Engagements & working papers

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Engagements & working papers

Leana van der MerweAccounting and Assurance SpecialistOctober 2021

Content

International Standards on Review Engagement – ISRE24001.

2.

3.

4.

Public Interest Score

Work Programs / File Sections

Planning the Review Engagement

Content

Finalizing the engagement5.

6.

7.

Comments or Questions

Fundamental Principles to Review Engagements

Conclusion and report on the engagement

International Standard On Review Engagement – ISRE24004

The objective of a review of financial statements is to enable a practitioner to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to the practitioner’s attention that causes the practitioner to believe that the financial statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework

The practitioner should comply with the Code of Ethics for Professional Accountants issued by the International Ethics Standards Board for Accountants (the IESBA Code).

Ethical principles governing the practitioner’s professional responsibilities are: (a) Independence; (b) Integrity; (c) Objectivity; (d) Professional competence and due care; (e) Confidentiality; (f) Professional behavior; and (g) Technical standards.

Public Interest Score5

Compiled

Internally

Compiled

Independently

Compiled

Internally

Compiled

Independently

Engagement Type

IR (Can be done

by SAIPA Certified

Independent

reviewer)

IR (Can be done

by SAIPA Certified

Independent

reviewer)

Compilation (Can

be done by SAIPA

member)

Voluntary IR (Can

be done by SAIPA

Certified

Independent

reviewer)

Compilation (Can

be done by SAIPA

member)

Voluntary IR (Can

be done by SAIPA

Certified

Independent

reviewer)

Accounting

Framework

No Framework

unless specified in

MOI

IFRS for SME's

No Framework

unless specified in

MOI

IFRS for SME's

< 100

NON OWNER MANAGED OWNER MANAGED

PUBLIC INTEREST SCORE

Public Interest Score6

Compiled

Internally

Compiled

Independently

Compiled

Internally

Compiled

Independently

Engagement Type

Audit (Only IRBA

Registered

Auditor)

Audit (Only IRBA

Registered

Auditor)

Audit (Only IRBA

Registered

Auditor)

Audit (Only IRBA

Registered

Auditor)

Accounting

Framework

IFRS or IFRS for

SME's

IFRS or IFRS for

SME's

IFRS or IFRS for

SME's

IFRS or IFRS for

SME's

Engagement Type

Audit (Only IRBA

Registered

Auditor)

IR (Only IRBA

Registered

Auditor)

Audit (Only IRBA

Registered

Auditor)

Compilation (Can

be done by SAIPA

member)

Voluntary IR (Can

be done by SAIPA

Certified

Independent

reviewer)

Accounting

Framework

IFRS or IFRS for

SME's

IFRS or IFRS for

SME's

IFRS or IFRS for

SME's

IFRS or IFRS for

SME's

NON OWNER MANAGED OWNER MANAGED

PUBLIC INTEREST SCORE

350 +

100 - 349

Planning the review engagement7

• Acceptance and continuation of the client• Agreeing the terms of the engagement (engagement letter)• Understanding the entity• Materiality• Designing and performing analytical procedures• Enquiries from management• Related parties• Applicable laws and regulations• Going Concern• Identifying risks / Areas that are likely to be misstated• Designing procedures• Opening balances

Acceptance and continuation of the client8

• Whether a review engagement is appropriate in the circumstances, e.g. no legal or other requirement for an audit exists;

• The integrity of the principal owners, key management and those charged with governance. If the practitioner has cause to doubt management’s integrity to a degree that is likely to affect proper performance of the review, it will not be appropriate to accept the engagement to perform a review;

• Significant matters that have arisen during the current or a previous review engagement, and their implications for continuing the relationship;

• Existence of any independence threats and the independence of the proposed team members;

• Ability of the firm to perform the required work;

• Availability of the required resources and time availability;

• Ability of the client to pay the fees involved

Agreeing the terms of the engagement (engagement letter)9

The purpose of an engagement letter is to help avoid misunderstanding regarding such matters as:

• The objectives and scope of the engagement;

• The extent of the practitioner’s responsibilities, and the form of the report to be issued;

• The responsibilities of management in relation to the review engagement and the financial statements to be reviewed.

