and Documenting Review Engagements
Guidance Under SSARS 10 and SSARS 11
Thomas A. Ratcliffe
2005 - In
May 2004, the AICPA Accounting and Review Services Committee
(ARSC) issued Statement on Standards for Accounting and Review
Services (SSARS) 10, Performance of Review Engagements,
and SSARS 11, Standards for Accounting and Review Services.
SSARS 10 amends SSARS 1, Compilation and Review of Financial
Statements, which covered the performance and documentation
of review engagements. SSARS 10 is not applicable to compilation
engagements. It expands on SSARS 1’s treatment of analytical
procedures, inquiries, and other procedures. Furthermore,
SSARS 10 requires specific fraud-related inquiries of management
and adds items to management’s representation letter
required in such engagements. SSARS 10 also clarifies existing
documentation issues and adds new documentation requirements
in review engagements.
to both compilation and review engagements, SSARS 11 establishes
a hierarchy of the technical literature and other publications.
While SSARS 11 is not expected to have a significant impact
on how compilation or review engagements are performed,
it will distinguish the literature with standards that must
be followed from guidance that is available to help.
the Review Engagement
objective of review engagement procedures is to provide
a reasonable basis for communicating any material modifications
that must be made to the financial statements for them to
be in conformity with generally accepted accounting principles
(GAAP) or, where applicable, with an other comprehensive
basis of accounting (OCBOA). The primary review engagement
procedures are generally limited to performing analytical
procedures and making inquiries of management. Other review
engagement procedures might include reading reports for
subsidiaries or investees of the primary reporting entity.
Also, as in compilation engagements, the financial statements
under review must be read for compliance with GAAP or OCBOA.
engagements do not require an understanding of internal
control–related issues, testing of accounting records,
corroboration of responses to inquiries, or any other procedures
typically associated with a financial statement audit. A
CPA engaged for a financial statement review should possess
knowledge of the accounting principles and practices in
the client’s industry and an understanding of the
business in order to perform the appropriate analytical
review and inquiry procedures to provide the limited assurance
that no material modifications must be made to the financial
statements to bring them into conformity with GAAP or OCBOA.
should perform analytical procedures in all review engagements.
These procedures help identify, and provide a basis for,
any necessary inquiries about relationships and individual
items within the financial statements that may indicate
a material misstatement.
procedures in review engagements should include the following:
Developing expectations by identifying and using plausible
relationships that are reasonably expected to exist for
the reporting entity and its industry.
Comparing recorded amounts, or ratios developed from recorded
amounts, to the expectations.
analytical procedures cannot occur without first developing
expectations related to the results of those procedures.
This requirement has existed in the performance of analytical
procedures since the issuance of SSARS 1. SSARS 10 creates
a new requirement to document significant expectations where
those expectations are not otherwise readily determinable
from other documentation of work performed in the engagement.
addition to analytical procedures, SSARS 10 adds to the
SSARS 1 inquiries for consideration in review engagements:
The status of uncorrected misstatements identified during
the previous engagement (if applicable).
Knowledge of fraud or suspected fraud affecting the entity
involving management or others, where the fraud could
have a material effect on the financial statements (e.g.,
communications received from employees, former employees,
audit engagements, review engagements do not require the
incorporation of uncorrected misstatements into the management
representation letter. The status of these uncorrected misstatements
must be understood, however, because of the potential impact
on the current-year review engagement. Like audit engagements,
there is a parallel requirement, established in SSARS 10,
for representations related to fraud to be incorporated
into the management representation letter. Essentially,
because misstatements in the financial statements could
be unintentional (error) or intentional (fraud), SSARS 10
requires inquiries about fraud and representations about
fraud in the management representation letter.
the Answer Is Yes
response to feedback on the exposure draft that ultimately
became SSARS 10 requesting guidance for cases when a fraud
inquiry received a “yes” answer, the ARSC released
Interpretation 26, Communicating About Possible Fraud
to Management and Others, simultaneously with SSARS
10. Interpretation 26 applies to both compilation and review
engagements when fraud is suspected, and expands on SSARS
1, paragraph 5. Essentially, whenever fraud is suspected
to have occurred, the matter should be brought to the attention
of the appropriate level of management unless the fraud
is considered to be clearly inconsequential. If the suspected
fraud involves senior management, the matter should be reported
to an individual or group at a higher level within the reporting
entity (e.g., the owner/manager or the board of directors).
