ASRE 2410 - Review of a Financial Report Performed by the Independent Auditor of the Entity - October 2009
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The Auditing and Assurance Standards Board (AUASB) made Auditing Standard on Review Engagements ASRE 2410 Review of a Financial Report Performed by the Independent Auditor of the Entity, pursuant to section 227B of the Australian Securities and Investments Commission Act 2001 and section 336 of the Corporations Act 2001, on 27 October 2009.
This compiled version of ASRE 2410 incorporates subsequent amendments contained in other Auditing Standards made by the AUASB up to and including 1 July 2013 (see Compilation Details).
Auditing Standard on Review Engagements ASRE 2410
Review of a Financial Report Performed by the Independent
Auditor of the Entity
Application
This Auditing Standard on Review Engagements applies to:
(a) a review by the independent auditor of the entity, of a financial report for a half‑year, in accordance with the Corporations Act 2001; and
(b) a review, by the independent auditor of the entity, of a financial report, or a complete set of financial statements, comprising historical financial information, for any other purpose.
Operative Date
This Auditing Standard on Review Engagements is operative for financial reporting periods commencing on or after 27 October 2009. [Note: For operative dates of paragraphs changed or added by an Amending Standard, see Compilation Details.]
Introduction
Scope of this Auditing Standard on Review Engagements
This Auditing Standard on Review Engagements (Auditing Standard) deals with the auditor’s responsibilities when an auditor undertakes an engagement to review a financial report of an audit client, and on the form and content of the auditor’s review report. The term “auditor” is used throughout this Auditing Standard, not because the auditor is performing an audit function but because the scope of this Auditing Standard is limited to a review of a financial report performed by the independent auditor of the financial report of the entity.
Objective
The objective of the auditor is to plan and perform the review to enable the auditor to express a conclusion whether, on the basis of the review, anything has come to the auditor’s attention that causes the auditor to believe that the financial report, or complete set of financial statements, is (are) not prepared, in all material respects, in accordance with the applicable financial reporting framework. (Ref: Para. A1‑A3)
Definitions
For the purposes of this Auditing Standard, the following terms have the meanings attributed below:
An interim financial report means a financial report that is prepared in accordance with an applicable financial reporting framework[1] for a period that is shorter than the entity’s financial year.
A financial report means a complete set of financial statements including the related notes and an assertion statement by those responsible for the financial report. The related notes ordinarily comprise a summary of significant accounting policies and other explanatory information. The requirements of the applicable financial reporting framework determine the form and content of the financial report. For example, a financial report, as defined under section 303 of the Corporations Act 2001 consists of financial statements for the half‑year, notes to the financial statements and the directors’ declaration about the statements and notes.
An applicable financial reporting framework means a financial reporting framework that is designed to achieve fair presentation.
Requirements
Performing a Review
The auditor who is engaged to perform a review of a financial report shall perform the review in accordance with this Auditing Standard. (Ref: Para. A4)
Where in rare and exceptional circumstances, factors outside the auditor’s control prevent the auditor from complying with an essential procedure contained within a relevant requirement in this Auditing Standard, the auditor shall:
if possible, perform appropriate alternative procedures; and
document in the working papers:
the circumstances surrounding the inability to comply;
the reasons for the inability to comply; and
justification of how alternative procedures achieve the objectives of the requirement.
When the auditor is unable to perform appropriate alternative procedures, the auditor shall consider the implications for the auditor’s review report.
General Principles of a Review of a Financial Report
The auditor shall comply with relevant ethical requirements relating to the audit of the annual financial report of the entity. (Ref: Para. A5)
The auditor shall implement quality control procedures that are applicable to the individual engagement. (Ref: Para. A6)
The auditor shall plan and perform the review by exercising professional judgement and with an attitude of professional scepticism, recognising that circumstances may exist that cause the financial report to require a material adjustment for it to be prepared, in all material respects, in accordance with the applicable financial reporting framework. (Ref: Para. A7)
Agreeing the Terms of the Engagement (Ref: Para. A8, A55 and A57)
Preconditions for a Review
The auditor shall, prior to agreeing the terms of the engagement, determine whether the financial reporting framework is acceptable and obtain agreement from management and, where appropriate, those charged with governance, that it acknowledges and understands its responsibility:
for the preparation and fair presentation of the financial report;
for such internal controls as management and, where appropriate, those charged with governance, deems necessary to enable the preparation of the financial report that is free from material misstatement; and
to provide the auditor with:
access to information relevant to the preparation of the financial report;
additional information that the auditor may request for the purposes of the review engagement; and
unrestricted access to persons from whom the auditor determines it necessary to obtain evidence.
