AU 722: Interim Financial Information

AU-C 930: Interim Financial Information

AU EFFECTIVE DATE AND APPLICABILITY

Original Pronouncement Statements on Auditing Standards (SASs) 100 and 116.
Effective Date SAS 116 is effective for reviews of interim financial information for interim periods beginning after December 15, 2009. Earlier application is permitted.
Applicability An accountant may conduct a review of interim financial information if:
1. The entity’s latest annual financial statements have been audited by the accountant or a predecessor;
2. The accountant has been engaged to audit the entity’s current year financial statements, or the accountant audited the entity’s latest annual financial statements and expects to audit the current year financial statements;
3. The client prepares its interim financial information in accordance with the same financial reporting framework as that used to prepare the annual financial statements; and
4. If the interim financial information is condensed information, then
a. The information conforms with a financial reporting framework such as International Accounting Standards (IAS) 34;
b. It includes a note that the financial information does not represent complete financial statements and should be read in conjunction with the entity’s latest annual audited financial statements; and
c. The information accompanies the entity’s latest audited annual financial statements.
NOTE: Although the section generally does not require a written report on a review, a review report should accompany interim financial information if the entity states in a written document that the interim information has been reviewed by an independent public accountant. The accountant may also issue a written report if there is a risk that users of the interim financial information may assume a higher level of assurance than that obtained by the accountant.

AU-C EFFECTIVE DATE AND SUMMARY OF CHANGES

SAS No. 122, Codification of Auditing Standards and Procedures, is effective for audits of financial statements with periods ending on or after December 15, 2012.

AU-C 722 does not change extant requirements in any significant way.

AU DEFINITIONS OF TERMS

Interim financial information or statement. Financial information or statements for less than a full year or for a twelve-month period ending on a date other than the entity’s fiscal year-end. Interim financial information may be condensed or in the form of a complete set of financial statements. Additionally, the term applicable financial reporting framework means a set of criteria used to determine measurement, recognition, presentation, and disclosure of all material items appearing in the financial statements; for example, US generally accepted accounting principles (GAAP) or international financial reporting standards.

Likely misstatement. The accountant’s best estimate of the total misstatement in the account balances or classes of transactions on which he or she has performed review procedures.

Specified regulatory agencies. For purposes of this section, specified regulatory agencies are the Securities and Exchange Commission (SEC) and the following agencies with which an entity files periodic reports pursuant to the Securities Exchange Act of 1934: Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Federal Reserve System, and Office of Thrift Supervision.

AU-C DEFINITION OF TERM

Source: AU-C 930.06

Interim financial information. Financial information prepared and presented in accordance with an applicable financial reporting framework that comprises either a complete or condensed set of financial statements covering a period or periods less than one full year or covering a twelve-month period ending on a date other than the entity’s fiscal year-end.

OBJECTIVES OF AU SECTION 722

The objective of a review of interim financial information is to provide the accountant with a basis for communicating whether he or she is aware of any material modifications that should be made to the information for it to conform to the applicable financial reporting framework. Review procedures consist primarily of inquiries, analytical procedures, and reading of certain documents and reports. A review is premised on the accountant’s base of knowledge about the company’s accounting and financial reporting practices and other aspects of its internal control. It is expected that this base of understanding will have been acquired by the accountant who audited the entity’s financial statements for one or more annual periods. An accountant who has not audited annual financial statements can review interim financial information if he or she can acquire equivalent knowledge and understanding.

The service of review of interim information of a public entity is a product of the natural tension between government regulation and professional standard setting. Using its regulatory powers over financial reporting by public companies, the SEC pushed the American Institute of Certified Public Accountants’ (AICPA’s) auditing standard-setting group to develop a level of service for interim data somewhere in between an audit and the minimal responsibility for association with unaudited statements. Initially, when first considered in 1975, the idea of providing negative, or limited, assurance based on the limited scope of a review was very controversial.

In 1999, the Auditing Standards Board (ASB) amended SAS 71 (the predecessor SAS to SAS 100) by issuing SAS 90, Audit Committee Communications, to require that auditors of SEC clients determine that SAS 61 (see Section 380, The Auditor’s Communication with Those Charged with Governance) matters identified in a review engagement be brought to the attention of the audit committee by management or the auditor.

In 2002, the ASB issued SAS 100, Interim Financial Information, which supersedes SAS 71. The ASB decided to issue this new standard to provide additional guidance on performing interim reviews, incorporate the requirements of the SEC for timely filings of interim financial information, and incorporate recommendations from the Public Company Accounting Oversight Board’s (PCAOB’s) Panel on Audit Effectiveness. The SAS also includes recommendations from the AICPA’s Professional Issues Task Force that were included in PITF 2000-4, Quarterly Review Procedures for Public Companies.

Finally, the ASB issued SAS 116 in 2009; it removes the guidance for reviews of the interim financial statements of issuers, since that guidance is provided by the auditing standards of the PCAOB.

OBJECTIVE OF AU-C SECTION 930

AU-C 930.045 states that:

. . . the objective of the auditor when performing an engagement to review interim financial information is to obtain a basis for reporting whether the auditor is aware of any material modifications that should be made to the interim financial information for it to be in accordance with the applicable financial reporting framework through performing limited procedures.

FUNDAMENTAL REQUIREMENTS: REVIEW PROCEDURES

Standards

The three general standards of the generally accepted auditing standards (GAAS) apply to reviews. This section provides guidance on application of the fieldwork and reporting standards to reviews.

Understanding with Client

A clear written understanding should be established with the client regarding the services to be performed in an engagement to review interim financial information. If an understanding has not been established with the client, the accountant should not accept or perform the engagement.

The understanding is specifically required to include:

1. Objectives of the engagement
2. Responsibilities of management
3. Responsibilities of the accountant
4. Limitations of the engagement

The understanding should state whether the accountant will provide a written or oral report upon completion of the engagement.

Prior to accepting the engagement, the accountant should assess management’s ability to acknowledge their responsibility to establish and maintain controls that are sufficient to provide a reasonable basis for the preparation of reliable interim financial information in accordance with the applicable financial reporting framework. The accountant should not accept the engagement if this is not the case.

NOTE: The best way to establish this understanding is to use an engagement letter (see “Techniques for Application”).

Knowledge of the Entity’s Business and Internal Control

The accountant should have knowledge of the entity’s business and internal controls that is sufficient to:

  • Identify types of potential material misstatements and the likelihood of such misstatements occurring.
  • Determine the inquiries and analytical procedures to be performed. (The accountant should also use this knowledge to identify particular events, transactions, or assertions to determine where to direct inquiries or apply analytical procedures.)

Planning the Review

When planning the review, the accountant should perform procedures to update his or her knowledge of the entity’s business and its internal control. This knowledge should be sufficient to aid in determining the inquiries to be made and the analytical procedures to be performed, and identify relevant events, transactions, or assertions to subject to inquiries or analytical procedures. The accountant should read:

  • Prior year’s audit documentation (The accountant should also consider whether results of audit procedures performed impact the current year’s financial statements.)
  • Documentation for prior interim period reviews of the current year
  • Documentation of prior year’s corresponding quarterly and year-to-date interim period reviews
NOTE: The accountant should specifically evaluate (1) corrected material misstatements; (2) issues identified in a summary of uncorrected misstatements (see Section 312); (3) identified risks of material misstatement due to fraud, including the risk of management override of controls; and (4) significant continuing financial accounting and reporting matters (e.g., significant deficiencies and material weaknesses).
  • The most recent annual and comparable prior interim period financial information.

The accountant should ask management about:

  • Changes in business activities of the entity
  • The nature and extent of significant changes in internal control, including changes in policies, procedures, or personnel, occurring after the prior annual audit or review of interim financial information

The accountant should also consider the results of any audit procedures performed with respect to the current year’s financial statements.

Initial Review of Interim Information

In an initial review of interim information, the accountant should perform procedures to enable him or her to obtain the understanding of the business and internal controls necessary to address the objectives of the review. In addition, the accountant should make inquiries of the predecessor accountant and, if permitted by the predecessor, review the predecessor’s documentation for:

  • The preceding annual audit, and
  • Any prior interim periods in the current year reviewed by the predecessor
NOTE: The accountant may also want to review the predecessor’s documentation for reviews of prior year’s interim periods.
The accountant should specifically evaluate the nature of any (1) corrected material misstatements, (2) issues identified in any summary of uncorrected misstatements, (3) identified risks of material misstatement due to fraud, including the risk of management override of controls, (4) significant continuing financial accounting and reporting matters (e.g., significant deficiencies or material weaknesses).

