a. ISRE 2410: International Standard on Review Engagements

This standard pertains to reviews conducted by a company’s external auditors on interim financial statements (mid-year financial statements), where companies are required to produce interim statements. These statements are not subject to a full audit but are instead reviewed. General auditing principles are applied to this review. The auditing firm that conducts the review of interim financial information (IFI) is typically also the external auditor for the annual accounts. The audit firm should:

i. Comply with the same ethical requirements as for the main audit;
ii. Implement suitable quality control procedures;
iii. Conduct the review with professional skepticism;
iv. Agree to the terms of engagement with the client in an engagement letter; and
v. Prepare documentation that is sufficient to support the auditor’s conclusions and to demonstrate that the review was conducted in compliance with ISRE 2410.

ISRS 4410 (Revised): Compilation Engagements

Revised in March 2012, this standard addresses the conduct of compilation engagements, which saw increased demand among SMEs due to exemptions from audit requirements in certain jurisdictions. In a compilation engagement, the review accountant does not provide assurance on the compiled information. However, the client receives some assurance as the accountant must adhere to a professional code of conduct, ensuring due care and technical competence.

Key Points of ISRS 4410:

i. An engagement letter is required, outlining the terms of the engagement, which indicates:

• The work conducted is not an audit nor a review;
• The engagement cannot be relied upon to detect errors, fraud, or irregularities;
• Management holds responsibility for the accuracy and completeness of the information used in the assignment;
• The intended use and distribution of the information provided at the engagement’s end;
• The applicable financial reporting framework;
• The practitioner’s responsibilities, including adherence to ethical requirements; and
• The expected form and content of the practitioner’s report in line with legal and regulatory requirements.

ii. Planning and documentation are essential for the engagement;

iii. The accountant must understand the client’s business, its operations, and its accounting systems, records, and financial reporting framework;

iv. If the information provided by management is incomplete, inaccurate, or otherwise unsatisfactory, the accountant should request corrections. If management refuses, the accountant should withdraw from the engagement and inform the entity; and

v. The practitioner must obtain management or governance acknowledgment of responsibility for the final version of the information.

b. Procedures for the Review of Interim Financial Information (IFI):

i. The auditor should obtain an understanding of the entity and its environment, including internal controls, to:

• Assess the risk of misstatement in the financial statements;
• Select appropriate procedures for the review.

ii. The auditor should make inquiries and perform analytical procedures to form a conclusion about whether the IFI is prepared, in all material respects, in line with the applicable financial reporting framework. (The auditor’s opinion is expressed in negative terms, as with ISRE 2400);

iii. If critical matters arise, the auditor should make further inquiries or perform additional procedures for more information;

iv. The auditor should ensure that the IFI aligns with or reconciles to the underlying accounting records;

v. The auditor should determine if management has:

• Considered subsequent events; and
• Assessed the entity’s ability to continue as a going concern.

vi. The auditor should evaluate any uncorrected misstatements in the IFI, individually and in aggregate (similar to the annual audit);

vii. The auditor should obtain written representations from management, confirming:

• Their responsibility for internal controls;
• The IFI’s preparation and presentation per the applicable financial reporting framework;
• The immateriality of any uncorrected misstatements, both individually and in aggregate;
• Full disclosure of significant facts, risk assessments, non-compliance (actual or possible) with laws, regulations, and subsequent events;

viii. The auditor should verify that any other information issued alongside the IFI is materially consistent with the IFI.

c. Substantive Procedures for Inventory Changes Evidence

The substantive procedures for gathering evidence for inventory changes should include:

i. Attending inventory count to:

• Observe procedures; and
• Record the inventory counts.

ii. Recording cut-off information;

iii. Checking inventory valuation at the lower of cost and net realizable value (NRV);

iv. Verifying inventory cut-off;

v. Conducting appropriate analytical review procedures;

vi. Confirming the existence of inventory at outside locations;

vii. Checking the treatment of inventory held on client premises but owned by a third party.

ISRS 4410 (Revised): Requirements for Compilation Engagement Report

The report for a compilation engagement must be in writing and should contain:

i. Title;
ii. Addressee;
iii. A statement that the practitioner has compiled the financial information based on information provided by management;
iv. A description of management’s (or governance’s) responsibilities for the compilation engagement;
v. Identification of the applicable financial reporting framework;
vi. Identification of the financial information, including the title of each element of the financial information and its date;
vii. A description of the practitioner’s responsibilities in compiling the financial information, including compliance with ISRS 4410 (Revised) and relevant ethical requirements;
viii. A description of what a compilation engagement entails;
ix. An explanation that, as a non-assurance engagement, the practitioner is not required to verify the accuracy or completeness of information provided by management;
x. A clarification that the practitioner does not express an audit opinion or review conclusion on whether the financial information aligns with the financial reporting framework;
xi. If the financial information is based on a special purpose framework, an explanatory paragraph describing its purpose and intended users, warning that it may not suit other purposes;
xii. Date of the report;
xiii. Practitioner’s address;
xiv. Practitioner’s signature.