Agreement on Review Engagement Terms
The auditor shall agree the terms of the engagement with the entity, which shall be recorded in writing by the auditor and forwarded to the entity. When the review engagement is undertaken pursuant to legislation, the minimum applicable terms are those contained in the legislation.
Procedures for a Review of a Financial Report
Understanding the Entity and its Environment, Including its Internal Control
The auditor shall obtain an understanding of the entity and its environment, including its internal control, as it relates to the preparation of both the annual and interim or other financial reports, sufficient to plan and conduct the engagement so as to be able to:
identify the types of potential material misstatements and consider the likelihood of their occurrence; and
select the enquiries, analytical and other review procedures that will provide the auditor with a basis for reporting whether anything has come to the auditor’s attention that causes the auditor to believe that the financial report is not prepared, in all material respects, in accordance with the applicable financial reporting framework. (Ref: Para. A9‑A12)
In order to plan and conduct a review of a financial report, a recently appointed auditor, who has not yet performed an audit of the annual financial report in accordance with Australian Auditing Standards, shall obtain an understanding of the entity and its environment, including its internal control, as it relates to the preparation of both the annual and interim or other financial reports. (Ref: Para. A13)
Materiality (Ref: Para. A14‑A18)
The auditor shall consider materiality, using professional judgement, when:
determining the nature, timing and extent of review procedures; and
evaluating the effect of misstatements.
Enquiries, Analytical and Other Review Procedures
The auditor shall make enquiries, primarily of persons responsible for financial and accounting matters, and perform analytical and other review procedures to enable the auditor to conclude whether, on the basis of the procedures performed, anything has come to the auditor’s attention that causes the auditor to believe that the financial report is not prepared, in all material respects, in accordance with the applicable financial reporting framework. (Ref: Para. A19‑A23)
The auditor shall obtain evidence that the financial report agrees or reconciles with the underlying accounting records. (Ref: Para. A24)
The auditor shall enquire whether management has identified all events up to the date of the review report that may require adjustment to or disclosure in the financial report. (Ref: Para. A25)
The auditor shall enquire whether those charged with governance have changed their assessment of the entity’s ability to continue as a going concern. When, as the result of this enquiry or other review procedures, the auditor becomes aware of events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern, the auditor shall:
enquire of those charged with governance as to their plans for future actions based on their going concern assessment, the feasibility of these plans, and whether they believe that the outcome of these plans will improve the situation; and
consider the adequacy of the disclosure about such matters in the financial report. (Ref: Para. A26)
When a matter comes to the auditor’s attention that leads the auditor to question whether a material adjustment should be made for the financial report to be prepared, in all material respects, in accordance with the applicable financial reporting framework, the auditor shall make additional enquiries or perform other procedures to enable the auditor to express a conclusion in the review report. (Ref: Para. A27)
Comparatives – First Financial Report (Ref: Para. A28‑A31)
When comparative information is included for the first time in a financial report, an auditor shall perform similar procedures on the comparative information as applied to the current period financial report.
Evaluation of Misstatements (Ref: Para. A32‑A34)
The auditor shall evaluate, individually and in the aggregate, whether uncorrected misstatements that have come to the auditor’s attention are material to the financial report.
Written Representations
The auditor shall endeavour to obtain written representations from management and, where appropriate, those charged with governance, that:
they acknowledge their responsibility for the design and implementation of internal control to prevent and detect fraud and error;
the financial report is prepared and presented in accordance with the applicable financial reporting framework;
they believe the effect of those uncorrected misstatements aggregated by the auditor during the review are immaterial, both individually and in the aggregate, to the financial report taken as a whole. A summary of such items is included in or attached to the written representations;
they have disclosed to the auditor all significant facts relating to any frauds or suspected frauds known to them that may have affected the entity;
they have disclosed to the auditor the results of their assessment of the risk that the financial report may be materially misstated as a result of fraud;
they have disclosed to the auditor all known actual or possible non‑compliance with laws and regulations, the effects of which are to be considered when preparing the financial report; and
they have disclosed to the auditor all significant events that have occurred subsequent to the balance sheet date and through to the date of the review report that may require adjustment to or disclosure in the financial report. (Ref: Para. A35)
If management and, where appropriate, those charged with governance refuse to provide a written representation that the auditor considers necessary, this constitutes a limitation on the scope of the auditor’s work and the auditor shall express a qualified conclusion or a disclaimer of conclusion, as appropriate.