The inquiries and procedures performed in the initial review and the conclusions reached are solely the responsibility of the successor accountant. The successor accountant should not make reference in his or her report to the predecessor’s work as the basis for the successor’s report. If the predecessor does not respond to inquiries or make documentation available for review, the accountant should perform alternative procedures to obtain the required knowledge.

If the accountant has not audited the most recent annual financial statements, the accountant should obtain sufficient knowledge of the entity’s internal control as it relates to preparing interim financial information. Such knowledge includes relevant aspects of the control environment, the entity’s risk assessment process, control activities, information and communication, and monitoring. The accountant should be aware that internal control over the preparation of interim information may differ from that over annual financial information because different accounting principles may be permitted for interim financial information by APB Opinion 28, Interim Financial Reporting.

NOTE: The scope of the review may be restricted if the entity’s internal control has deficiencies that are so significant that it is not practicable for the accountant to effectively perform necessary review procedures.

Required Review Procedures

The following procedures should be tailored to the engagement based on the accountant’s knowledge of the entity’s business and internal control.

Analytical Procedures

The accountant should perform the following analytical procedures to identify and provide a basis for asking about the relationships and individual items that appear to be unusual and that may indicate a material misstatement in the interim financial information.

The accountant should compare:

  • Quarterly interim financial information with comparable information for the immediately preceding interim period and the prior year’s corresponding information. The accountant should factor in his or her knowledge of changes in the business or transactions.
  • Recorded amounts or ratios developed from such amounts to the account’s expectations.
  • Disaggregated revenue data, such as comparing the current interim period’s revenue reported by month and by operating segment with that of comparable prior periods.

The accountant should also consider plausible relationships among financial and relevant nonfinancial information. The accountant may want to consider information developed by the entity such as a director’s information package.

AU Illustration 8 provides examples of analytical procedures.

The accountant should keep in mind that, although expectations from analytical procedures in a review are normally less precise than those of an audit, and the accountant is not required to corroborate management’s responses with other evidence, the accountant should consider whether such responses are reasonable and consistent with other information from the review.

Inquiries and Other Procedures

The accountant should make the following inquiries of financial and accounting management:

  • Has the interim financial information been prepared in conformity with the applicable financial reporting framework consistently applied?
  • Are there any unusual or complex situations potentially affecting interim financial information? (See AU Illustration 9.)
  • Have any significant transactions occurred or been recorded in the last several days of the interim period?
  • Were uncorrected misstatements identified during the previous audit and interim review subsequently recorded? If so, when, and what were the final amounts of the adjustments?
  • Were any issues identified while performing review procedures?
  • Are there any subsequent events that could have a material effect on interim financial information?
  • Does management know about any actual or suspected fraud involving management, employees who have significant roles in internal controls, or anyone else in a position to commit fraud that would materially affect the financial information?
  • Does management know about any actual or suspected fraud alleged by anyone including employees, former employees, analysts, regulators, or short sellers?
  • Are there any significant journal entries and other adjustments?
  • Are there any communications from regulatory agencies?
  • Are there any significant deficiencies, including material weaknesses, in internal control relating to the preparation of both annual and interim financial information?

The accountant should also read the following:

  • Available minutes of meetings of stockholders, directors, and appropriate committees. The accountant should ask about issues discussed at meetings for which minutes are not available in order to identify issues that might affect interim financial information.
  • The interim financial information to consider whether it conforms to the applicable financial reporting framework, based on the results of review procedures and other information that comes to the accountant’s attention.
  • Other information in documents containing the interim financial information, to consider whether the information or the manner of presentation is materially inconsistent with the interim financial information.

The accountant should also perform the following procedures:

  • Obtain reports from other accountants engaged to perform a review of the interim financial information of significant components of the reporting entity, its subsidiaries, or its other investees. If reports have not been issued, make inquiries of those accountants.
NOTE: The accountant may also find the guidance in Section 543, Part of the Audit Performed by Other Independent Auditors, helpful.
  • Obtain evidence that the interim financial information agrees or reconciles with the accounting records. The accountant should consider asking management about the reliability of the records to which the interim information is compared or reconciled.

Inquiries Concerning Litigation, Claims, and Assessments

In a review, the accountant is ordinarily not required to send an inquiry letter to the entity’s lawyer about litigation, claims, or assessments. However, it would be appropriate for the accountant to ask legal counsel about any specific matters that come to the accountant’s attention that lead him or her to question whether there is a departure from the applicable financial reporting framework related to litigation, claims, or assessments.

Inquiries Concerning Going Concern Issues

Although a review is not designed to identify conditions or events indicating substantial doubt about the entity’s ability to continue as a going concern, such conditions may already exist, or the accountant may become aware of them while performing the review. In either case, the auditor should ask management about its plans for dealing with the adverse effects of conditions and events and consider whether these matters are adequately disclosed in the interim financial information.

Extension of Interim Review Procedures

During a review, an accountant may become aware of information that leads him or her to believe that the interim financial information may not be in conformity with the applicable financial reporting framework in all material respects. In this case, the accountant should make additional inquiries or perform other appropriate procedures to provide a basis for communicating whether he or she is aware of any material modifications that should be made to the interim information.

NOTE: For example, if an accountant questions whether a significant sales transaction is recorded in conformity with the applicable financial reporting framework, the accountant may perform procedures to resolve the question such as discussing the terms of the transaction with senior accounting and marketing personnel and/or reading the sales contract.

Timing of Review Procedures and Coordination with the Audit

Many review procedures can be performed before or at the same time that the entity is preparing interim financial information. Early performance of certain review procedures allows for early identification and consideration of significant accounting matters. Also, since the accountant performing the review is usually engaged to perform the year-end audit, the accountant may perform certain auditing procedures, such as reading the minutes of board of directors’ meetings, concurrently with the interim review.

Management Representation Letter

The accountant should obtain written representations from management for all interim financial information presented and for all periods covered by the review. According to AU 722.24, specific representations should cover the following:

Interim Financial Information

1. Management’s acknowledgment of its responsibility for the fair presentation of the interim financial information in conformity with the applicable financial reporting framework
2. Management’s belief that the interim financial information has been prepared and presented in conformity with the applicable financial reporting framework applicable to interim financial information

Internal Control

3. Management’s acknowledgment of its responsibility to establish and maintain controls that are sufficient to provide a reasonable basis for the preparation of reliable interim financial information in accordance with the applicable financial reporting framework
4. Disclosure of all significant deficiencies, including material weaknesses, in the design or operation of internal controls as it relates to the preparation of both annual and interim financial information
5. Acknowledgment of management’s responsibility for the design and implementation of programs and controls to prevent and detect fraud
6. Knowledge of fraud or suspected fraud affecting the entity involving (a) management, (b) employees who have significant roles in internal control, or (c) others where fraud could have a material effect on the interim financial information
7. Knowledge of any allegations of fraud or suspected fraud affecting the entity received in communications from employees, former employees, analysts, regulators, short sellers, or others

Completeness of Information

8. Availability of all financial records and related data
9. Completeness and availability of all minutes of meetings of stockholders, directors, and committees of directors or summaries of actions of recent meetings for which minutes have not yet been prepared
10. Communications with regulatory agencies concerning noncompliance with or deficiencies in financial reporting practices
11. Absence of unrecorded transactions

Recognition, Measurement, and Disclosure

12. Management’s belief that the effects of any unrecorded financial statement misstatements aggregated by the accountant during the current review engagement and pertaining to the interim period(s) in the current year are immaterial, both individually and in the aggregate, to the interim financial information as a whole (a summary of such items should be included in or attached to the letter)
13 Plans or intentions that may materially affect the carrying value or classification of assets or liabilities
14. Information concerning related-party transactions and amounts receivable from or payable to related parties
15. Guarantees, whether written or oral, under which the entity is contingently liable
16. Significant estimates and material concentrations known to management that are required to be disclosed in accordance with the AICPA’s Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties
17. Violations or possible violations of laws or regulations whose effects should be considered for disclosure in the interim financial information or as a basis for recording a loss contingency
18. Unasserted claims or assessments that are probable of assertion and must be disclosed in accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards 5, Accounting for Contingencies
19. Other liabilities or gain or loss contingencies that are required to be accrued or disclosed by FASB Statement 5
20. Satisfactory title to all owned assets, liens or encumbrances on such assets, and assets pledged as collateral
21. Compliance with aspects of contractual agreements that may affect the interim financial information

Subsequent Events

22. Information concerning subsequent events

The representation letter should be tailored to include additional representations specific to the entity’s business or industry. See the “Illustrations” section of this chapter for examples of representation letters.

