Why Review Engagements Might Be a Perfect Fit for Your Small Business Clients

Phil Cowperthwaite, Member, IFAC SMP Committee | October 17, 2014 | 4

The Gateway discussion, What is the Future for Assurance and Small Business?, noted that the rise in audit thresholds across many jurisdictions, perhaps most notably in Europe, means that increasing numbers of small- and medium-sized entities (SMEs) no longer require an audit. Instead, review engagements might be the ideal option for them.  

The international standard for review engagements is the International Auditing and Assurance Standards Board (IAASB)’s International Standard on Review Engagements (ISRE) 2400 (Revised), Engagements to Review Historical Financial Statements, which is effective for periods ended on or after December 31, 2013. Review engagements provide a limited form of assurance on historical financial statements and may be a cost effective and value-adding alternative when an audit is not required.

Adding Cost-Effective Value to Clients

A review, consisting primarily of inquiry and analysis, is based on the professional accountant’s understanding of the entity and its environment and the applicable financial reporting framework according to which the financial statements are prepared. This understanding includes relevant industry, regulatory, and other external factors; the entity’s operations, ownership, and governance structure; how it is financed; and its accounting systems and records. The professional accountant uses this knowledge to design and perform inquiry and analytical procedures on both material items in the financial statements and on those items where material misstatements are likely to arise. In the course of the engagement, the practitioner develops a significant understanding of the client and its business, which gives him/her an excellent opportunity to also offer additional value to the client through the provision of bespoke advice.

Practitioners can provide review services most efficiently by staffing a review engagement with professionals competent in assurance skills and techniques, consistently using the same staff members, and making use of technology to automate the mechanics of the engagement wherever possible. As so much of a review consists of effective communication with clients, performing a significant proportion of the work at the client’s place of business is preferable.

Adding a Meaningful Level of Assurance to Financial Statements

In accordance with ISRE 2400 (Revised), a review engagement is not just about practitioners obtaining knowledge of their clients through questions and analysis; it also requires the accountant to dig deeper and obtain additional evidence if it is determined there may be a material misstatement in the financial statements. Additional procedures are also required when further questions arise, such as if related party transactions fall outside the normal course of business, fraud or non-compliance with laws or regulations is suspected, or doubts arise regarding the entity’s ability to continue as a going concern. This additional work effort allows for the meaningful and valuable level of assurance conveyed by the review conclusion.

Under ISRE 2400 (Revised), the practitioner is required to comply with relevant ethical requirements, including those pertaining to independence in the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code), or national equivalent requirements that are at least as restrictive. The review standard also requires professional accountants to exercise professional judgment and to be skeptical throughout the engagement.

Benefits for All Parties Involved

In summary, there are benefits for all parties involved in an ISRE 2400 (Revised) review engagement. Practitioners will obtain the knowledge base to enable them to add value to their clients’ businesses while expressing the assurance conclusions needed on annual financial statements. Clients and other financial statements users will have the comfort of a meaningful level of assurance provided by an objective and independent professional accountant.

A Guide to Reviews for Practitioners and IFAC Member Bodies

The IFAC SMP Committee’s, the Guide to Review Engagements, can help IFAC member organizations and their members in practice, especially small- and medium-sized practices (SMPs), implement ISRE 2400 (Revised). The guide includes illustrative examples alongside relevant extracts from the standard, practical points for practitioners’ consideration, tips on how to efficiently implement the standard, and checklists and forms that practitioners can adapt to meet the requirements and circumstances in their particular jurisdiction. The guide has been translated into Bulgarian and translations into Spanish, Estonian, and Swedish are in progress. To request permission to translate or reproduce the guide, and access existing translations, see the Translations Database

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Do you think there is a market for providing review engagements to your existing client base? If not, do you think there might be one in the foreseeable future?


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Lasse Åkerblad October 23, 2014

"Does anybody know in how many countries a Review is accepted as a statutory "audit" for SMEs? " According to my knowledge, mandatory assurance is conducted with a review engagement is possible in Estonia, Denmark (“extended review”), Switzerland, Australia, New Zealand and South Africa. Voluntary reviews are to be found at least in the UK (“assurance review”) and in the USA.

Kari Lydman October 22, 2014

Thanks, Krzysztof. So having a Review as an alternative might lead to an additional Expectation Gap in addition to those two we already have (or broaden the only one): 1) SME Auditors vs. ISAs 2) Auditors vs. Clients 3) SME Clients vs. Review

krzysztof burnos October 22, 2014

The translation into Polish also is in progress. Still there is a limited level of understanding the difference between a review and an audit by the auditors. It is also difficult to communicate SMEs the limited level of assurance in review. SMEs do not understand the auditor's levels of assurance at all. If they want assurance from auditor they expect the audit. there is much to do in this area.

Kari Lydman October 22, 2014

It really makes sense, Mr Phil Cowperthwaite, what you are writing - thank you. Does anybody know in how many countries a Review is accepted as a statutory "audit" for SMEs? And how it has been received by the stakeholders in those countries? In ISAs, the "significant understanding of the client and its business" is overruled by insisting vast amount of technical procedures and documentation as otherwise you have not done an audit at all, accoriding to ISAs' principles. Also the "offer[ing] additional value to the client through the provision of bespoke advice" is almost prohibited in ISAs because it is easily seen as an involvement in the preparation process of financial statements (taking management role). This is in practice never the case for Professional Accountants applying the Code of Ethics. Despite of the abovesaid, I am optimistic that even ISAs could be applied in the audit of SMEs and even in Mini- and MicroEs. This would insist a definition of the absolutely Must standards or alike in the ISAs' framework. If this is impossible, perhaps a Review could be an answer instead. We auditors like to help our clients to be wealthy, law respecting citizens in the society. It is hard to see how this is in conflict with the Public Interest.


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