In recent practice inspections, there are have been a number of issues identified in the performance of review engagements which are resulting in practitioners being assessed as not meeting professional standards and thereby requiring a re-inspection. Some of the most common issues have been identified below. It is important that practitioners fully document the actual work performed in their review engagements, along with the discussions that they had with management, and their conclusions based on their work performed.
Insufficient Documentation of Work Performed
Many firms who perform review engagements use the C-PEM or PPM checklists as a tool to assist in their documentation. In certain instances, these checklists are being filled out with only “Yes”, “No” or “Not Applicable” responses, with no additional documentation either in the body of the checklists or in the engagement working papers.
Firms are required to document the procedures undertaken and any unusual matters considered during the performance of a review engagement, including the conclusions reached by the firm as a result of the procedures applied. When a firm’s documentation consists only of checklists filled out with “Y”, “N” or “Not Applicable”, with no additional discussion in the file, this documentation is not sufficient to meet the review engagement standards.
Example A: Review procedures performed for allowance for doubtful accounts
The firm includes an aged AR listing, with a material amount over 90 days. The checklist section of whether the allowance for doubtful accounts was adequate was filled out as “Yes”.
The firm includes an aged AR listing, with a material amount over 90 days. For each material amount over 90 days, the firm has included documentation on the aged AR listing of their discussions with management indicating why the amount is collectible.
Performance and Documentation of Analytical Procedures
A review consists primarily of making inquiries concerning financial information, applying analytical procedures to this information, and having discussions with management (or other appropriate individuals) to obtain explanations for unexpected or unusual relationships in the information.
When it comes to applying analytical procedures to the financial information, there are instances where firms are calculating operating ratios and variances from the prior year, but are not documenting whether these ratios are consistent with the firm’s expectations, if the changes are plausible based on the firm’s understanding of the business, and any inquiries made to management or others to obtain explanations for unexpected or unusual relationships.
Example B: Review procedures performed for allowance for doubtful accounts
The firm has calculated AR turnover and the variance from the previous year but has not documented whether these are consistent with the firm’s understanding on the business.
The firm calculated AR turnover and the variance from the previous year, and has documented whether this is consistent with their expectations. If these amounts were not consistent with expectations (i.e. the firm expected AR turnover to decrease due to the firm extending the credit terms but turnover actually increased), the firm followed up with management to get the reasons for this unexpected change and documented the results of their discussion and their conclusion as to whether the reason was plausible.
Applying Professional Skepticism
Review engagement standards require obtaining explanations from management (and others, where applicable) to assess the plausibility of financial information. In some cases, explanations are obtained from management, but there is no documentation to show that explanations were considered for plausibility.
Firms should ensure that, when management provides an explanation for a change from the prior year (or the absence of an expected change), that this explanation is consistent with the financial information and with the firm’s knowledge of the business. If the explanation is not consistent, the firm may need to perform additional procedures to ensure plausibility.
Example C: Review procedures performed for allowance for doubtful accounts
The client has several large accounts receivable over 120 days where subsequent payment has not been received. Management tells the firm that the amounts are collectible. The firm notes this, does not propose adjustments to write off any amounts, and performs no additional work.
For the accounts receivable over 120 days where no subsequent payment has been received, the firm reviews the previous year’s file to determine if there were amounts owing from these individuals in other years, and if these amounts were ultimately paid, in order to determine if management’s assessment that the amounts are collectible is plausible. The firm also uses its knowledge of the accuracy of assessments that management has made in the past regarding collectability and history of bad debts.
Practice Review Program Implications
The CPABC Practice Review Program assesses the work of firms solely against the Assurance and Accounting Standards of the CPA Canada Handbook. The CPABC Practice Review Program does not conduct their review against a checklist, nor does it require that firms use checklists to meet standards.
Checklists are a tool which often helps firms record the work that was performed, to ensure that important procedures are not omitted, and to document the conclusions reached. However, there are often specific issues that may arise in a review engagement where the checklists would not include the appropriate procedures to address the issue.
Practitioners must have a solid understanding of the accounting standards to ensure that all matters are appropriately addressed and documented in the review engagement. Practitioners need to review the CPA Canada Handbook guidance and use their professional judgement to perform sufficient and appropriate procedures. If a firm uses solely checklists to perform and document a review engagement, there is substantial risk that they might not meet the professional standards and therefore not meet the requirements of the Practice Review Program.
- CPA Canada Handbook, Section 8100 (periods ending before December 13, 2017)
- CPA Canada Handbook, Section 2400 (periods ending on or after December 14, 2017)
- CPABC News and Views, July 2016 – “2015-2016 Practice Review Results and Common Deficiencies”
- CPABC PD Courses:
- “Common Documentation Deficiencies with Review Engagements”
- “Review Engagements Under the Current Standards”
- “Review Engagements – Introduction and Overview (new standard CRSE 2400)”
- “Effective Use of Analytical Procedures”