SSARS Part 3: The Review Engagement

SSARS 21 is Coming! SSARS 21 is Coming!

SSARS 21 Part 3: The Review Engagement

By: Joseph L. Santoro MBA/CPA/CVA/MAFF/ABA

This is the third in a series of articles intended to provide information about the AICPA’s Statement on Standards for Accounting and Review Services [SSARS] No. 21 which was released on October 23, 2014. The first installment described a new level of engagement—The Preparation—which falls below the level of a Compilation as defined by the Accounting and Review Services Committee of the AICPA. The second installment discussed the changes to the Compilation level of service and offered comparisons between the new Preparation and the revised Compilation. This installment describes the changes to the new management representation letter for the Review level of service. The fourth and final installment will focus on the new Review Report and contrast it with the Preparation and the Compilation.

SSARS 21 is Coming! Summary of  Parts I & II

On October 23, 2014, the Accounting and Review Services Committee of the AICPA released SSARS No. 21, which is the most significant change to the presentation of non-audited financial statements since SSARS was introduced in 1978. This standard—which is mandatory for reporting periods that end on or after December 15, 2015, but is available for early implementation—effectively expands financial statement presentation and reporting options to five:

1. The Audit
2. The Review
3. The Compilation with full disclosure
4. The Compilation in which substantially all disclosures are omitted
5. The Preparation

The Preparation is a non-attest service that can be provided by an accountant when financial statements have not been subjected to procedures required by an Audit, a Review, or a Compilation. The Preparation standards permit the accountant to provide financial statements to the entity that have no significant visible differences from those other service levels. However, when The Preparation level of service is provided, two very important distinctions are required: (1) the accountant is prohibited from including an accountant’s report with those statements, and (2) each page of the financial statements must contain a legend clearly stating that “no assurance is provided” on the accuracy of those statements. Nevertheless, such statements may be forwarded to a third party to be used, as appropriate—even to obtain credit! And, since no report is issued, The Preparation level of service is expected to negate the need for peer review.

The Compilation under SSARS No. 21 is markedly different from prior standards. SSARS No. 1 [essentially in effect from 1979 to 2009] required the release of an accountant’s report with a minimum of two paragraphs of explanation; SSARS No. 19 [essentially in effect from 2010 through 2014] required an accountant’s report to have at least three paragraphs of explanation. However, the new SSARS No. 21 reduces the minimum number of paragraphs to one. Further, SSARS No. 21 requires the accountant to include this revised statement of the objective of a Compilation within the accountant’s engagement letter:

“The accountant’s objective in a compilation engagement is to apply accounting and financial reporting expertise to assist management in the presentation of financial statements and report in accordance with this standard without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements in order for them to be in accordance with the applicable financial reporting framework.”

Note that phrase: “to apply accounting and financial reporting expertise.” For the first time, an accountant who issues a Compilation report will state within the engagement contract that he or she is an “expert.”

For more information on The Preparation or The Compilation under SSARS No. 21, please refer to previous blog entries. Part 1 Part 2

AR-C Section 90: The Review Engagement under SSARS No. 21

The “new” standards for the Review level of service only apply to full operating cycle presentations. That is, when an accountant is engaged to provide a Review level of service for interim financial statements, the appropriate guidance is found at AU-C Section 930, Interim Financial Information.

That being said, the “new” standards for the Review level of service under SSARS No. 21 remain relatively unchanged from SSARS No. 19:

1. the accountant’s objective continues to be obtaining limited assurance as to whether the accountant is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework;
2. the accountant must still apply analytical procedures to evaluate the plausible relationships among both financial and nonfinancial data to render the opinion about material modifications; and,
3. the accountant can provide Review level services under generally accepted accounting principles [GAAP] or through the use of a special purpose framework such as cash basis, tax basis, or other acceptable alternatives to GAAP.

However, some of the more striking differences with respect to Review level services compared with prior SSARS standards involve (1) the tone and style of the management representation letter and (2) the formatting and appearance of the accountant’s review report. The remainder of this article discusses the new management representation letter.

Note: Sample engagement letters for both the Preparation and the new Compilation were provided in the first two articles in this series. The SSARS No. 21 engagement letter for a Review is similar in approach and content to that of the Compilation. Consult AR-C Section 90 for an illustration.

Illustrative Representation Letter Under SSARS No. 21

(Entity Letterhead)

(To the Accountant)                                                                                                (Date)

This representation letter is provided in connection with your review of the financial statements of XYZ Company, which comprise the balance sheets as of December 31, 2015 and 2014, and the related statements of income, changes in stockholders’ equity and cash flows for the years then ended, and the related notes to the financial statements, for the purpose of obtaining limited assurance as a basis for reporting whether you are aware of any material modifications that should be made to the financial statements in order for the statements to be in accordance with accounting principles generally accepted in the United States of America.

Certain representations in this letter are described as being limited to matters that are material. Items are considered material, regardless of size, if they involve an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement.

