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New horizons in reviews for interim financial information.

The preparation of interim financial information (IFI) is an integral part of the financial reporting process and, as such, an independent accountant is usually called upon to review the information. In conducting a review of IFI, accountants have followed the same standards for the past 10 years. However, effective in 1992, a new set of standards will govern the nature, timing and extent of procedures to be applied by the independent accountant in conducting a review of IFI and preparing the report for such engagements. The purpose of this article is to help practitioners understand the requirements specified in the new standards.

This article is based on an analysis of the Statement on Auditing Standards for "Review of or Performing Procedures on Interim Financial Information" issued by the AICPA. The guidance in this Statement applies to engagements on IFI that is presented alone, including interim financial statements and summarized interim financial data, as well as IFI that accompanies, or is included in a note to, the annual financial statements. The remainder of this article is organized into three sections. The first section provides an overview of IFI issues from the accountant's perspective. The second section discusses the procedures to be performed for a review of IFI. Finally, the last section presents guidelines for the accountant's report on IFI.

Overview of Interim Financial Information

A primary purpose for the preparation of IFI is to provide interested users, such as investors, with timely data for decision making. IFI includes financial statements or information for less than a full year or for a 12-month period ending on a date other than the entity's normal year-end. Since management generally makes its IFI available to users more promptly than its annual financial information, there is less documentation underlying the IFI. For this reason many of the financial elements that comprise the IFI are estimated to a greater extent than for annual reporting purposes. This increased dependency on accounting estimation by management must be recognized by the accountant throughout the planning and performance of the IFI review engagement.

The objective of a review of IFI is different than the objective of an audit of financial statements. The objective accountant with an adequate basis for expressing limited assurance that there are no material modifications that should be made for such information to conform with GAAP. To acquire this basis the accountant obtains evidence principally through inquiries and analytical procedures. However, since these procedures are substantially less in scope than an audit, they are not sufficient to provide the accountant with a basis for expressing reasonable assurance, in the form of an opinion, that the financial statements taken as a whole fairly present financial position, results of operations and cash flows in conformity with GAAP. For example, a review does not include tests of the accounting records through inspection, observation or confirmation, nor does it involve obtaining corroborating evidential matter rating evidential matter in response to inquiries. Although a review may bring to the accountant's attention significant matters affecting the IFI, it does not provide assurance that the accountant will become aware of all significant matters that would be discovered in an audit.

Procedures for a Review of

Interim Financial


Proper planning by the accountant is essential to the timely completion of a review of IFI. Performance of some of the procedures before the end of the interim period may permit the work to be carried out in a more efficient manner and to be completed at an earlier date. Performing some of the procedures earlier in the interim period also enables early conderation of significant accounting matters affecting the IFI. The new Standard specifies several types of procedures to be applied by the accountant in conducting a review of IFI. These procedures are outlined in Table 1 and include: an engagement letter, preliminary inquiries, analytical procedures, reading, final inquiries, obtain a client representation letter and consider the work of other accountants.
 Table I
 Procedures Required for a Review of
 Interim Financial Information
 Procedure Explanation
A. Prepare engagement The letter should include:
 letter 1. a general description of the
 2. an explanation that such
 procedures are substantially less
 in scope than an audit done in
 accordance with GAAS.
 3. an explanation that the IFI is the
 responsibility of the company's
 4. if applicable, a description of
 the form of the report to be
B. Make preliminary These inquiries are intended to provide
 inquiries the accountant with information about:
 1. the internal control structure,
 including the control environment,
 the accounting system and to the
 extent appropriate, control
 procedures, for both annual and
 2. any significant changes in the
 internal control structure since
 the most recent financial
 statement audit or review of IFI,
 to ascertain their potential
 effect on the preparation of IFI.
C. Apply analytical Procedures applied to the IFI for
 procedures analytical purposes consist of:
 1. comparison of the IFI with
 comparable information for the
 immediately preceding interim
 period and for corresponding
 previous period(s).
 2. evaluations of financial
 information made by consideration
 of plausible relationships among
 both financial and nonfinancial
 3. comparisons of recorded amounts,
 or ratios developed from recorded
 amounts, to expectations developed
 by the accountant.
D. Read The accountant should read:
 1. the minutes of meetings of stock
 holders, board of directors and
 committees of the board to
 identify actions that may affect
 the IFI.
 2. the IFI and consider, on the basis
 of information coming to the
 accountant's attention, whether
 the information to be reported
 conforms with GAAP.
E. Make final Inquiry of officers and other
 inquiries executives having responsibility for
 financial and accounting matters
 1. whether the IFI has been prepared
 in conformity with GAAP,
 consistently applied.
 2. changes in the entity's accounting
 practices or business activities.
 3. matters about which questions have
 arisen in the course of applying
 reading information.
 4. events subsequent to the date of
 the IFI that would have a material
 effect on the preparation of such
F. Obtain client Obtaining written representations from
 representation management concerning its
 letter responsibility for the IFI,
 completeness of minutes, subsequent
 events and other matters for which the
 accountant believes written
 representations are appropriate in the
G. Consider other Obtain reports from other accountants,
 accountants if any, who have been engaged to make a
 review of the IFI of significant
 components of the reporting entity, its
 subsidiaries or other investees. Decide
 whether to refer to the review of the
 other accountants in the principal
 accountant's review report.