Additional procedures to ascertain whether fraud has occurred
or the probability that fraud has occurred are not required.
the guidance in AICPA Code of Professional Conduct Section
301, Confidential Client Information, Interpretation
26 clearly stipulates that the disclosure of possible fraud
to parties outside the reporting entity ordinarily is not
a CPA’s responsibility and ordinarily would be precluded
by ethical or legal obligations of confidentiality. In the
following circumstances, however, a duty to disclose a fraud
issue to parties outside the entity might exist:
To comply with certain legal and regulatory requirements.
To notify a successor accountant, if the successor communicates
with the predecessor accountant regarding acceptance of
In response to a subpoena.
the ethical and legal obligations for client confidentiality
are complex, it is usually wise to consult legal counsel
before disclosing suspected fraud to parties outside the
the Review Engagement
should document work performed in a review of financial
statements; the form and content of the documentation reflect
the circumstances of the engagement. Review engagement documentation
is the principal record of procedures performed and conclusions
reached. Because each review engagement is unique, it is
not possible to specify the form and content of review engagement
documentation for all engagements. Documentation should,
however, include any significant findings or issues that
engagement documentation should include the following:
Matters covered in inquiry procedures.
Analytical procedures performed.
The significant expectations used in analytical tests,
and the factors considered in the development of these
expectations if they are not otherwise readily determinable
in other workpaper documentation.
Results of the comparison of expectations to recorded
amounts or computed ratios.
Any additional procedures performed in response to significant
unexpected differences and their results.
Any unusual matters considered during the performance
of review procedures, including the disposition of those
The management representation letter.
10 includes a significant new requirement to document significant
expectations used in analytical tests. While effective analytical
tests cannot be performed without developing expectations
for recorded amounts or ratios, the requirement to document
the significant expectations is new. The Exhibit
provides an example of how to document expectations for
analytical tests in review engagements. The ARSC has developed
a revised management representation letter that incorporates
the provisions of SSARS 10; it is available at www.aicpa.org/members/div/auditstd/
must perform compilation and review engagements in accordance
with SSARSs. SSARSs provide a measure of quality, and the
objectives to be achieved, in these engagements. Because
of the wealth of literature about compilation and review
engagements, SSARS 11 provides the following hierarchy for
Level I: SSARSs. These documents should be followed
in the performance of both compilation and review engagements.
Level II: Interpretive publications. These consist
of Interpretations of the SSARSs, appendices to the SSARSs,
applicable AICPA accounting and auditing guides, and applicable
AICPA Statements of Position (SOP). These interpretive
publications should be considered and, when they apply,
Level III: Other compilation and review publications.
These include AICPA accounting and review publications
not included within Level I and Level II; the annual AICPA
Compilation and Review Alert; compilation and
review articles in the Journal of Accountancy;
other professional journals; compilation and review articles
in the AICPA’s CPA Letter; continuing professional
education programs and other instruction materials, textbooks,
guidebooks, compilation and review programs, and checklists;
and other compilation and review publications from state
CPA societies, other organizations, and individuals. Although
not authoritative, such sources may aid in understanding
and applying the guidance contained in the SSARSs.
SSARS 10 both clarifies and expands the requirements for
review engagements, its effective date is for reviews of
financial statements for periods ending on or after December
15, 2004. Because SSARS 11 should not affect the performance
and documentation of either compilation or review engagements,
the compilation and review engagement hierarchy literature
became effective upon issuance of the document.
A. Ratcliffe, PhD, CPA, is director of the school
of accountancy and Eminent Scholar in Accounting and Finance
at Troy University, Troy, Ala., and a member of the AICPA
Accounting and Review Services Committee.
Note: For additional information on analytical procedures,
see “The Hidden Risk in Analytical Procedures: What
WorldCom Revealed,” by Neal B. Hitzig (The CPA
Journal, February 2004, p. 32).