New Guidance for Review Engagements: SSARS 10
Analytical Procedures, Documentation, and Representation Letters

By Steve Grice

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SSARS 10 has a significant effect on analytical procedures and inquiries, unquestionably the most fundamental review engagement procedures. In addition, SSARS 10 affects management’s representation letter as well as the documentation for review engagements. The provisions of SSARS 10 apply to review engagements for financial statements prepared using GAAP as well as those prepared using other comprehensive bases of accounting. It is effective for reviews of financial statements for periods ending on or after December 15, 2004.

Analytical Procedures

One of the primary procedures in review engagements has been the performance of analytical procedures. Prior to SSARS 10, SSARS 1, Compilation and Review of Financial Statements, indicated that the analytics should include the following:

• A comparison of the financial statements with those of prior periods.
• A comparison of the financial statements with anticipated results (e.g., budgets).
• A study of the relationships of the financial statement elements that would be expected to conform to a predictable
  pattern.

SSARS 10 now indicates that the results of analytics should provide a basis for inquiries related to unusual relationships or unusual items reported in the financial statements. SSARS 10 also identifies the need to:

• Develop expectations for the analytics by identifying and using plausible relationships that are expected to exist based on an understanding of the entity and the industry in which it operates.
• Compare recorded amounts, or ratios developed from recorded amounts, to the expectations.

SSARS 10 does not create a new requirement to develop expectations, but it does clarify existing guidance in SSARS 1. On the other hand, as discussed below, SSARS 10 does create a new requirement to document the expectations for analytical procedures. The ARSC emphasizes that the critical first step in the performance of analytical procedures is the development of related expectations; consequently, in SSARS 10 the ARSC required the documentation of those expectations. SSARS 10 also added Appendix H to SSARS 1 to provide detailed analytical procedures for consideration when conducting a review engagement.

The ARSC recently published an issues paper, “Analytical Procedures in a Review Engagement,” to provide additional nonauthoritative guidance related to developing expectations, performing analytical procedures, and documenting analytical procedures. This issues paper provides examples for documenting analytical procedures when there is: 1) an expected increase in revenue, 2) an expected decrease in revenue, or 3) no significant change in revenue or expenses expected. The issues paper can be accessed through the AICPA website at www.aicpa.org/members/div/auditstd/technic_arsc.asp.

In addition, the AICPA is expected to issue a related practice aid on analytical procedures documentation.

Documentation Requirement

Prior to SSARS 10, the literature did not specify the form or content of the documentation for review engagements. Nonetheless, it did indicate that the documentation should describe 1) matters covered by the inquiry and analytical procedures and 2) unusual matters considered during the performance of the review, including their disposition. SSARS 10 revised and expanded this list to include the following documentation requirements:

• The analytical procedures performed.
• Significant expectations developed for the analytical procedures when those expectations are not readily determinable from the documentation of the work performed. Documenting the factors considered in the development of these expectations is an integral part of this requirement.
• Results of the comparison of the expectations to the recorded amounts or ratios developed using recorded amounts.
• Any additional procedures performed in response to significant unexpected differences that arise in the performance of analytical procedures, and the results of these additional procedures.
• The management representation letter.

Whereas best practice has always suggested the documentation of analytical procedures performed during review engagements as well as the responses to any significant unexpected differences that arose during the performance of those procedures, now there is a requirement to document those expectations and their development in the workpapers. The Exhibit illustrates the required documentation based on the provisions of SSARS 10.

Accountant’s Inquiries

In addition to analytical procedures, inquiry has always been a required procedure in the performance of review engagements. The required inquiries before SSARS 10 included the following:

• Procedures for recording, classifying, and summarizing transactions.
• Procedures for accumulating information for disclosure in the financial statements.
• Actions taken at shareholder, board of directors, committees of board of directors, or other comparable meetings that may affect the financial statements.
• Persons responsible for financial and accounting matters concerning whether the financial statements have been prepared in conformity with generally accepted accounting principles (GAAP).
• Persons responsible for financial and accounting matters concerning changes in business activities, accounting principles, or accounting practices.
• Persons responsible for financial and accounting matters about which questions have arisen in the course of applying review procedures.
• Persons responsible for financial and accounting matters concerning events subsequent to the date of the financial statements that would have material effect on them.

SSARS 10 revised and expanded the list of required inquiries to include the following:

• The status of uncorrected misstatements identified during the previous engagement.
• Knowledge of any fraud or suspected fraud affecting the entity, involving management or others, where fraud could have a material effect on the financial statements (e.g., communications received from employees, former employees, or others).
• Unusual or complex situations that may have an effect on the financial statements.
• Significant transactions that occurred or were recognized in the last several days of the reporting period.
• Significant journal entries and other adjustments.
• Communications from regulatory agencies.
  SSARS 10 also amended Appendix B of SSARS 1 to expand the list of illustrative inquiries for review engagements.

Communicating Fraud and Illegal Acts

ARSC also recently issued Interpretation 26, “Communicating Possible Fraud and Illegal Acts to Management and Others,” to address the required communications when an accountant performing a compilation or review engagement suspects fraud or illegal acts. According to this interpretation of SSARS 1, when a fraud or illegal act is suspected in a compilation or review engagement, the accountant should communicate the matter (unless it is clearly inconsequential) to an appropriate level of management. For example, when the fraud or illegal act is suspected of senior management, the matter should be communicated to an individual or a group at the highest level (e.g., the board of directors or the owner). Interpretation 26 also indicates that the accountant should do the following:

• Consider withdrawing from the engagement when the fraud or illegal act involves the owner.
• Consider consulting legal counsel.
• Remember that he is not required to perform additional procedures to determine whether the fraud or illegal act actually occurred.
• Consider the impact that the suspected fraud or illegal act has on the required inquiries and other review procedures.

Though reporting the suspected fraud or illegal act to parties other than senior management (e.g., parties outside the entity) would typically be beyond the scope of the accountant’s responsibility, Interpretation 26 lists the following three circumstances that would require such communication:

• To comply with certain legal and regulatory requirements.
• When the successor accountant decides to communicate with the predecessor in accordance with the SSARS regarding acceptance of an engagement to compile or review the financial statements of a nonpublic entity.
• In response to a subpoena.

Management Representations

SSARS 1 requires that an accountant obtain a management representation letter for all financial statements and periods covered by the report. The representations required in the letter before the issuance of SSARS 10 included representations related to the following matters:

• Management’s acknowledgment of its responsibility for the fair presentation in the financial statements of financial position, results of operation, and cash flows, in conformity with GAAP.
• Management’s belief that the financial statements are fairly presented in conformity with GAAP.
• Management’s full and truthful response to all inquiries.
• Completeness of information.
• Information concerning subsequent events.

SSARS 10 expanded this list to include required representations related to 1) management’s acknowledgement of its responsibility to prevent and detect fraud and 2) knowledge of any fraud or suspected fraud affecting the entity involving management or others where the fraud could have a material effect on the financial statements, including any communications received from employees, former employees, or others.