We represent that, to the best of our knowledge and belief, having made such inquiries as we considered necessary for the purpose of appropriately informing ourselves, as of (date of the accountant’s review report):

Financial Statements

1. We acknowledge our responsibility and have fulfilled our responsibilities for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America.
2. We acknowledge our responsibility and have fulfilled our responsibilities for the design, implementation, and maintenance of internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
3. We acknowledge our responsibility for the design, implementation, and maintenance of internal controls to prevent and detect fraud.
4. Significant assumptions used by us in making accounting estimates, including those measured at fair value, are reasonable.
5. Related party relationships and transactions have been appropriately accounted for and disclosed in accordance with the requirements of accounting principles generally accepted in the United States of America.
6. Guarantees, whether written or oral, under which the company is contingently liable have been properly accounted for and disclosed in accordance with the requirements of accounting principles generally accepted in the United States of America.
7. Significant estimates and material concentrations known to management that are required to be disclosed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 275, Risks and Uncertainties, have been properly accounted for and disclosed in accordance with the requirements of accounting principles generally accepted in the United States of America. Significant estimates are estimates at the balance sheet date that could change materially within the next year. Concentrations refer to volumes of business, revenues, available sources of supply, or markets or geographic areas for which events could occur that would significantly disrupt normal finances within the next year.
8. All events subsequent to the date of the financial statements, and for which accounting principles generally accepted in the United States of America require adjustment or disclosure, have been adjusted or disclosed.
9. The effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial statements as a whole.
10. The effects of all known or possible litigation and claims have been accounted for and disclosed in accordance with accounting principles generally accepted in the United Stated of America.

[Any other matters that the accountant may consider appropriate]

Information Provided

1. We have responded fully and truthfully to all inquiries made to us by you during your review.
2. We have provided you with:
   1. Access to all information of which we are aware that is relevant to the preparation and fair presentation of the financial statements, such as records, documentation, and other matters.
   2. Minutes of meetings of stockholders, directors, and committees of directors, or summaries of actions of recent meetings for which minutes have not yet been prepared.
   3. Additional information that you have requested from us for the purpose of the review.
   4. Unrestricted access to persons within the entity from whom you determined it necessary to obtain review evidence.
3. All transactions have been recorded in the accounting records and are reflected in the financial statements.
4. We have no knowledge of fraud or suspected fraud that affects the entity and involves:
   1. Management
   2. Employees who have significant roles in internal control
   3. Others when the fraud could have a material effect on the financial statements
5. We have no knowledge of any allegations of fraud, or suspected fraud, affecting the entity’s financial statements as a whole communicated by employees, former employees, analysts, regulators, or others.
6. We have no plans or intentions that may materially affect the carrying amounts or classification of assets and liabilities.
7. We have disclosed to you all known instances of noncompliance or suspected noncompliance with laws or regulations whose effects should be considered when preparing financial statements.
8. We have disclosed to you all known or possible litigation and claims whose effects should be considered when preparing the financial statements.
9. We have disclosed to you any other material liabilities or gain or loss contingencies that are required to be accrued or disclosed by FASB ASC 450, Contingencies.
10. We have disclosed to you the identity of the entity’s related parties and all the related party relationships and transactions of which we are aware.
11. No material losses exist, such as from obsolete inventory or purchase or sale commitments, that have not been properly accrued or disclosed in the financial statements.
12. The Company has satisfactory title to all owned assets, and no liens or encumbrances on such assets exist, nor has any asset been pledged as collateral, except as disclosed to you and reported in the financial statements.
13. We have complied with all aspects of contractual agreements that would have a material effect on the financial statements in the event of noncompliance.
14. We are in agreement with the adjusting journal entries that you have recommended, and they have been posted to the company’s accounts, if applicable.

[Any other matters that the accountant may consider necessary].

 

___________________________________

(Name of Chief Executive Officer and Title)

Highlights of The Illustrative Representation Letter

1. While much of the content of the prior Review level representation remains, some of the changes are subtle. For example, in the third paragraph management is offered a form of disclaimer: although management purports to provide specific representations, it can make a soft landing when it uses the option to modify its liability with the phrase “to the best of our knowledge and belief, having made such inquiries as we considered necessary for the purpose of appropriately informing ourselves.”
2. This caveat may work when management is at a level far above actual operations but may not be appropriate for an entity with few employees. At the smaller entity level, management cannot avoid taking full responsibility.
3. The representation letter has two new captions to delineate representations: one section deals with the representations directly applicable to the Financial Statements; the other section deals with the Information Provided. The prior representation letter made no distinctions with respect to the purpose or placement of management assertions.
4. Note also the positive nature of those assertions. In prior representation letters, management “acknowledged” its responsibilities. However, in the current version, management has greater accountability: it must affirm that it knows it has certain responsibilities and it has fulfilled those responsibilities. For example, at Financial Statement representations 1 and 2, above, management not only acknowledges its responsibility with respect to both financial statement preparation and the maintenance of an internal control system: management must make a positive statement of assurance that the financial statements are in fact fairly presented and that the internal control system it designed actually works.
5. In prior representation letters, management provided the accountant with all relevant documents related to the preparation and presentation of financial statements. In this letter, management must confirm that it provided “unrestricted access to persons within the entity from whom you [the accountant] determined it necessary to obtain review evidence.” The effect of this representation is to emphasize to the accountant that he or she was given access both to all data and to any person(s) necessary to provide limited assurance that the financial statements do not contain material modifications. Hence, the accountant cannot later claim that anything stood in the way of the accountant submitting complete Review level financial statements in accordance with professional standards. In a court of law, it is now more difficult for the accountant to contend that he or she was blindsided.
6. Other changes in phraseology and tone are present throughout this latest version of a management representation letter in the SSARS No. 21 exhibits. The accountant should exam the new phrases and grammatical nuances very carefully.

Download a copy of the Illustrative Representation Letter in the NSA Resource Library.

In the next and final installment of the SSARS 21 is Coming! series, we focus on the changes to the accountant’s review report.

SSARS 21: Part 1: Major Changes to the Compilation – The Preparation

SSARS 21: Part 2: Major Changes to the Compilation – New Engagement Letter and the New Accountant’s Report

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