Auditor’s Responsibility for Accompanying Information
The auditor shall read the other information that accompanies the financial report to consider whether any such information is materially inconsistent with the financial report. (Ref: Para. A36)
If a matter comes to the auditor’s attention that causes the auditor to believe that the other information appears to include a material misstatement of fact, the auditor shall discuss the matter with the entity’s management, and where appropriate, those charged with governance. (Ref: Para. A37)
Communication
When, as a result of performing a review of a financial report, a matter comes to the auditor’s attention that causes the auditor to believe that it is necessary to make a material adjustment to the financial report for it to be prepared, in all material respects, in accordance with the applicable financial reporting framework, the auditor shall communicate this matter as soon as practicable to the appropriate level of management.
When, in the auditor’s judgement, management does not respond appropriately within a reasonable period of time, the auditor shall inform those charged with governance. (Ref: Para. A38)
When, in the auditor’s judgement, those charged with governance do not respond appropriately within a reasonable period of time, the auditor shall consider:
whether to modify the review report; or
the possibility of withdrawing from the engagement; and
the possibility of resigning from the appointment to audit the annual financial report. (Ref: Para. Aus A36.1 and A58)
When, as a result of performing the review of a financial report, a matter comes to the auditor’s attention that causes the auditor to believe in the existence of fraud or non‑compliance by the entity with laws and regulations, the auditor shall communicate the matter as soon as practicable to those charged with governance and shall consider the implications for the review. (Ref: Para. A39)
The auditor shall communicate relevant matters of governance interest arising from the review of the financial report to those charged with governance. (Ref: Para. A40 and A59)
Reporting the Nature, Extent and Results of the Review of a Financial Report
The auditor shall issue a written report that contains the following:
An appropriate title clearly identifying it as a review report of the independent auditor of the entity.
An addressee, as required by the circumstances of the engagement.
Identification of the financial report reviewed, including identification of the title of each of the statements contained in the financial report and the date and period covered by the financial report.
A statement that those charged with governance are responsible for the preparation and fair presentation of the financial report in accordance with the applicable financial reporting framework.
A statement that the auditor is responsible for expressing a conclusion on the financial report based on the review.
A statement that the review of the financial report was conducted in accordance with Auditing Standard on Review Engagements ASRE 2410 Review of a Financial Report Performed by the Independent Auditor of the Entity, and that that Auditing Standard requires the auditor to comply with ethical requirements relevant to the audit of the annual financial report.
A statement that a review consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
A statement that a review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable the auditor to obtain assurance that the auditor would become aware of all significant matters that might be identified in an audit, and that accordingly no audit opinion is expressed.
A conclusion as to whether anything has come to the auditor’s attention that causes the auditor to believe that the financial report does not present fairly, or if applicable, is not true and fair, in all material respects, in accordance with the applicable financial reporting framework (including a reference to the jurisdiction or country of origin of the financial reporting framework when Australia is not the origin of the financial reporting framework used).
The date of the auditor’s review report.
The location in the country or jurisdiction where the auditor practices.
The auditor’s signature. (Ref: Para. A41)
Departure from the Applicable Financial Reporting Framework
The auditor shall express a qualified or adverse conclusion when a matter has come to the auditor’s attention that causes the auditor to believe that a material adjustment should be made to the financial report for it to be prepared, in all material respects, in accordance with the applicable financial reporting framework. The auditor shall include a basis for modification paragraph in the report, that describes the nature of the departure and, if practicable, states the effects on the financial report. If the effects or possible effects are incapable of being measured reliably, a statement to that effect and the reasons therefor shall be included in the basis for modification paragraph. The conclusion paragraph shall be headed “Qualified Conclusion” or “Adverse Conclusion”, whichever is relevant. (Ref: Para. A42)
When the effect of the departure is so material and pervasive to the financial report that the auditor concludes a qualified conclusion is not adequate to disclose the misleading or incomplete nature of the financial report, the auditor shall express an adverse conclusion. (Ref: Para. A43)
Limitation on Scope (Ref: Para. A44)
When the auditor is unable to complete the review, the auditor shall communicate, in writing, to the appropriate level of management and to those charged with governance the reason why the review cannot be completed, and consider whether it is appropriate to issue a review report.