Evaluating the Results of Interim Review Procedures

During a review, the accountant may become aware of likely misstatements and should accumulate such misstatements for further evaluation. The account should evaluate misstatements individually and in the aggregate to determine whether a material modification to the interim financial statements is necessary for it to conform to the applicable financial reporting framework. The accountant should use professional judgment in evaluating the materiality of uncorrected likely misstatements. When evaluating the materiality of uncorrected misstatements, the accountant should consider:

  • The nature, cause, and amount of misstatements
  • When the misstatement occurred (prior year or interim periods of the current year)
  • Materiality judgments made in the prior or current year annual audit
  • The potential effect of the misstatements on future interim or annual periods

When evaluating whether uncorrected likely misstatements, individually or in the aggregate, are material, the accountant should also consider:

  • Whether it is appropriate to offset a misstatement of an estimated item with a misstatement of an item that can be precisely measured
  • That accumulating immaterial misstatements in the balance sheet may contribute to material misstatements in the future

A review is incomplete, and a review report cannot be issued if the accountant is not able to:

  • Perform procedures necessary for a review engagement
  • Obtain required written representations from management

In this case, the accountant should communicate that information, following the guidance in “Fundamental Requirements: Communication with Management and Audit Committees.”

Documentation

The accountant should prepare documentation for the review engagement. The form and content of such documentation should be designed to meet the particular engagement’s circumstances. The accountant should use professional judgment when evaluating the quantity, type, and content of the documentation. However, such documentation should:

1. Include any significant findings or issues, such as indications that the interim financial information is materially misstated
2. Include any actions taken to address these findings
3. Include the basis for final conclusions reached
4. Enable engagement team members with supervision and review responsibilities to understand the nature, timing, extent, and results of the review procedures performed
5. Identify the engagement team members who performed and reviewed the work
6. Identify the evidence obtained to support the conclusion that the interim financial information reviewed agreed or reconciled with accounting records

FUNDAMENTAL REQUIREMENTS: COMMUNICATION WITH AUDIT COMMITTEES

Required SAS 61 Communications

The accountant should determine whether any of the matters described in Section 380, The Auditor’s Communication with Those Charged with Governance, as they relate to interim financial information, have been identified. (Examples of such matters include the process used by management for determining particularly sensitive accounting estimates or changes in significant accounting policies affecting the interim financial information. SAS 100 states that the presentation to the audit committee should be similar to the presentation of uncorrected misstatements in the management representation letter.) If so, the accountant should communicate such matters to the audit committee or be satisfied, through discussions with the audit committee, that management has communicated these matters to the committee.

Since the objective of a review is significantly different from that of an audit, any discussion about the quality of an entity’s accounting principles for interim financial information would generally be limited to the impact of significant events, transactions, and changes in accounting estimates considered by the accountant when conducting the review. Interim review procedures do not provide assurance that the accountant will become aware of all matters affecting the accountant’s judgment that would be identified as a result of an audit.

Reportable Conditions

If the accountant becomes aware of matters relating to internal control over financial reporting that might be of interest to the audit committee, he or she should communicate those matters to the audit committee (see Section 325, Communicating Internal Control Related Matters Identified in an Audit).

FUNDAMENTAL REQUIREMENTS: COMMUNICATION WITH MANAGEMENT AND AUDIT COMMITTEES

Communications to Management

The accountant should communicate with management as soon as practicable, if he or she believes that material modification should be made to the interim financial information for it to conform with the applicable financial reporting framework, or that the entity issued the interim financial information before completion of the review, in those circumstances in which a review is required.

Lack of Appropriate Management Response

The accountant should inform the audit committee or others with equivalent authority and responsibility of these matters as soon as practicable if management does not respond appropriately to his or her communication within a reasonable period of time.

Oral Communication

If the accountant identifies issues that need to be communicated to those charged with governance, this information should at least be sent to the chair of the audit committee on a sufficiently timely basis to ensure that appropriate action can be taken. The accountant should document communications with the audit committee if that communication is oral.

Lack of Appropriate Audit Committee Response

The accountant should decide whether to resign from the engagement related to interim financial information and whether to remain as the auditor of the entity’s financial statements if the audit committee does not respond appropriately to his or her communication within a reasonable period of time. The accountant may wish to consult with his or her attorney when making these decisions.

Fraud or Illegal Acts

If the accountant becomes aware of fraud, the accountant should communicate this to management. If the fraud involves senior management, or if it materially misstates the financial statements, then the accountant should communicate directly with the audit committees. (See Section 316, Consideration of Fraud in a Financial Statement Audit.)

If the accountant becomes aware of a possible illegal act, and the effect is not inconsequential, the accountant should assure himself or herself that the audit committee is informed.

Significant Deficiencies or Material Weaknesses

If the accountant becomes aware of significant deficiencies or material weaknesses in internal control relating to the preparation of annual and interim financial information, then this should be communicated to management and the audit committee.

FUNDAMENTAL REQUIREMENTS: ACCOUNTANT’S REPORT

Description of Interim Financial Information

Each page of the interim financial information should be marked as “unaudited.”

Date of Report and Addressee

The report should be dated as of the date of completion of the review procedures.

NOTE: SAS 100 does not provide guidance on addressing the report. As discussed in Section 508, “Reports on Audited Financial Statements,” under the Sarbanes–Oxley Act, the audit committee is responsible for appointment and oversight of the external auditor. Therefore, interim review reports, as well as year-end audit reports, should be addressed to the audit committee. It is acceptable to also address the report to the stockholders and boards of directors.

Form of Accountant’s Review Report

The accountant is not required to issue a report on a review of interim financial information; however, if the accountant does so, then according to AU 722.37 each page of the report should be clearly marked as unaudited, and the report should consist of the following:

1. A title that includes the word independent
2. Statements that:
a. The interim financial information identified in the financial statements was reviewed.
b. The financial information is the responsibility of the entity’s management.
c. The review of interim financial information was conducted in accordance with standards established by the AICPA.
3. A description of the procedures for a review of interim financial information
4. Statements that:
a. A review of interim financial information is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is an expression of opinion regarding the financial information taken as a whole, and accordingly, no such opinion is expressed.
b. Whether the accountant is aware of any material modifications that should be made to the accompanying financial information so that it conforms to the applicable financial reporting framework. (This should include an identification of the country of origin of the accounting principles used.)
5. The manual or printed signature of the accountant’s firm
6. The date of the review report

Reference to Report of Another Accountant

When he or she reports on the review of interim financial information, the accountant may use and make reference to the review reports of other accountants (see “Illustrations”).

Modification of the Review Report

A departure from the applicable financial reporting framework that has a material effect on the interim financial information requires the accountant to modify the review report; this includes both inadequate disclosure and changes in accounting principle that are not in conformity with the applicable financial reporting framework. The modified report should describe the nature of the departure and, if practicable, should state the effects of the departure on the interim financial information (see “Illustrations”).

If there is substantial doubt about the entity’s ability to continue as a going concern or a lack of consistency in the application of accounting principles affecting the interim financial information, the accountant does not have to add an additional paragraph in the report, provided that the interim financial information discloses the issue.

If there is inadequate disclosure within the interim financial information, then the accountant should include the necessary information in the report (see “Illustrations”).

If the auditor’s report for the prior year-end indicated the existence of substantial doubt about the entity’s ability to continue as a going concern, the supporting conditions continue to exist, and there is adequate disclosure of these conditions in the interim financial information, there is no need to modify the accountant’s report. However, the accountant can emphasize the matter in the report (see “Illustrations”).

Conversely, if the auditor’s report for the prior year did not indicate the existence of substantial doubt about the entity’s ability to continue as a going concern, but conditions now indicate such an issue, and there is adequate disclosure of the situation in the interim financial information, then the accountant is not required to issue a modified report. However, the accountant can emphasize the matter in the report (see “Illustrations”).

