16.4 Review of Financial Statements (AR-C 90)

16.4 Review of Financial Statements (AR-C 90)

Core Principle: A review of financial statements under AR-C Section 90 is an attest service that provides limited assurance (also termed negative assurance). The accountant's objective is to obtain limited assurance as a basis for reporting whether the accountant is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework. Review procedures are restricted almost exclusively to inquiries of management and analytical procedures.

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1. Nature, Objective, and Assurance Level

A review is significantly greater in scope than a compilation or preparation, but substantially less in scope than an audit conducted under GAAS.

+---------------------------------------------------------------------------------------------------+
|                                   AR-C 90 REVIEW ARCHITECTURE                                     |
|                                                                                                   |
|   - Engagement Type: Attest Service providing LIMITED ASSURANCE                                   |
|   - Conclusion Formulation: Negative Assurance ("We are not aware of any material modifications") |
|   - Independence: STRICTLY MANDATORY (Cannot be waived or disclosed away)                         |
|   - Primary Procedures: Inquiries of Management & Analytical Procedures                           |
|   - Testing Internal Control: NOT PERFORMED (No assessment of control risk)                       |
|   - Substantive Details: NOT PERFORMED (No physical inventory counts, no confirmations)           |
|   - Management Rep Letter: STRICTLY MANDATORY (Dated as of the review report date)                |
+---------------------------------------------------------------------------------------------------+

The Negative Assurance Conclusion

In an audit, the auditor issues an opinion expressing positive reasonable assurance ("In our opinion, the financial statements present fairly..."). In a review, the accountant expresses negative assurance in the conclusion paragraph:

"Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America."

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2. Independence: A Strict, Non-Negotiable Mandate

Under the AICPA Code of Professional Conduct and AR-C Section 90, the accountant must be independent to perform a review engagement.

• Unlike a compilation, where an accountant who lacks independence can still compile the statements by disclosing the impairment in the report, a CPA who lacks independence cannot issue a review report under any circumstances.
• If independence is impaired at any point during the engagement, the accountant cannot complete the review. The CPA must either:
  1. Withdraw from the engagement; OR
  2. Downgrade to a compilation engagement under AR-C Section 80 (if client agrees and the lack of independence is explicitly disclosed in the compilation report).

Exam Trap: Examiners will describe a scenario where an accountant discovers an independence impairment (e.g., acquiring client stock or a family member taking an executive role) and ask if the accountant can issue a review report with an explanatory paragraph disclosing the impairment. The answer is NO. A review report can never be issued by a non-independent accountant.

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3. The Core Review Procedures: Inquiries and Analytics

Under AR-C 90, the accountant designs and performs procedures primarily consisting of inquiry and analytical procedures to obtain limited assurance.

                            THE TWO PILLARS OF AR-C 90 REVIEW FIELDWORK
                                                 |
        +----------------------------------------+----------------------------------------+
        |                                                                                 |
  INQUIRIES OF MANAGEMENT                                                   ANALYTICAL PROCEDURES
  - Accounting principles & industry practices                              - Develop plausible expectations
  - Recording, classifying & summarizing transactions                       - Compare recorded amounts & ratios
  - Significant or unusual transactions & entries                             (Prior years, budgets, industry)
  - Suspected or actual fraud & non-compliance                             - Investigate unexpected fluctuations
  - Subsequent events & litigation/claims                                   - Evaluate plausible relationships
  - Related-party transactions & balances                                   - Inquire & corroborate deviations

Inquiries of Management

The accountant must direct inquiries to management and internal personnel with financial and accounting responsibility regarding:

1. Whether the statements have been prepared in accordance with the framework.
2. Accounting principles and practices used, and changes in accounting policies.
3. The entity's procedures for recording, classifying, and summarizing transactions.
4. Significant, unusual, or complex transactions, and large journal entries at period-end.
5. The status of uncorrected misstatements identified in previous engagements.
6. Material subsequent events occurring between balance sheet date and report date.
7. Knowledge of any actual, suspected, or alleged fraud affecting the entity.
8. Significant litigation, claims, assessments, and related-party relationships.
9. Actions taken at meetings of stockholders, board of directors, and board committees.

Analytical Procedures

The accountant must perform analytical procedures to identify relationships and individual items that appear unusual or inconsistent with expectations:

1. Developing Expectations: Establish expectations based on prior-period financial results, anticipated results (budgets/forecasts), and predictable industry patterns.
2. Comparing Recorded Amounts: Compare current recorded amounts or ratios with expectations.
3. Investigating Inconsistencies: When an analytical procedure reveals an unusual fluctuation, inconsistency, or significant variance, the accountant must investigate by inquiring of management and performing other procedures as necessary in the circumstances.