Matters that would usually be included in the engagement letter are:

• The objective and scope of the review engagement;

• The responsibilities of the practitioner;

• The responsibilities of management including:

• The preparation of the financial statements and the applicable financial reporting framework, as well us unrestricted access to records, documentation and other information requested during the review engagement;

• Establishing and maintaining effective internal controls over financial reporting.

Agreeing the terms of the engagement (engagement letter)10

Matters that would usually be included in the engagement letter are:

• Identification of the applicable financial reporting framework for the preparation of the financial statements;

• A statement that the engagement is not an audit, and that the practitioner will not express an audit opinion on the financial statements;

• The fact that the engagement cannot be relied upon to disclose errors, illegal acts or other irregularities, for example fraud;

• A statement that the practitioner will inform management of any material errors, illegal acts and any evidence that came to his attention during the performance of his duties;

• The intended use and distribution of the financial statements, and any restrictions on either their use or their distribution; and

• Reference to the expected form and content of the report to be issued by the practitioner, and a statement that there may be circumstances in which the report may differ from its expected form and content;

• The expectation that management will provide written representations to the practitioner

Agreeing the terms of the engagement (engagement letter)11

It is not necessary to send a new engagement letter each year, but it is recommended that the

engagement letter is updated at regular intervals.

A revised engagement letter should however be issued in the following circumstances:

• Any indication that the entity misunderstands the objective and scope of the review;

• Any revised or special terms of the review engagement;

• A recent change of senior management;

• A significant change in ownership;

• A significant change in nature or size of the entity’s business;

• A change in legal or regulatory requirements;

• A change in the financial reporting framework adopted in the preparation of the financial

statements.

Understanding the entity12

• The entity and its environment, including the entity’s accounting system and accounting records relevant to the review; and

• The applicable financial reporting framework, including its application in the industry in which the entity operates;

• Size and complexity of the entity

• Industry trends

• Government policies

• Taxation requirements

• “Tone at the top”

• Key personnel

• Financing

• Capital investments

• Control environment through which the entity addresses risks relating to financial reporting

• Relevant provisions of laws and regulations that have a

direct effect on the determination of material amounts and

disclosures in the financial statements

• Roles of the board of directors

• Key personnel

• Significant related parties

• Shareholders

• Subsidiaries

• Significant or unusual transactions

• Control systems

• Legal agreements and contracts

• Period-end-cut-off procedures

• Inventory count instructions

Materiality13

The following benchmarks could be used to determine materiality for the financial statements as a whole:

• Revenue 0.5% - 2%• Net Profit Before Tax 5% - 10%• Equity 2% - 5%• Total assets or debt 1% to 2%

Examples of matters that may influence decision makers and hence necessitate a lower level of specific materiality

• Laws, • Regulations• Accounting Framework Requirements• Key Industry Disclosures• Significant Events• Important Changes in Operations

Designing and performing analytical procedures14

• A review engagement primarily involves performing enquiry and analytical procedures.

• Review procedures are based on the understanding obtained of the entity’s business.

• The practitioner should apply judgement in determining the specific nature, timing and extent

of the review procedures.

• These procedures should, however, be sufficient for the practitioner to be able to identify areas

in the financial statements where material misstatements are likely to arise, and to design

procedures to address those areas.

• The procedures performed should also provide an adequate basis for a conclusion on the

financial statements as a whole.

Where in certain circumstances, the results of the enquiry and analytical procedures performed do not provide an adequate basis for the practitioner to form a conclusion on the financial

statements, the practitioner is required to perform additional procedures

Enquiries from management15

• Specific laws and regulations that may have an effect on the financial statements.

• Any related party transactions and relationships.• Plans to dispose of major assets or business segments.• Your assessment of the risk that the financial statements may be

materially misstated due to non-compliance with laws and regulations

• Your assessment of the entity's ability to continue as a going concern

• Any events that have occurred after the date of the financial statements that may affect the financial statements

• Your assessment of the risk that the financial statements may be materially misstated due to fraud

• accounting estimates • Significant, unusual or complex transactions, events or matters that

have affected or may affect the financial statements• Changes in the organization and or environment

• Minutes of Meetings• AGM• Staff meetings

Related parties16

• Enquiries• Alert• Professional skepticism• Ask around!• Terms and conditions?• Disclosed?• Approved?• Directors Declaration• Body Corporates / HOA

Applicable laws and regulations17

• Companies Act• Other Act• Vat / PAYE / SDL / UIF / income Tax• Labor Law• Covid• Entity Specific• Mining• Pharmaceutical• Basic Conditions of employment• Workman's Compensation

Going Concern18

• Management responsibility• Professional Accountant responsibility• Disclosure

Indicators• Decline revenue• Decline GP• Increase operating expenses• Increase payable days• Dividend ceased• Cashflow• Financial Ratios

Identifying risks / Areas that are likely to be misstated19

Based on the following:• Enquiries with management• Analytical Review• Discussions• Experience

ReasonRefer to work performedConclude!!!