Client Representation about Accountant’s Review

If a client states in a written communication containing the reviewed interim financial information that the accountant has reviewed the interim financial information, the accountant should advise the entity that his or her report must also be included.

If the client does not agree to include the report, the accountant should:

  • Request that neither his or her name nor reference to him or her be associated with the interim financial information
  • If the client does not comply, notify the client that the accountant does not permit either the use of his or her name or the reference
  • Communicate the client’s noncompliance with the request to those charged with governance
  • Recommend that the client consult with legal counsel about applicable laws and regulations, if appropriate
  • Consider other appropriate actions
NOTE: In these circumstances, it is prudent for the accountant to consult with his or her lawyer.

If the accountant cannot complete his or her review and the client has represented that the accountant has reviewed interim financial information in a document filed with a regulatory agency or issued to stockholders or third parties, the accountant cannot issue the report and must notify the appropriate level of management as soon as practicable, and also consider following the steps noted immediately prior to this paragraph.

FUNDAMENTAL REQUIREMENTS: INTERIM FINANCIAL INFORMATION ACCOMPANYING AUDITED FINANCIAL STATEMENTS

Presentation of Interim Financial Information

Interim financial information ordinarily is presented as supplementary information outside the audited financial statements. Each page of the interim financial information should be clearly marked “unaudited.” If this information is presented in a note to the audited financial statements, it should be clearly marked “unaudited.”

The Auditor’s Report

Because interim financial information is not audited and is not required to be fairly stated in conformity with the applicable financial reporting framework, the auditor need not modify the audit report for the review of interim financial information accompanying audited financial statements. However, the auditor should modify his or her report in the following circumstances:

1. The interim financial information in a note to the financial statements is not marked as unaudited, in which case the auditor should disclaim an opinion on the interim financial information.
2. The interim financial information is not presented in conformity with the applicable financial reporting framework. The audit report does not need to be modified if the separate review report is presented with the information and addresses this issue.

INTERPRETATIONS

There are no interpretations for this section.

TECHNIQUES FOR APPLICATION

The following aspects of conducting a review of interim financial information are discussed below:

1. Engagement letter
2. Analytical procedures
3. Extent of procedures
4. Subsequent discovery of facts existing at the date of report
5. Other information
6. Successor auditors
7. Additional guidance

Engagement Letter

It is prudent for the accountant to confirm the nature and scope of his or her engagement in a letter to the client. The engagement letter includes the following matters:

1. The objective of the review is to provide the accountant with a basis for communicating whether he or she is aware of any material modifications that should be made to the interim financial information for it to conform to the applicable financial reporting framework.
2. The review includes obtaining sufficient knowledge of the entity’s business and its internal control as it relates to the preparation of both annual and interim financial information to:
a. Identify the types of potential material misstatements in the interim financial information and consider the likelihood of their occurrence.
b. Select the inquiries and analytical procedures that will provide the accountant with a basis for communicating whether the accountant is aware of any material modifications that should be made to the interim financial information for it to conform to the applicable financial reporting framework.
3. The review engagement is limited in these areas:
a. It does not provide a basis for expressing an opinion about whether the financial information is presented fairly, in all material respects, in conformity with the applicable financial reporting framework.
b. It does not provide assurance that the accountant will become aware of all significant matters that would be identified in an audit.
c. It does not provide assurance on internal control or to identify significant deficiencies and material weaknesses in internal control; however, the accountant is responsible for communicating to management and those charged with governance any significant deficiencies or material weaknesses in internal control that the accountant identified.
4. Management is responsible for:
a. The interim financial information
b. Establishing and maintaining effective internal control over financial reporting
c. Compliance with laws and regulations
d. Providing all financial records and related information to the accountant
e. Providing a written representation letter to the accountant at the end of the engagement
f. Adjusting the interim information to correct material misstatements
g. Affirming in the management representation letter that any uncorrected misstatements are immaterial, both individually and in the aggregate to the interim financial statements as a whole
5. The accountant is responsible for conducting the review in accordance with standards established by the AICPA. A review of interim financial information consists principally of performing analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information taken as a whole. Accordingly, the accountant will not express an opinion on the interim financial information.
6. The expected form of communication is a description of the expected form of the accountant’s communication upon completion of the engagement, and a statement that if the entity states in any form of communication containing the interim financial information that the information has been reviewed by the accountant or makes other reference to the accountant’s association, that the accountant’s review report will be included in the document.

Analytical Procedures

In applying analytical procedures, it is prudent for the accountant to develop a permanent file similar to the one illustrated in Section 329, Analytical Procedures. The file contains the following:

1. Comparative financial information:
a. Current quarter and preceding quarters
b. Current quarter and year-to-date and the same periods of preceding years
c. Current quarter and year-to-date and budgets for similar periods
2. Analysis of relationships. Computation of relevant ratios (gross profit, net income, current, etc.) and comparison of these ratios with similar ratios of preceding years.
3. Sources of information for analytical procedures:
a. Financial information for comparable prior periods giving consideration to known changes
b. Anticipated results; for example, budgets or forecasts including extrapolations from interim or annual data
c. Relationships among elements of financial information within the period
d. Information regarding the industry in which the client operates; for example, gross margin data
e. Relationships of financial information with relevant nonfinancial information; for example, the relationship of sales to interest rates in the housing industry
NOTE: In applying analytical procedures, it is prudent for the accountant to follow the guidance of Section 329, Analytical Procedures.
4. Comparisons of disaggregated revenue data and other required procedures.

Extent of Procedures

The extent of procedures is influenced by significant changes in the client’s accounting practices or in the nature or volume of its business activities. Examples of these changes are provided in AU Illustration 9.

NOTE: Interim financial information requires more estimates than annual financial statements. The accountant, therefore, might wish to refer to the guidance of Section 342, Auditing Accounting Estimates.

Subsequent Discovery of Facts Existing at the Date of Report

If, subsequent to the date of the report, the accountant becomes aware of facts that existed at the date of the report that might have affected the report had he or she been aware of those facts, he or she is well-advised to refer to Section 561, Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report, for guidance.

Other Information

If interim financial information and the accountant’s review report on such information appears in a document containing other information, the accountant might wish to refer to the guidance in Section 550, Other Information in Documents Containing Audited Financial Statements. For example, the SEC requires Form 10-Q to include a Management’s Discussion and Analysis (MD&A) in addition to quarterly financial statements. The accountant might wish to read the MD&A and consider whether it is consistent with the accountant’s knowledge obtained in reviewing the quarterly data.

Successor Auditors

Successor auditors must complete inquiries of the predecessor auditor as required under Section 315, Communications between Predecessor and Successor Auditors, before accepting an engagement to perform an initial review of interim information.

Additonal Guidance

When performing reviews, the accountant may find that audit guidance for relevant sections is useful. Specifically, the accountant may wish to consider:

  • Section 329, Analytical Procedures, when performing analytical procedures. The accountant should keep in mind that expectations developed during a review of interim information would ordinarily be less precise than those developed in an audit. In addition, the accountant is not required to corroborate management’s answers with other evidence when performing a review, but should instead consider whether the response is reasonable and consistent with the results of other review procedures and the accountant’s knowledge of the entity’s business and its internal control.
  • Section 380, The Auditor’s Communication with Those Charged with Governance, when making communications to the audit committee.

AU ILLUSTRATIONS

The following illustrations are presented:

1. Accountant’s Standard Review Report
2. Accountant’s Standard Review Report on Comparative Interim Financial Information (Condensed Information Included)
3. Accountant’s Review Report Referring to the Review Report of Another Accountant
4. Accountant’s Review Report, Departure from GAAP
5. Accountant’s Review Report, Inadequate Disclosure
6. Additional Going Concern Paragraph When:
a. A Going Concern Paragraph Was Included in the Prior Year’s Audit Report and the Conditions Continue to Exist
b. A Going Concern Paragraph Was Not Included in the Prior Year’s Audit Report and Conditions Exist That Cause Substantial Doubt
7. Management Representation Letters for a Review of Interim Financial Information
a. Short Form
b. Long Form
8. Analytical Procedures to Consider Performing When Conducting a Review
9. Unusual or Complex Situations to Consider in a Review.