Limitation on Scope Imposed by Management
Unless required by law or regulation, an auditor shall not accept an engagement to review a financial report when management has imposed a limitation on the scope of the auditor’s review. (Ref: Para. A45 and A58)
If, after accepting the engagement, management imposes a limitation on the scope of the review, the auditor shall request management to remove the limitation. If management refuses the auditor’s request to remove the limitation, the auditor shall communicate, in writing, to the appropriate level of management and those charged with governance, the reason(s) why the review cannot be completed. (Ref: Para. A46)
If management and, where appropriate, those charged with governance, refuses the auditor’s request to remove a limitation that has been imposed on the scope of the review, but there is a legal or regulatory requirement for the auditor to issue a report, the auditor shall issue a disclaimer of conclusion or qualified conclusion report, as appropriate, containing the reason(s) why the review cannot be completed. (Ref: Para. A47)
Other Limitations on Scope Not Imposed by Management (Ref: Para. A48‑A49)
The auditor shall express a qualified conclusion when, in rare circumstances, there is a limitation on the scope of the auditor’s work that is confined to one or more specific matters, which while material, is not in the auditor’s judgement pervasive to the financial report, and when the auditor concludes that an unqualified opinion cannot be expressed. A qualified conclusion shall be expressed as being “except for” the effects of the matter to which the qualification relates. The conclusion paragraph shall be headed “Qualified Conclusion”.
Going Concern and Significant Uncertainties (Ref: Para. A50‑A54)
If adequate disclosure is made in the financial report, the auditor shall add an emphasis of matter paragraph to the review report to highlight a material uncertainty relating to an event or condition that casts significant doubt on the entity’s ability to continue as a going concern.
If a material uncertainty that casts significant doubt on the entity’s ability to continue as a going concern is not adequately disclosed in the financial report, the auditor shall express a qualified or adverse conclusion, as appropriate. The report shall include specific reference to the fact that there is such a material uncertainty.
In circumstances other than a going concern problem, the auditor shall consider adding an emphasis of matter paragraph to highlight a significant uncertainty that is adequately disclosed in the financial report, that came to the auditor’s attention, the resolution of which is dependent upon future events and which may materially affect the financial report.
If a significant uncertainty (other than a going concern problem) is not adequately disclosed in the financial report, the auditor shall express a qualified or adverse conclusion, as appropriate. The report shall include specific reference to the fact that there is such a significant uncertainty.
Documentation (Ref: Para. A60)
The auditor shall prepare review documentation that is sufficient and appropriate to provide a basis for the auditor’s conclusion, and to provide evidence that the review was performed in accordance with this Auditing Standard and applicable legal and regulatory requirements.
* * *
Application and Other Explanatory Material
Objective (Ref: Para. 4)
Under paragraph 13, the auditor needs to make enquiries, and perform analytical and other review procedures in order to reduce to a limited level the risk of expressing an inappropriate conclusion when the financial report is materially misstated.
The objective of a review of a financial report differs significantly from that of an audit conducted in accordance with Australian Auditing Standards. A review of a financial report does not provide a basis for expressing an opinion whether the financial report gives a true and fair view, or is presented fairly, in all material respects, in accordance with the applicable financial reporting framework.
A review, in contrast to an audit, is not designed to obtain reasonable assurance that the financial report is free from material misstatement. A review consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review may bring significant matters affecting the financial report to the auditor’s attention, but it does not provide all of the evidence that would be required in an audit.
