review. Therefore, TIC recommends that analytical procedures specific to reviews of governmental entities be added to the application material Basic SSARS. #14 GT This paragraph indicates that the accountant is not required to corroborate management s responses with other evidence. We believe that this statement may be taken out of context without The Task Force agrees with the commenter and has made the proposed revision. Task Force does not believe that analytical procedures performed in a review of a governmental entity are dissimilar to those performed in any other review engagement. The Task Force disagrees with the commenter as the paragraph reinforces the limited nature of the review engagement. Agenda Item 2C Page 31 of 83

32 51 23 Reading revision or additional application guidance. Other review procedures may be necessary when management s responses do not seem reasonable, are consistent with the accountant s knowledge of the entity s business, or otherwise appear to be inadequate. Financial Statements the Reading the Financial Statements #4 McGladrey 23 states that The accountant should read the financial statements This sentence should be changed to state that The accountant must read the financial statements There are no procedures other than reading the financial statements that would accomplish the objective of this requirement. #6 TIC 23 includes a presumptively mandatory requirement for the accountant to read the financial statements. The definition of presumptively mandatory requirements in AR would allow the accountant, in rare circumstances, to depart from such requirements if the accountant can justify the departure by way of alternative procedures that would achieve the same objectives. The Task Force believes that the presumptively mandatory requirement (i.e., should) is appropriate. See consideration of comment #38. Based on the definitions of professional requirements in AR 60.11, TIC believes reading the financial statements does not meet the definition of a presumptively mandatory requirement. An accountant cannot perform a review engagement without reading the financial statements in all cases. It is the procedure upon which all other review procedures are based. No alternative procedure exists that would achieve the same objective. Elevating its status hierarchy of professional requirements is also one way to emphasize its importance. TIC therefore recommends that Agenda Item 2C Page 32 of 83