Procedures NOT Required in a Review Engagement

Candidates must know what procedures are excluded from AR-C 90. In a review, the accountant is NOT required to:

• Obtain an understanding of internal control or assess control risk.
• Test the operating effectiveness of internal controls.
• Perform substantive tests of details (e.g., vouching invoices, examining shipping documents).
• Observe physical inventory counts.
• Send external confirmations to banks, customers (accounts receivable), or vendors.
• Obtain an attorney's letter regarding litigation and claims (unless specific litigation issues arise that require legal verification).

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4. Mandatory Written Management Representation Letter

In every review engagement under AR-C Section 90, the accountant must obtain a signed written representation letter from management (normally the CEO and CFO).

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|                         AR-C 90 WRITTEN REPRESENTATION LETTER RULES                               |
|                                                                                                   |
|   - Signers: Chief Executive Officer (CEO) and Chief Financial Officer (CFO).                     |
|   - Timing: DATED AS OF THE DATE OF THE REVIEW REPORT.                                            |
|   - Core Confirmations:                                                                           |
|      1. Management has fulfilled its responsibility for the financial statements.                 |
|      2. Management is responsible for internal control relevant to financial reporting.           |
|      3. Full disclosure of all known fraud, suspected fraud, and non-compliance.                  |
|      4. Completeness of all financial records, meeting minutes, and subsequent events.            |
|                                                                                                   |
|   CONSEQUENCE OF REFUSAL:                                                                         |
|   If management refuses to sign and provide the representation letter, the review is INCOMPLETE.   |
|   The accountant is PROHIBITED from issuing a review report and MUST WITHDRAW from the engagement. |
+---------------------------------------------------------------------------------------------------+

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5. Review Report Architecture

The review report is an attest report. Under AR-C 90, the title must include the word "Independent".

+---------------------------------------------------------------------------------------------------+
|                       INDEPENDENT ACCOUNTANT'S REVIEW REPORT (AR-C 90)                            |
|                                                                                                   |
|   Title: Independent Accountant's Review Report                                                   |
|   Addressee: To the Board of Directors and Shareholders of ABC Company                            |
|                                                                                                   |
|   [Introductory Paragraph]                                                                        |
|   We have reviewed the accompanying financial statements of ABC Company, which comprise the       |
|   balance sheet as of December 31, 20XX, and the related statements of income, changes in          |
|   stockholders' equity, and cash flows for the year then ended, and the related notes...          |
|                                                                                                   |
|   [Management's Responsibility for the Financial Statements]                                      |
|   Management is responsible for the preparation and fair presentation of these financial          |
|   statements in accordance with accounting principles generally accepted in the United States...  |
|                                                                                                   |
|   [Accountant's Responsibility]                                                                   |
|   Our responsibility is to conduct our review engagement in accordance with Statements on         |
|   Standards for Accounting and Review Services promulgated by the Accounting and Review Services  |
|   Committee of the AICPA. Those standards require us to perform procedures to obtain limited       |
|   assurance as a basis for reporting whether we are aware of any material modifications that      |
|   should be made to the financial statements for them to be in accordance with U.S. GAAP. We      |
|   believe that the results of our procedures provide a reasonable basis for our conclusion.       |
|   We are required to be independent of ABC Company...                                             |
|                                                                                                   |
|   [Accountant's Conclusion]                                                                       |
|   Based on our review, we are not aware of any material modifications that should be made to      |
|   the accompanying financial statements in order for them to be in accordance with accounting     |
|   principles generally accepted in the United States of America.                                  |
|                                                                                                   |
|   Signature: [CPA Firm Signature]                                                                 |
|   City & State: [City and State of Practice]                                                      |
|   Date: [Date of Completion of Review Procedures]                                                 |
+---------------------------------------------------------------------------------------------------+

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6. Departures from the Framework: Qualified and Adverse Conclusions (SSARS No. 25)

SSARS No. 25 (effective for reviews of financial statements for periods ending on or after December 15, 2021) requires the accountant to determine and use materiality in a review and permits modified conclusions:

1. Adverse opinions belong to audits; adverse conclusions belong to reviews. Match the label to the engagement.
2. Older materials describe a "Known Departure" paragraph and say the accountant withdraws when a departure is pervasive; SSARS No. 25 replaced that approach with qualified and adverse conclusions.
3. Withdrawal still applies when the accountant cannot complete the review, as described next.

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7. Inability to Complete Review Procedures (Scope Limitations)

If the accountant is unable to perform the inquiries or analytical procedures considered necessary, or if management refuses to provide written representations:

• The review is incomplete and no review report may be issued.
• The accountant cannot issue a "disclaimer of review conclusion"—the standard dictates that when a review cannot be completed, the accountant must withdraw from the engagement.