Illustrations 1–9 are reproduced or adapted from Section 722, Interim Financial Information.

Following these illustrations are the exhibits and illustrations from AU-C 930.

Illustration 1. Accountant’s Standard Review Report
Report of Independent Registered Public Accounting Firm
We have reviewed the accompanying [describe the statements or information reviewed] of DMG Company and consolidated subsidiaries as of September 30, 20X1, and for the three-month and nine-month periods then ended. This interim financial information is the responsibility of the company’s management.
We conducted our review in accordance with the standards of the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial information taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying financial information for it to be in conformity with [identify the applicable financial reporting framework; for example accounting principles generally accepted in the United States of America]
[Signature]
[Date]
Illustration 2. Accountant’s Standard Review Report on Comparative Interim Financial Information (Condensed Information Included)
Report of Independent Registered Public Accounting Firm
We have reviewed the condensed consolidated balance sheet of DMG Company and subsidiaries as of March 31, 20X1, and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 31, 20X1 and 20X0. This condensed financial information is the responsibility of the company’s management.
We conducted our reviews in accordance with the standards of the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial information taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the condensed financial information referred to above for it to be in conformity with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America].
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of DMG Company and subsidiaries as of December 31, 20X0, and the related consolidated statements of income, retained earnings, and cash flows for the year then ended (not presented herein); and in our report dated February 15, 20X1, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 20X0, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
[Signature]
[Date]
Illustration 3. Accountant’s Review Report Referring to the Review Report of Another Accountant
Report of Independent Registered Public Accounting Firm
We have reviewed the accompanying [describe the statements or information reviewed] of DMG Company and consolidated subsidiaries as of September 30, 20X1, and for the three-month and nine-month periods then ended. This interim financial information is the responsibility of the company’s management.
We were furnished with the report of other accountants on their review of the interim financial information of Basic Subsidiary, whose total assets as of September 30, 20X1, and whose revenues for the three-month and nine-month periods then ended, constituted 10%, 12%, and 15%, respectively, of the related consolidated totals.
We conducted our reviews in accordance with the standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial information taken as a whole. Accordingly, we do not express such an opinion.
Based on our review and the report of other accountants, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America].
[Signature]
[Date]
Illustration 4. Accountant’s Review Report, Departure from Gaap
[Standard title, first and second paragraphs]
Based on information furnished to us by management, we believe that the company has excluded from property and debt in the accompanying balance sheet certain lease obligations that we believe should be capitalized to conform with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America]. This information indicates that if these lease obligations were capitalized at September 30, 20X1, property would be increased by $_____, long-term debt by $_____, and net income and earnings per share would be increased [decreased] by $_____, $_____, $_____, and $_____, respectively, for the _____ and _____ periods then ended.
Based on our review, with the exception of the matter(s) described in the preceding paragraph(s), we are not aware of any material modifications that should be made to the accompanying interim financial statements [information] for them [it] to be in conformity with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America].
[Signature]
[Date]
Illustration 5. Accountant’s Review Report, Inadequate Disclosure
[Standard title, first and second paragraphs]
Management has informed us that the company is presently defending a claim regarding [describe the nature of the loss contingency], and that the extent of the company’s liability, if any, and the effect on the accompanying information is not determinable at this time. The information fails to disclose these matters, which we believe are required to be disclosed in conformity with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America].
Based on our review, with the exception of the matter(s) described in the preceding paragraph(s), we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America].
[Signature]
[Date]
Illustration 6A. Additional Going Concern Paragraph When a Going Concern Paragraph Was Included in Prior Year’s Audit Report and the Conditions Continue to Exist
Note 4 of the Company’s audited financial statements as of December 31, 20X1, and for the year then ended discloses that the Company was unable to renew its line of credit or obtain alternative financing at December 31, 20X1. Our auditor’s report on those financial statements includes an explanatory paragraph referring to the matters in Note 4 of those financial statements and indicating that these matters raised substantial doubt about the Company’s ability to continue as a going concern. As indicated in Note 3 of the Company’s unaudited interim financial information as of March 31, 20X2, and for the three months then ended, the Company was still unable to renew its line of credit or obtain alternative financing as of March 31, 20X2. The accompanying interim financial information does not include any adjustments that might result from the outcomes of this uncertainty.
Illustration 6B. Additional Going Concern Paragraph When a Going Concern Paragraph Was Not Included in Prior Year’s Audit Report and the Conditions Continue to Exist
As indicated in Note 3, certain conditions indicate that the Company may be unable to continue as a going concern. The accompanying interim financial information does not include any adjustments that might result from the outcome of this uncertainty.
Illustration 7A. Management Representation Letter for a Review of Interim Financial Information (Short Form)
NOTE: This representation letter is used with the representation letter for the prior year audit. Management confirms the audit representations as they apply to the interim financial information, and makes any needed additional representations for the interim financial information.
[Date]
To [Independent Accountant]
We are providing this letter in connection with your review of the [identification of interim financial information] of [name of entity] as of [dates] and for the [periods] for the purpose of determining whether any material modifications should be made to the [consolidated] interim financial information for it to conform with [identify the applicable financial reporting framework (for example, accounting principles generally accepted in the United States of America), including, if appropriate, an indication as to the appropriate form and content of interim financial information (for example, Article 10 of SEC Regulation S-X)]. We confirm that we are responsible for the fair presentation of the [consolidated] interim financial information in conformity with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America] and that we are responsible for establishing and maintaining controls that are sufficient to provide a reasonable basis for the preparation of reliable interim financial information in accordance with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America].
Certain representations in this letter are described as being limited to matters that are material. Items are considered material, regardless of size, if they involve an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement.
We confirm, to the best of our knowledge and belief, [as of (date of accountant’s report or the completion of the review)], the following representations made to you during your review:
1. The interim financial information referred to above has been prepared and presented in conformity with [identify the applicable financial reporting framework; for example, generally accepted accounting principles] applicable to interim financial information.
2. We have made available to you:
a. All financial records and related data
b. All minutes of the meetings of stockholders, directors, and committees of directors, or summaries of actions of recent meetings for which minutes have not yet been prepared; all significant board and committee actions are included in the summaries
3. We believe that the effects of any uncorrected financial statement misstatements aggregated by you during the current review engagement and pertaining to the interim period(s) in the current year, as summarized in the accompanying schedule, are immaterial, both individually and in the aggregate, to the interim financial information taken as a whole.1
4. There are no significant deficiencies or material weaknesses in the design or operation of internal control as it relates to the preparation of both annual and interim financial information.
5. We acknowledge our responsibility for the design and implementations of programs and controls to prevent and detect fraud.
6. We have no knowledge of any fraud or suspected fraud affecting the company involving:
a. Management;
b. Employees who have significant roles in internal control; or
c. Others where the fraud could have a material effect on the interim financial information
7. We have no knowledge of any allegations of fraud or suspected fraud affecting the company received in communications from employees, former employees, analysts, regulators, short sellers, or others.
8. We have reviewed our representation letter to you dated [date of representation letter relating to most recent audit] with respect to the audited financial statements for the year ended [prior year-end date]. We believe that representations A, B, and C, within that representation letter do not apply to the interim financial information referred to above. We now confirm those representations 1 through X, as they apply to the interim financial information referred to above, and incorporate them herein, with the following changes:
[Indicate any changes]
9. [Add any representations related to new accounting or auditing standards that are being implemented for the first time.]