The accountant's first responsibility in a review engagement is to establish a clear understanding with the client regarding the nature of the procedures to be performed on the IFI. Preferably, this understanding should be confirmed in writing with an engagement letter furnished to the client that adequately de scribes the scope of the review. The accountant should send the client two copies of the letter and request that the client provide an acknowledgement by signing one copy and returning it to the accountant.

The accountant must have a sufficient ledge of the client's internal control structure policies and procedures as they relate to the preparation of both annual and IFI. This knowledge as it pertains to the annual financial information would ordinarily have been acquired, and may have been acquired with respect to IFI, by the accountant during an Audit of the client's annual financial statements. However, if the accountant has not conducted such an audit, or has not otherwise previously acquired sufficient knowledge for the review, then the accountant's first task is to acquire the necessary knowledge about the client's internal control structure. Also, if the internal control structure appears to contain deficiencies so significant that it is impracticable for the accountant to effectively apply his or her knowledge of accounting and financial reporting practices to the IFI, the accountant should consider whether this constitutes a scope limitation that precludes completion of the review.

One of the most significant steps in the conduct of a review involves the application of analytical procedures. These procedures provide a basis for identifying IFI relationships and individual items that appear to be unusual. Items identified in this manner are then investigated through inquiries of management. In contrast to an audit engagement, the accountant ordinarily would not obtain corroborating evidential matter of management's responses to the accountant's inquiries in performing a review of IFI. However, the accountant should consider the consistency of management's responses in light of the results of other inquiries and the application of analytical procedures.

Remaining procedures to be performed include reading, making final inquiries and obtaining the client representation letter. The accountant should read the minutes of meetings to identify actions that may affect the IFI. The accountant must also read the IFI to consider whether the information to be reported con forms with GAAP. Similarly, the accountant's final inquiries of management are directed toward learning: whether the IFI has been prepared in conformity with GAAP; whether there have been changes in the client's accounting practices or business activities; whether the preparation of IFI is affected by subsequent events. The accountant concludes the review procedures by obtaining written representations from management concerning its responsibility for the IFI and other matters for which the accountant believes written representations are appropriate. Finally, if there are other accountants involved, the principal accountant must decide whether to use and make reference to the review report of the other accountant. This reference establishes a division of responsibility for performance of the review in the report issued by the principal accountant.

