If your firm performs review-engagements, there have been important changes issued by the AICPA. Specifically, the Accounting and Review Services Committee recently published SSARS No. 25. The title is Materiality in a Review of a Financial Statement and Adverse Conclusions. Chiefly, the purpose of SSARS No. 25 is to align with GAAS and converge with international standards.
A Wolters Kluwer Audit Talk podcast featured the topic of SSARS 25. Technology product manager, Patrick Tokarski, interviewed Robert Pearson, managing editor for CCH Accounting Research Manager. In the first place, they explained the changes brought about by SSARS 25. Further, they discussed how CCH® ProSystem fx® Knowledge Coach and CCH Axcess™ Knowledge Coach prepare accountants for these changes.
Here are a few explanations and pointers from that Audit Talk. Additionally, you can listen to the podcast for the complete presentation.
Review-engagements, what does SSARS 25 change?
The primary purpose of SSARS 25 is to help review standards converge with audit standards and with the international review standard. There are two main driving forces of change:
First, the concept of documenting and applying materiality through the review-engagement is going to become much more aligned with the audit standard. Under SSARS 25, the word materiality is much more explicit in a review-engagement than it used to be. Now, firms have to determine the materiality amount and then apply it in designing and reviewing the results of procedures. At the end of the engagement, you need to look back to see if you would have determined a different amount of materiality. If the answer is yes, it is different than your initial determination of amount, you need to reset it and redo it, much like you would for an audit. Furthermore, you’re required to apply inquiry and analytical procedures to all material items, including disclosures.
Second, firms will now be able to reach an adverse conclusion. This provides firms with the ability to state that, based on their procedures, the financial statements being reviewed are not in accordance with the financial reporting framework. Although the current review standards did not allow for this, the international standards did allow for it. Now, both standards will be in alignment.
Review and update practice aids
For example, engagement letters need to be tweaked for new required language. Representation letters now have new required management representations. Sample letters in both CCH ProSystem fx Knowledge Coach or CCH Axcess Knowledge Coach already incorporate this change.
Familiarize yourself with new requirements for procedures
There have been significant changes around review procedures in SSARS 25. In the first place, there’s a larger focus increasing analytics around related parties. Also, new procedures are required for accounting estimates and inquiring of management. Additionally, there are more procedures required for subsequent events and subsequently discovered facts. Finally, one of the biggest changes in SSARS 25 involves additional review procedures when you find unexpected or inconsistent items. Now, the additional review procedures follow basically the same procedures performed in an audit.
Meet the new documentation requirement
There is a new documentation requirement around how to document items that are inconsistent with your findings. In fact, you now need to document the inconsistency, how it was addressed in your review in terms of procedures, and how it was resolved.
Make changes to review reports
As you wrap up your review-engagements, you will need to make some changes in the review report. As we highlighted, you can now issue an adverse conclusion. What’s more, you must be independent of the company you review in order to meet ethical responsibilities. Sometimes you will need a separate basis of conclusion paragraph. For instance, if you have a qualified conclusion, an except-for conclusion, or an adverse conclusion, you need to have a separate basis for conclusion paragraph in your report. An unmodified conclusion does not require such a paragraph. Furthermore, the same principal applies for going concern which SARRS 25 breaks into a separate section with additional focus.
When does SSARS 25 become effective?
The provisions of SSARS 25 become effective for financial statements created for periods ending on or after December 15, 2021. So, for most review-engagements, the SSARS 25 changes will go into effect starting in 2022. Moreover, firms can implement SAARS 25 early if they wish.
Learn more with Wolters Kluwer
If your firm performs review-engagements, then you will want to learn all you can about how to implement SSARS 25. If your firm uses ProSystem fx Knowledge Coach or CCH Axcess Knowledge Coach, refer to the RES documents that are part of the knowledge-based audit methodology. Additionally, Robert Pearson wrote a guide about SSARS 25 you will find helpful. As always, the guide links back to the actual sections of the standards so you can use it as a reference. Finally, be sure to listen to the podcast of this Audit Talk for more SSARS 25 details, including changes to preparations and compilations.