Revenue are Inherent High Risk!

Designing procedures20

From the results obtained from performing enquiries and analytical procedures, the practitioner will either have • obtained evidence that is sufficient and appropriate to conclude on the financial statements, • or will have identified the need to perform additional procedures

If the practitioner becomes aware of a matter(s) that causes the practitioner to believe the financial statements may be materially misstated, the practitioner shall design and perform additional procedures sufficient to enable the practitioner to:

• Conclude that the matter(s) is not likely to cause the financial statements as a whole to be materially misstated; or

• Determine that the matter(s) causes the financial statements as a whole to be materially misstated

Procedures will be:• Further Analytical Review• Substantive procedures• Confirmations

Example – Debtors, Revenue

Work Programs / File Sections21

• Balance – Agree TB / GL / AFS• Risk – Agree to Planning• Additional Procedures or Not – Agree to

planning notes• Conclusions on Assertions• Conclusion have to say why• Who Prepared Section• Date work was prepared• Who reviewed – ISQM • Date of Review• Procedures• Results• Document all details, who what why when• Electronic date stamp etc.

• Related Parties• Opening Balances• Commitments and Contingencies

Finalising The Engagement22

• Going Concern• Subsequent Events• Evaluation of misstatements• Conclusion on Risk Items / Items Likely

to be misstated• Directors Remuneration

Going Concern23

• Enquire from management - going concern assessment,• Evaluate results of enquiries with management • Consider whether management's assessment included all the relevant information

of which you became aware as a result of the review.• Ensure management's assessment covers at least twelve months• written representations • Budget?• Forecast?• Change In product / business etc• Prior year actual vs prior year budget• Period after y/e results• Order Book

Subsequent Events24

• Discussion management• Management procedures in identifying• Results after y/e• Minutes of meetings• Commitments / Contracts• Changes in business• Written presentation

Evaluation of misstatements25

• Planning materiality• Final Materiality• Change? Why? Impact work?• Overs / Under unrecorded misstatement

• Aggregate• Individual

• If material adjust!• If not, material discuss management

Conclusion and Reporting26

• AFS to Records – Show the evidence• AFS Checklist - disclosure• Design Report

• Unmodified• Modified• Qualified• Adverse• Disclaim

• Representation Letter• Signed before the report

• Matters communicated to those charged with governance – Management Report

• Final Review and Practitioner Sign Off - ISQM

Report27

The report on a review of financial statements should contain the following basic elements, ordinarily in the following layout: (a) Title;(b) Addressee; (c) Opening or introductory paragraph including:

(i) Identification of the financial statements on which the review has been performed; and (ii) A statement of the responsibility of the entity’s management and the responsibility of the practitioner;

(d) Scope paragraph, describing the nature of a review, including: (i) A reference to this ISRE applicable to review engagements, or to relevant national standards or practices; (ii) A statement that a review is limited primarily to inquiries and analytical procedures; and (iii) A statement that an audit has not been performed, that the procedures undertaken provide less

assurance than an audit and that an audit opinion is not expressed; (e) Statement of negative assurance; (f) Date of the report; (g) Practitioner’s address; and (h) Practitioner’s signature.

TEMPLATES IN ISRE2400

Fundamental principles to review Engagements28

• ISRE 2400• Sufficient and appropriate evidence• Quality Control• Ethical Requirements• Professional skepticism• Professional judgement• Work of an expert – ISRS2400 Para16• Documentation

Documentation29

The practitioner should document matters which are important in providing evidence to support the review report, and evidence that the review was carried out in accordance with this ISRE – ISRE2400 Para 17

• Anything that support your opinion• Date, Time, done by who• Discussions• Needs to be documented, cannot carry it in

your heart• Remember if AR is different than expected –

do additional work

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