To the best of our knowledge and belief, no events have occurred subsequent to the balance sheet date and through the date of this letter that would require adjustment to or disclosure in the aforementioned interim financial information.
__________________________________
[Name of Chief Executive Officer and Title]
__________________________________
[Name of Chief Financial Officer and Title]
__________________________________
[Name of Chief Accounting Officer and Title]
Illustration 7B. Management Representation Letter for a Review of Interim Financial Information (Long Form)
NOTE: This representation letter is similar in detail to the management representation letter used for the audit of the financial statements of the prior year and thus need not refer to the written management representations received in the most recent audit.
[Date]
To [Independent Accountant]
We are providing this letter in connection with your review of the [identification of interim financial information (statements)] of [name of entity] as of [dates] and for the [periods] for the purpose of determining whether any material modifications should be made to the [consolidated] interim financial information for it to conform to [identify the applicable financial reporting framework; (for example, accounting principles generally accepted in the United States of America), including, if appropriate, an indication as to the appropriate form and content of interim financial information (for example, Article 10 of Regulation S-X)]. We confirm that we are responsible for the fair presentation of the [consolidated] interim financial information in conformity with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America] and that we are responsible for establishing and maintaining controls that are sufficient to provide a reasonable basis for the preparation of reliable interim financial information in accordance with [identify the applicable financial reporting framework; for example, generally accepted accounting principles].
Certain representations in this letter are described as being limited to matters that are material. Items are considered material, regardless of size, if they involve an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement.
We confirm, to the best of our knowledge and belief, [as of (date of accountant’s report or the completion of the review)], the following representations made to you during your review:
1. The interim financial information referred to above has been prepared and presented in conformity with [identify the applicable financial reporting framework; for example, generally accepted accounting principles] applicable to interim financial information.
2. We have made available to you:
a. All financial records and related data
b. All minutes of the meetings of stockholders, directors, and committees of directors, or summaries of actions of recent meetings for which minutes have not yet been prepared; all significant board and committee actions are included in the summaries
3. There have been no communications from regulatory agencies concerning noncompliance with or deficiencies in financial reporting practices.
4. There are no material transactions that have not been properly recorded in the accounting records underlying the interim financial information.
5. We believe that the effects of any uncorrected financial statement misstatements aggregated by you during the current review engagement and pertaining to the interim period(s) in the current year, as summarized in the accompanying schedule, are immaterial, both individually and in the aggregate, to the interim financial information taken as a whole.2
6. There are no significant deficiencies or material weaknesses in the design or operation of internal controls as they relate to the preparation of both annual and interim financial information.
7. We acknowledge our responsibility for the design and implementation of programs and controls to prevent and detect fraud.
8. We have no knowledge of any fraud or suspected fraud affecting the company involving:
a. Management;
b. Employees who have significant roles in internal control; or
c. Others where the fraud could have a material effect on the interim financial information.
9. We have no knowledge of any allegations of fraud or suspected fraud affecting the company in communications from employees, former employees, analysts, regulators, short sellers, or others.
10. The company has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.
11. The following have been properly recorded or disclosed in the interim financial information:
a. Related-party transactions, including sales, purchases, loans, transfers, leasing arrangements, and guarantees, and amounts receivable from or payable to related parties
b. Guarantees, whether written or oral, under which the company is contingently liable
c. Significant estimates and material concentrations known to management that are required to be disclosed in accordance with the AICPA’s Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties. [Significant estimates are estimates at the balance sheet date that could change materially within the next year. Concentrations refer to volumes of business, revenues, available sources of supply, or markets or geographic areas for which events could occur that would significantly disrupt normal finances within the next year.]
12. There are no:
a. Violations or possible violations of laws or regulations whose effects should be considered for disclosure in the interim financial information or as a basis for recording a loss contingency.
b. Unasserted claims or assessments that are probable of assertion and must be disclosed in accordance with Financial Account Standards Board (FASB) Statement No. 5, Accounting for Contingencies.
c. Other liabilities or gain or loss contingencies that are required to be accrued or disclosed by FASB Statement No. 5.
13. The company has satisfactory title to all owned assets, and there are no liens or encumbrances on such assets; nor has any asset been pledged as collateral.
14. The company has complied with all aspects of contractual agreements that would have a material effect on the interim financial information in the event of noncompliance.
15. [Add additional representations that are unique to the entity’s business or industry. See Section 333, Management Represenations.]
16. [Add any representations related to new accounting or auditing standards that are being implemented for the first time.]
To the best of our knowledge and belief, no events have occurred subsequent to the balance sheet date and through the date of this letter that would require adjustment to or disclosure in the aforementioned interim financial information.
_________________________________
[Name of Chief Executive Officer and Title]
_________________________________
[Name of Chief Financial Officer and Title]
__________________________________
[Name of Chief Accounting Officer and Title]
Illustration 8. Analytical Procedures to Consider Performing When Conducting a Review
Examples of analytical procedures an accountant may consider performing in a review of interim financial information include (reproduced with permission from AU 722.54):
  • Comparing current interim financial information with anticipated results, such as budgets or forecasts (for example, comparing tax balances and the relationship between the provision for income taxes and pretax income in the current interim financial information with corresponding information in (1) budgets, using expected rates, and (2) financial information for prior periods).3
  • Comparing current interim financial information with relevant nonfinancial information.
  • Comparing ratios and indicators for the current interim period with expectations based on prior periods, for example, performing gross profit analysis by product line and operating segment using elements of the current interim financial information and comparing the results with corresponding information for prior periods. Examples of key ratios and indicators are the current ratio, receivable turnover or days’ sales outstanding, inventory turnover, depreciation to average fixed assets, debt to equity, gross profit percentage, net income percentage, and plant operating rates.
  • Comparing ratios and indicators for the current interim period with those of entities in the same industry.
  • Comparing relationships among elements in the current interim financial information with corresponding relationships in the interim financial information of prior periods, for example, expense by type as a percentage of sales, assets by type as a percentage of total assets, and percentage of change in sales to percentage of change in receivables.
  • Comparing disaggregated data. The following are examples of how data may be disaggregated.
    • By period, for example, financial statement items disaggregated into quarterly, monthly, or weekly amounts.
    • By product line or operating segment.
    • By location, for example, subsidiary, division, or branch.
Analytical procedures may include such statistical techniques as trend analysis or regression analysis and may be performed manually or with the use of computer-assisted techniques.
Illustration 9. Unusual or Complex Situations to Consider in a Review of Interim Financial Information
The following are examples, reproduced with permission from AU 722.55, of situations about which the accountant would ordinarily inquire of management:
  • Business combinations
  • New or complex revenue recognition methods
  • Impairment of assets
  • Disposal of a segment of a business
  • Use of derivative instruments and hedging activities
  • Sales and transfers that may call into question the classification of investments in securities, including management’s intent and ability with respect to the remaining securities classified as held to maturity
  • Computation of earnings per share in a complex capital structure
  • Adoption of new stock compensation plans or changes to existing plans
  • Restructuring charges taken in the current and prior quarters
  • Significant, unusual, or infrequently occurring transactions
  • Changes in litigation or contingencies
  • Changes in major contracts with customers or suppliers
  • Application of new accounting principles
  • Changes in accounting principles or the methods of applying them
  • Trends and developments affecting accounting estimates,4 such as allowances for bad debts and excess or obsolete inventories, provisions for warranties and employee benefits, and realization of unearned income and deferred charges
  • Compliance with debt covenants
  • Changes in related parties or significant new related-party transactions
  • Material off-balance-sheet transactions, special-purpose entities, and other equity investments
  • Unique terms for debt or capital stock that could affect classification