Based on the performance of the aforementioned procedures the accountant may discover certain matters that must be communicated to the client's audit committee or to those with equivalent authority. For illustrative purposes the required communications are incorporated into a flowchart diagram that is presented as Table 2 on the previous page. This flowchart highlights the necessary communications and integrates them with a summary analysis of the accountant s report options under the new Standard. There are four matters that the accountant must communicate to the audit committee. First, any material departure from GAAP that management has not appropriately responded to within a reasonable period of time despite having been specifically informed of the departure. Second, any irregularities or illegal acts, unless they are clearly inconsequential. Third, reportable conditions related to the internal control structure. These conditions represent significant deficiencies in the design or operation of the internal control structure, which could adversely affect the organization's ability to record, process summarize and report financial data consistent with the assertions of management in the IFI. Fourth, any other matters identified in SAS No. 61, Communications with Audit Committees, that have a significant effect on IFI. For example, the accountant should determine that the audit committee is informed about the basis for formulating particularly sensitive accounting estimates or a change in significant accounting policy affecting the IFI.


The Accountant's Report

After reviewing the IFI in accordance with the procedures specified by the new Standard, the accountant may permit the use of his or her name and inclusion of the accountant's report in a written communication setting forth the IFI. The flowchart diagram in Table 2 indicates four report options depending on the type of circumstances encountered by the accountant. These options are for a scope limitation, a GAAP departure, inadequate disclosure and a standard review report. Furthermore, the accountant's review report should follow the format that is outlined in Table 3. According to the exhibit, most review reports consist of three paragraphs, the introduction, scope and conclusion. However, when there is a departure from GAAP or inadequate disclosure the accountant should insert an additional explanatory paragraph between the scope and concluding paragraph.
 Table 3
 Preparing the Review Report
Report Requirement Explanation
A. Addressee The report may be addressed to the company
 whose financial information is being
 reviewed, its board of directors, or its
B. Title The title must include the word
 independent, i.e., Independent Accountant
C. Introduction Identify the interim financial information
 Include a statement that the financial
 information is the responsibility of the
 company's management.
D. Scope Include a statement that the review of IFI
 was made in accordance with standards for
 such reviews.
 Provide a description of the procedures
 for a review of IFI.
 State that a review of IFI is
 substantially less in scope than an audit
 conducted in accordance with GAAS, also
 disclaim in opinion.
E. Conclusion A statement about whether the accountant
 is aware of any material modifications
 that should be made to the accompanying
 financial information so that it conforms
 with generally accepted accounting
F. Signature The signature of the accountant's firm
 either manual or printed.
G. Date The report should be dated as of the date
 of completion of the review and each page
 of the IFI should be clearly marked as

Some conditions do not lead to a modification of the accountant's review report. For example, neither an uncertainty or substantial doubt about the entity's ability to continue as a going concern, nor a lack of consistency in the application of accounting principles affecting IFI, requires the accountant to include an additional paragraph in the report, provided that the IFI appropriately discloses such matters. Although not required, the accountant should consider emphasizing such matters in a separate paragraph of the report.

The report is completed with a signature and date. The signature of the accountant's firm can be printed or manually written. The report should be dated as of the date of completion of the review. However, in the case of subsequent events the report can be dual-dated in a manner similar to that of an audit report.

Subsequent to the date of the review report, the accountant may become aware that facts existed at the date of the report that might have affected the review report had the accountant been aware of those facts. The specific actions to be taken by the accountant in a particular case may vary with the circumstances since there is an endless variety of conditions that might be encountered. In any event, the accountant should refer to the AICPA's official guidelines for handling subsequent discovery of facts.


In recent years the importance of interim financial information to the financial reporting process has increased significantly. The emphasis on more timely information has created an opportunity for accountants' services that extend beyond the boundaries of the traditional annual audit function. To meet this challenge, accountants are urged to familiarize themselves with the revised guidelines for performing adequate review procedures and preparing an appropriate report.

Frank R. Urbancic, DBA, CPA, is a Professor of accounting in the College of Business and Management Studies at the University of South Alabama in Mobile, Alabama.
COPYRIGHT 1992 National Society of Public Accountants
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Title Annotation:new set of standards to govern accountants in reviewing interim financial statements
Author:Urbancic, Frank R.
Publication:The National Public Accountant
Date:Aug 1, 1992
Previous Article:Amortizing intangible assets.
Next Article:Health care and the tax law.

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