Performing a Review (Ref: Para 6)
Through performing the audit of the annual financial report, the auditor obtains an understanding of the entity and its environment, including its internal control. When the auditor is engaged to review the financial report, under paragraph 13, the auditor needs to update this understanding through enquiries made in the course of the review, to assist the auditor in focusing the enquiries to be made and the analytical and other review procedures to be applied. A practitioner who is engaged to perform a review of a financial report, and who is not the auditor of the entity, does not perform the review in accordance with ASRE 2410, as the practitioner ordinarily does not have the same understanding of the entity and its environment, including its internal control, as the auditor of the entity.
Although other Auditing Standards do not apply to review engagements, they include guidance which may be helpful to auditors performing reviews covered by this Auditing Standard.
General Principles of a Review of a Financial Report
Relevant ethical requirements[2] govern the auditor’s professional responsibilities in the following areas: independence, integrity, objectivity, professional competence and due care, confidentiality, professional behaviour, and technical standards. (Ref: Para. 8)
The elements of quality control that are relevant to an individual engagement include leadership responsibilities for quality on the engagement, ethical requirements, acceptance and continuance of client relationships and specific engagements, assignment of engagement teams, engagement performance, and monitoring. ASQC 1 and ASA 220[3] include guidance that may be helpful. (Ref: Para. 9)
An attitude of professional scepticism denotes that the auditor makes a critical assessment, with a questioning mind, of the validity of evidence obtained and is alert to evidence that contradicts or brings into question the reliability of documents or representations by management of the entity. ASA 200 includes guidance which may be helpful. (Ref: Para. 10)
Agreeing the Terms of the Engagement
Written agreement of the terms of the engagement helps to avoid misunderstandings regarding the nature of the engagement and, in particular, the objective and scope of the review, the responsibilities of management and, where appropriate, those charged with governance, the extent of the auditor’s responsibilities, the assurance obtained, and the nature and form of the report. The communication ordinarily covers the following matters:
the objective of a review of a financial report;
the scope of the review;
the responsibilities of management and, where appropriate, those charged with governance for:
the financial report;
establishing and maintaining effective internal control relevant to the preparation of the financial report; and
making all financial records and related information available to the auditor;
agreement from management and, where appropriate, those charged with governance:
to provide written representations to the auditor to confirm representations made orally during the review, as well as representations that are implicit in the entity’s records; and
that where any document containing the financial report indicates that the financial report has been reviewed by the entity’s auditor, the review report also will be included in the document; and
the anticipated form and content of the report to be issued, including the identity of the addressee of the report.
An illustrative engagement letter is set out in Appendix 1. The terms of engagement to review a financial report can also be combined with the terms of engagement to audit the annual financial report. ASA 210 includes guidance which may be helpful. (Ref: Para. 12)
Procedures for a Review of a Financial Report
Understanding the Entity and its Environment, Including its Internal Control
Under ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, the auditor who has audited the entity’s financial report for one or more annual periods has obtained an understanding of the entity and its environment, including its internal control, as it relates to the preparation of the annual financial report, that was sufficient to conduct the audit. In planning a review of a financial report, the auditor needs to update this understanding. The auditor also needs to obtain a sufficient understanding of internal control as it relates to the preparation of the financial report subject to review, as it may differ from internal control as it relates to the preparation of the annual financial report. (Ref: Para. 13)
The auditor needs to use the understanding of the entity and its environment, including its internal control, to determine the enquiries to be made and the analytical and other review procedures to be applied, and to identify the particular events, transactions or assertions to which enquiries may be directed or analytical or other review procedures applied. (Ref: Para. 13)
The procedures performed by the auditor to update the understanding of the entity and its environment, including its internal control, ordinarily include the following:
reading the documentation, to the extent necessary, of the preceding year’s audit, reviews of prior period(s) of the current year, and corresponding period(s) of the prior year, to enable the auditor to identify matters that may affect the current‑period financial report;
considering any significant risks, including the risk of management override of controls, that were identified in the audit of the prior year’s financial report;
reading the most recent annual and comparable prior period financial report;
considering materiality with reference to the applicable financial reporting framework as it relates to the financial report, to assist in determining the nature and extent of the procedures to be performed and evaluating the effect of misstatements;
considering the nature of any corrected material misstatements and any identified uncorrected immaterial misstatements in the prior year’s financial report;
considering significant financial accounting and reporting matters that may be of continuing significance, such as material weaknesses in internal control;