AU-C 930 ILLUSTRATIONS

Illustrative Management Representation Letters for a Review of Interim Financial Information

The following management representation letters, which relate to a review of interim financial information, are presented for illustrative purposes only:

1. Short Form Representation Letter for a Review of Interim Financial Information
2. Detailed Representation Letter for a Review of Interim Financial Information

It is assumed in these illustrations that the applicable financial reporting framework is accounting principles generally accepted in the United States of America, that no conditions or events exist that might be indicative of the entity’s possible inability to continue as a going concern, and that no exceptions exist to the requested written representations. If circumstances differ from these assumptions, the representations would need to be modified to reflect the actual circumstances.

Illustration 1. Short Form Representation Letter for a Review of Interim Financial Information
This representation letter is to be used in conjunction with the representation letter for the audit of the financial statements of the prior year. Management confirms the representations made in the representation letter for the audit of the financial statements of the prior year end, as they apply to the interim financial information, and makes additional representations that may be needed for the interim financial information.
[Date]
To [Independent Auditor]:
This representation letter is provided in connection with your review of the [consolidated] balance sheet as of June 30, 20X1 and the related [consolidated] statements of income, changes in equity, and cash flows for the six-month period then ended of ABC Company for the purpose of reporting whether any material modifications should be made to the [consolidated] interim financial information for it to be in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) [including, if appropriate, an indication as to the appropriate form and content of interim financial information (for example, Article 10 of SEC Regulation S-X)].
We confirm that [, to the best of our knowledge and belief, having made such inquiries as we considered necessary for the purpose of appropriately informing ourselves] [as of (date of auditor’s review report),]:
Interim Financial Information
1. We have fulfilled our responsibilities, as set out in the terms of the engagement letter dated [insert date] for the preparation and fair presentation of interim financial information in accordance with US GAAP; in particular the interim financial information is presented in accordance therewith.
2. We acknowledge our responsibility for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of interim financial information that is free from material misstatement, whether due to fraud or error.
3. The interim financial information has been adjusted or includes disclosures for all events subsequent to the date of the interim financial information for which US GAAP requires adjustment or disclosure.
4. The effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the interim financial information as a whole. A list of the uncorrected misstatements is attached to the representation letter.
[Any other matters that the auditor may consider appropriate]
Information Provided
5. We have provided you with:
  • Access to all information of which we are aware that is relevant to the preparation and fair presentation of the interim financial information such as records, documentation, and other matters;
  • Minutes of the meetings of stockholders, directors, and committees of directors, or summaries of actions of recent meetings for which minutes have not yet been prepared;
  • Additional information that you have requested from us for the purpose of the review; and
  • Unrestricted access to persons within the entity of whom you determined it necessary to make inquiries.
6. We have disclosed to you all significant deficiencies or material weaknesses in the design or operation of internal control of which we are aware, as it relates to the preparation and fair presentation of both annual and interim financial information.
7. We have disclosed to you the results of our assessment of the risk that the interim financial information may be materially misstated as a result of fraud.
8. We have [no knowledge of any] [disclosed to you all information of which we are aware in relation to] fraud or suspected fraud that affects the entity and involves:
  • Management;
  • Employees who have significant roles in internal control; or
  • Others when the fraud could have a material effect on the interim financial information.
9. We have [no knowledge of any] [disclosed to you all information in relation to] allegations of fraud, or suspected fraud, affecting the entity’s interim financial information communicated by employees, former employees, analysts, regulators, or others.
10. We have disclosed to you the identity of the entity’s related parties and all the related-party relationships and transactions of which we are aware.
[Any other matters that the auditor may consider necessary]
11. We have reviewed our representation letter to you dated [date of representation letter relating to most recent audit] with respect to the audited consolidated financial statements as of and for the year ended [prior year-end date]. We believe that representations [references to applicable representations] within that representation letter do not apply to the interim financial information referred to above. We now confirm those representations [references to applicable representations], as they apply to the interim financial information referred to above, and incorporate them herein, with the following changes:
[Indicate any changes.]
12. [Add any representations related to new accounting or auditing standards that are being implemented for the first time.]
________________________________
[Name of Chief Executive Officer and Title]
________________________________
[Name of Chief Financial Officer and Title]
________________________________
[Name of Chief Accounting Officer and Title]
Illustration 2. Detailed Representation Letter for a Review of Interim Financial Information
This representation letter is similar in detail to the management representation letter used for the audit of the financial statements of the prior year and, thus, need not refer to the written management representations received in the most recent audit.
[Date]
To [Independent Auditor]:
This representation letter is provided in connection with your review of the [consolidated] balance sheet as of June 30, 20X1 and the related [consolidated] statements of income, changes in equity, and cash flows for the six-month period then ended of ABC Company for the purpose of reporting whether any material modifications should be made to the [consolidated] interim financial information for it to be in accordance with accounting principles generally accepted in the United States of America (US GAAP) [including, if appropriate, an indication as to the appropriate form and content of interim financial information (for example, Article 10 of SEC Regulation S-X)].
We confirm that [, to the best of our knowledge and belief, having made such inquiries as we considered necessary for the purpose of appropriately informing ourselves] [as of (date of auditor’s review report)]:
Interim Financial Information
1. We have fulfilled our responsibilities, as set out in the terms of the engagement letter dated [insert date] for the preparation and fair presentation of the interim financial information in accordance with US GAAP; in particular the interim financial information is presented in accordance therewith.
2. We acknowledge our responsibility for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of interim financial information that is free from material misstatement, whether due to fraud or error.
3. Significant assumptions used by us in making accounting estimates, including those measured at fair value, are reasonable.
4. Related-party relationships and transactions have been appropriately accounted for and disclosed in accordance with the requirements of US GAAP.
5. The interim financial information has been adjusted or includes disclosures for all events subsequent to the date of the interim financial information for which US GAAP requires adjustment or disclosure.
6. The effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the interim financial information as a whole. A list of the uncorrected misstatements is attached to the representation letter.
[Any other matters that the auditor may consider appropriate]
Information Provided
7. We have provided you with:
  • Access to all information of which we are aware that is relevant to the preparation and fair presentation of the interim financial information such as records, documentation, and other matters;
  • Minutes of the meetings of stockholders, directors, and committees of directors, or summaries of actions of recent meetings for which minutes have not yet been prepared;
  • Additional information that you have requested from us for the purpose of the review; and
  • Unrestricted access to persons within the entity of whom you determined it necessary to make inquiries.
8. All transactions have been recorded in the accounting records and are reflected in the interim financial information.
9. We have disclosed to you all significant deficiencies or material weaknesses in the design or operation of internal control of which we are aware, as it relates to the preparation and fair presentation of both annual and interim financial information.
10. We have disclosed to you the results of our assessment of the risk that the interim financial information may be materially misstated as a result of fraud.
11. We have [no knowledge of any][disclosed to you all information of which we are aware in relation to] fraud or suspected fraud that affects the entity and involves:
  • Management;
  • Employees who have significant roles in internal control; or
  • Others when the fraud could have a material effect on the interim financial information.
12. We have [no knowledge of any] [disclosed to you all information in relation to] allegations of fraud, or suspected fraud, affecting the entity’s interim financial information communicated by employees, former employees, analysts, regulators, or others.
13. We have disclosed to you all known instances of noncompliance or suspected noncompliance with laws and regulations whose effects should be considered when preparing interim financial information.
14. There have been no communications from regulatory agencies concerning noncompliance with or deficiencies in financial reporting practices.
15. We have disclosed to you the identity of the entity’s related parties and all the related-party relationships and transactions of which we are aware.
[Any other matters that the auditor may consider necessary]
________________________________
[Name of Chief Executive Officer and Title]
________________________________
[Name of Chief Financial Officer and Title]
________________________________
[Name of Chief Accounting Officer and Title]

