CSRE 2400, A New Standard for Review Engagements

June 12, 2017

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Practitioners have been performing review engagements under standards that have been in effect for many, many years.  To address what are recognized as outdated standards, encourage consistency in practice, and to align with international standards, a new Canadian Standard on Review Engagements (CSRE 2400) was developed. The standard is effective for reviews of annual and interim financial statements for periods ending on or after December 14, 2017.

While the standards contained in CSRE 2400 apply to the practitioner, companies whose financial statements are being reviewed will be affected as well.  This publication has been developed for both preparers of financial statements and other users of the financial statements such that they will understand significant new procedures required of the practitioner, what the new review engagement report will look like, and the increased emphasis on communication between the preparer of financial statements and the practitioner.  

Performance of the Review Engagement

Under the old standard of review engagements, the practitioner exercised professional judgment in deciding which items on the financial statements he or she would review.  While professional judgment is essential to the proper conduct of any review engagement, the new standard now requires that the practitioner explicitly:

  • design and perform inquiry and analytical procedures to address all material items in the financial statements, including disclosures;
  • identify and focus on areas in the financial statements where material misstatements are likely to arise  (these areas could encompass items that are less than materiality but require focus due to qualitative considerations or potential omission from the financial statements, or matters that do not relate directly to the financial statement line items); and
  • inquire regarding specific areas, including but not limited to:  related parties, significant estimates, the going concern assumption, fraud and non-compliance with laws and regulations. 

Because of the above requirements, preparers of financial statements may observe that practitioners are increasing their work in some areas and reducing their work in others.  Additionally, the requirement to identify areas in the financial statements where material misstatements are likely to arise and to inquire about specific areas will necessitate a greater understanding of the entity by the practitioner and so there may be an increase in the amount and depth of inquiries posed to management and those charged with governance (for example, an owner-manager, the board of directors, or the audit committee). 

Communication with Management and Those Charged with Governance (TCWG)

CSRE 2400 places greater emphasis on timely and two-way communication between the practitioner, management and TCWG.  

In conjunction with the anticipated increase in inquiry noted above, the practitioner will rely on the cooperation and availability of both management and TCWG to respond to such inquiries and other requests, and to share information to assist the practitioner in his or her understanding of the entity and other relevant matters.

Management and TCWG are likely to receive more communication based on the practitioner’s explicit responsibility to communicate the following to management and TCWG:

  • Any matters concerning the review engagement that are considered of sufficient importance to warrant the attention of management and / or TCWG.  
  • All misstatements accumulated during the review, with the request that such misstatements be corrected.  

A New Independent Practitioner’s Review Engagement Report

Users of the financial statements will notice a substantial change to the new independent practitioner’s review engagement report.  The report is much lengthier due to the inclusion of added paragraphs outlining both management’s and the practitioner’s responsibilities.  The description of the practitioner’s responsibilities expands on the conduct of a review engagement with the objective of providing a conclusion on the fair presentation of the financial statements.    Practically speaking, despite the lengthened report and amended wording, the practitioner is still providing a level of assurance on the financial statements consistent with that provided under the old standard for review engagements. This is now referred to as a “limited” level of assurance.

Should matters arise that warrant drawing the users’ attention to a particular item in the financial statement or pertaining to the understanding of the review engagement, additional paragraphs may be included in the report.  For example, concern regarding a company’s ability to continue as a going concern would be included as an “Emphasis of Matter” paragraph, or if the comparative figures in the financial statements were reviewed by another practitioner, this fact would be disclosed in an “Other Matters” paragraph.

For an example of what a typical report will look like, please refer to the illustrative example at the end of this publication.

What Do Preparers of Financial Statements Need to Do?

To facilitate some of the aforementioned changes and enhancements to the practitioner’s review procedures, practitioners may request additional information from their clients when planning the review engagement. These requests may be in the form of completing a questionnaire or worksheet, or requests to gather and prepare certain information, schedules, or analyses.   

In Conclusion

The new standard CSRE 2400 will rely upon increased inquiry by the practitioner, as well as enhanced and timely communication and sharing of information between the practitioner, management, and those charged with governance.  The benefits of expanded communications will help each of the practitioner, management and TCWG to discharge their respective responsibilities and ultimately result in a more meaningful and effective engagement.

Please contact your BDO advisor for further information or if you have any questions about the impact of CSRE 2400 on your entity.


Illustrative Example of Practitioner’s Review Engagement Report with an Unmodified Conclusion

INDEPENDENT PRACTITIONER'S REVIEW ENGAGEMENT REPORT

[Appropriate Addressee]

We have reviewed the accompanying financial statements of ABC Company that comprise the balance sheet as at December 31, 20X1, and the statements of income, retained earnings and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian accounting standards for private enterprises, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Practitioner's Responsibility

Our responsibility is to express a conclusion on the accompanying financial statements based on our review. We conducted our review in accordance with Canadian generally accepted standards for review engagements, which require us to comply with relevant ethical requirements.

A review of financial statements in accordance with Canadian generally accepted standards for review engagements is a limited assurance engagement. The practitioner performs procedures, primarily consisting of making inquiries of management and others within the entity, as appropriate, and applying analytical procedures, and evaluates the evidence obtained.

The procedures performed in a review are substantially less in extent than, and vary in nature from, those performed in an audit conducted in accordance with Canadian generally accepted auditing standards. Accordingly, we do not express an audit opinion on these financial statements.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the financial statements do not present fairly, in all material respects, the financial position of ABC Company as at December 31, 20X1, and the results of its operations and its cash flows for the year then ended in accordance with Canadian accounting standards for private enterprises.

[Practitioner's signature]
[Date of the practitioner's report]
[Practitioner's address]


The information in this publication is current as of June 1, 2017.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.