Illustrations of Auditor’s Review Reports on Interim Financial Information

1. A Review Report on Interim Financial Information
2. A Review Report on Condensed Comparative Interim Financial Information
3. A Review Report That Refers to a Component Auditor’s Review Report on the Interim Financial Information of a Significant Component of a Reporting Entity
4. A Review Report on Comparative Interim Financial Information When the Prior Period Was Reviewed by Another Auditor
Illustration 1. A Review Report on Interim Financial Information
Circumstances include the following:
  • A review of interim financial information presented as a complete set of financial statements, including disclosures
Independent Auditor’s Review Report
[Appropriate Addressee]
Report on the Financial Statements
We have reviewed the accompanying [describe the interim financial information or statements reviewed] of ABC Company and subsidiaries as of September 30, 20X1, and for the three-month and nine-month periods then ended.
Management’s Responsibility
The Company’s management is responsible for the preparation and fair presentation of the interim financial information in accordance with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America]; this responsibility includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in accordance with the applicable financial reporting framework.
Auditor’s Responsibility
Our responsibility is to conduct our review in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion.
Conclusion
Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in accordance with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America].
[Auditor’s signature]
[Auditor’s city and state]
[Date of the auditor’s report]
Illustration 2. A Review Report on Condensed Comparative Interim Financial Information
The following is an example of a review report on a condensed balance sheet as of March 31, 20X1; the related condensed statements of income and cash flows for the three-month periods ended March 31, 20X1 and 20X0; and a condensed balance sheet derived from audited financial statements as of December 31, 20X0. If the auditor’s report on the preceding year-end financial statements was other than unmodified or included an emphasis-of-matter paragraph because of a going concern matter or an inconsistency in the application of accounting principles, the last paragraph of the illustrative report would be appropriately modified.
Independent Auditor’s Review Report
[Appropriate Addressee]
Report on the Financial Statements
We have reviewed the condensed consolidated financial statements of ABC Company and subsidiaries, which comprise the balance sheet as of March 31, 20X1, and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 31, 20X1 and 20X0.
Management’s Responsibility
The Company’s management is responsible for the preparation and fair presentation of the condensed financial information in accordance with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America]; this responsibility includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in accordance with the applicable financial reporting framework.
Auditor’s Responsibility
Our responsibility is to conduct our reviews in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion.
Conclusion
Based on our reviews, we are not aware of any material modifications that should be made to the condensed financial information referred to above for it to be in accordance with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America].
Report on Condensed Balance Sheet as of [Date]
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 20X0, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the year then ended (not presented herein); and we expressed an unmodified audit opinion on those audited consolidated financial statements in our report dated February 15, 20X1. In our opinion, the accompanying condensed consolidated balance sheet of ABC Company and subsidiaries as of December 31, 20X0, is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived.
[Auditor’s signature]
[Auditor’s city and state]
[Date of the auditor’s report]
Illustration 3. A Review Report That Refers to a Component Auditor’s Review Report on the Interim Financial Information of a Significant Component of a Reporting Entity
Circumstances include the following:
  • A review of interim financial information presented as a complete set of financial statements, including disclosures.
  • The auditor is making reference to another auditor’s review report on the interim financial information of a significant component of a reporting entity.
Independent Auditor’s Review Report
[Appropriate Addressee]
Report on the Financial Statements
We have reviewed the accompanying [describe the interim financial information or statements reviewed] of ABC Company and subsidiaries as of September 30, 20X1, and for the three-month and nine-month periods then ended.
Management’s Responsibility
The Company’s management is responsible for the preparation and fair presentation of the interim financial information in accordance with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America]; this responsibility includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in accordance with the applicable financial reporting framework.
Auditor’s Responsibility
Our responsibility is to conduct our review in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion.
We were furnished with the report of other auditors on their review of the interim financial information of DEF subsidiary, whose total assets as of September 30, 20X1, and whose revenues for the three-month and nine-month periods then ended, constituted 15%, 20%, and 22%, respectively, of the related consolidated totals.
Conclusion
Based on our review and the review report of other auditors, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in accordance with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America].
[Auditor’s signature]
[Auditor’s city and state]
[Date of the auditor’s report]
Illustration 4. A Review Report on Comparative Interim Financial Information When the Prior Period Was Reviewed by Another Auditor
Circumstances include the following:
  • A review of interim financial information presented as a complete set of financial statements, including disclosures as of March 31, 20X1, and for the three-month period then ended.
  • Comparative information is presented for the balance sheet as of December 31, 20X0, and for the statements of income and cash flows for the comparable interim period.
  • The December 31, 20X0, financial statements were audited, and the March 31, 20X0, interim financial information was reviewed, by another auditor.
Independent Auditor’s Review Report
[Appropriate Addressee]
Report on the Financial Statements
We have reviewed the accompanying [describe the interim financial information or statements reviewed] of ABC Company and subsidiaries as of March 31, 20X1, and for the three-month period then ended. The consolidated statements of income and cash flows of ABC Company and subsidiaries for the three-month period ended March 31, 20X0, were reviewed by other auditors whose report dated June 1, 20X0, stated that based on their review, they were not aware of any material modifications that should be made to those statements in order for them to be in conformity with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America]. The consolidated balance sheet of the Company as of December 31, 20X0, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the year then ended (not presented herein), were audited by other auditors whose report dated March 15, 20X1, expressed an unmodified opinion on that statement.
Management’s Responsibility
The Company’s management is responsible for the preparation and fair presentation of the interim financial information in accordance with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America]; this responsibility includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in accordance with the applicable financial reporting framework.
Auditor’s Responsibility
Our responsibility is to conduct our review in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion.
Conclusion
Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial information as of and for the three months ended March 31, 20X1, for it to be in accordance with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America].
[Auditor’s signature]
[Auditor’s city and state]
[Date of the auditor’s report]

Illustrations of Example Modifications to the Auditor’s Review Report Due to Departures from the Applicable Financial Reporting Framework

1. Modification Due to a Departure from the Applicable Financial Reporting Framework
2. Modification Due to Inadequate Disclosure
3. Emphasis-of-Matter Paragraph When a Going Concern Emphasis-of-Matter Paragraph Was Included in the Prior Year’s Audit Report, and Conditions Giving Rise to the Emphasis-of-Matter Paragraph Continue to Exist
4. Emphasis-of-Matter Paragraph When a Going Concern Emphasis-of-Matter Paragraph Was Not Included in the Prior Year’s Audit Report, and Conditions or Events Exist as of the Interim Reporting Date Covered by the Review That Might Be Indicative of the Entity’s Possible Inability to Continue as a Going Concern
Illustration 1. Modification Due to a Departure From the Applicable Financial Reporting Framework
The following is an example of a modification of the auditor’s review report due to a departure from the applicable financial reporting framework:
[Basis for Modification Paragraph]
Based on information furnished to us by management, we believe that the Company has excluded from property and debt in the accompanying balance sheet certain lease obligations that we believe should be capitalized to be in accordance with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America]. This information indicates that if these lease obligations were capitalized at September 30, 20X1, property would be increased by $______, long-term debt would be increased by $______, and net income would be increased (decreased) by $________ and $________, respectively, for the three-month and nine-month periods then ended.
[Conclusion]
Based on our review, with the exception of the matter(s) described in the preceding paragraph(s), we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in accordance with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America].
Illustration 2. Modification Due to Inadequate Disclosure
The following is an example of a modification of the auditor’s review report due to inadequate disclosure:
[Basis for Modification Paragraph]
Management has informed us that the Company is presently defending a claim regarding [describe the nature of the loss contingency] and that the extent of the Company’s liability, if any, and the effect on the accompanying interim financial information is not determinable at this time. The interim financial information fails to disclose these matters, which we believe are required to be disclosed in accordance with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America].
[Conclusion]
Based on our review, with the exception of the matter(s) described in the preceding paragraph(s), we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in accordance with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America].
Illustration 3. Emphasis-of-Matter Paragraph When a Going Concern Emphasis-of-Matter Paragraph Was Included in the Prior Year’s Audit Report, and Conditions Giving Rise to the Emphasis-of-Matter Paragraph Continue to Exist
The following is an example of an emphasis-of-matter paragraph when a going concern emphasis-of-matter paragraph was included in the prior year’s audit report, and conditions giving rise to the emphasis-of-matter paragraph continue to exist:
[Emphasis-of-Matter Paragraph]
Note 4 of the Company’s audited financial statements as of December 31, 20X1, and for the year then ended, discloses that the Company was unable to renew its line of credit or obtain alternative financing at December 31, 20X1. Our auditor’s report on those financial statements includes an emphasis-of-matter paragraph referring to the matters in note 4 of those financial statements and indicating that these matters raised substantial doubt about the Company’s ability to continue as a going concern. As indicated in note 3 of the Company’s unaudited interim financial information as of March 31, 20X2, and for the three months then ended, the Company was still unable to renew its line of credit or obtain alternative financing as of March 31, 20X2. The accompanying interim financial information does not include any adjustments that might result from the outcome of this uncertainty.
Illustration 4. Emphasis-of-Matter Paragraph When a Going Concern Emphasis-of-Matter Paragraph Was Not Included in the Prior Year’s Audit Report, and Conditions or Events Exist as of the Interim Reporting Date Covered by the Review That Might Be Indicative of the Entity’s Possible Inability to Continue as a Going Concern
The following is an example of an emphasis-of-matter paragraph when a going concern emphasis-of-matter paragraph was not included in the prior year’s audit report, and conditions or events exist as of the interim reporting date covered by the review that might be indicative of the entity’s possible inability to continue as a going concern:
[Emphasis-of-Matter Paragraph]
As indicated in note 3, certain conditions indicate that the Company may be unable to continue as a going concern. The accompanying interim financial information does not include any adjustments that might result from the outcome of this uncertainty.

1 If a summary of uncorrected misstatements is unnecessary because no uncorrected misstatements were identified, this representation should be eliminated.

2 If a summary of uncorrected misstatements is unnecessary because no uncorrected misstatements were identified, this representation should be eliminated.

3 The accountant should exercise caution when comparing and evaluating current interim financial information with budgets, forecasts, or other anticipated results because of the inherent lack of precision in estimating the future and susceptibility of such information to manipulation and misstatement by management to reflect desire interim results.

4 The accountant may wish to refer to the guidance in AU 342, Audited Accounting Estimates.

..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.
Reset
18.118.122.46