considering the results of any audit procedures performed with respect to the current year’s financial report;
considering the results of any internal audit performed and the subsequent actions taken by management;
enquiring of management about the results of management’s assessment of the risk that the financial report may be materially misstated as a result of fraud;
enquiring of management about the effect of changes in the entity’s business activities;
enquiring of management about any significant changes in internal control and the potential effect of any such changes on the preparation of the financial report; and
enquiring of management of the process by which the financial report has been prepared and the reliability of the underlying accounting records to which the financial report is agreed or reconciled. (Ref: Para. 13)
The auditor needs to determine the nature of the review procedures, if any, to be performed for components and, where applicable, communicate these matters to other auditors involved in the review. Factors considered ordinarily include the materiality of, and risk of misstatement in, the financial report components, and the auditor’s understanding of the extent to which internal control over the preparation of such reports is centralised or decentralised. (Ref: Para. 13)
Obtaining an understanding of the entity and its environment enables the auditor to focus the enquiries made, and the analytical and other review procedures applied in performing a review of the financial report in accordance with this Auditing Standard. As part of obtaining this understanding, ordinarily the auditor makes enquiries of the predecessor auditor and, where practicable, reviews the predecessor auditor’s documentation for the preceding annual audit and for any prior periods in the current year that have been reviewed by the predecessor auditor. In doing so, ordinarily the auditor considers the nature of any corrected misstatements, and any uncorrected misstatements aggregated by the auditor, any significant risks, including the risk of management override of controls, and significant accounting and any reporting matters that may be of continuing significance, such as material weaknesses in internal control. (Ref: Para. 14)
Materiality (Ref: Para. 15)
The auditor needs to use professional judgement and consider qualitative and quantitative factors in determining materiality.
Ordinarily, the auditor’s consideration of materiality for a review of a financial report is based on the period financial data and accordingly, materiality based on interim period financial data may be less than materiality for annual financial data. If the entity’s business is subject to cyclical variations or if the financial results for the current period show an exceptional decrease or increase compared to prior periods and expected results for the current year, the auditor may, for example, conclude that materiality is more appropriately determined using a normalised figure for the period.
The auditor’s consideration of materiality, in evaluating the effects of misstatements, is a matter of professional judgement and is affected by the auditor’s perception of the financial information needs of users of the financial report.
If the applicable financial reporting framework contains a definition of materiality, it will ordinarily provide a frame of reference to the auditor when determining materiality for planning and performing the review.
The auditor needs, when relevant, to consider materiality from the perspective of both the entity and the consolidated entity.
Enquiries, Analytical and Other Review Procedures
A review ordinarily does not require tests of the accounting records through inspection, observation or confirmation. Procedures for performing a review of a financial report ordinarily are limited to making enquiries, primarily of persons responsible for financial and accounting matters and applying analytical and other review procedures, rather than corroborating information obtained concerning matters relating to the financial report. The auditor’s understanding of the entity and its environment, including its internal control, the results of the risk assessments relating to the preceding audit and the auditor’s consideration of materiality as it relates to the financial report, affects the nature and extent of the enquiries made, and analytical and other review procedures applied. (Ref: Para. 16)
The auditor ordinarily performs the following procedures:
Reading the minutes of the meetings of shareholders, those charged with governance and other appropriate committees to identify matters that may affect the financial report, and enquiring about matters dealt with at meetings for which minutes are not available that may affect the financial report.
Considering the effect, if any, of matters giving rise to a modification of the audit or review report, accounting adjustments or unadjusted misstatements, at the time of the previous audit or reviews.
Communicating, where appropriate, with other auditors who are performing a review of the financial report of the entity’s significant components.
Enquiring of members of management responsible for financial and accounting matters, and others as appropriate, about the following:
whether the financial report has been prepared and presented in accordance with the applicable financial reporting framework;
whether there have been any changes in accounting principles or in the methods of applying them;
whether any new transactions have necessitated the application of a new accounting principle;
whether the financial report contains any known uncorrected misstatements;
unusual or complex situations that may have affected the financial report, such as a business combination or disposal of a segment of the business;
significant assumptions that are relevant to the fair value measurement or disclosures and management’s intention and ability to carry out specific courses of action on behalf of the entity;
whether related party transactions have been appropriately accounted for and disclosed in the financial report;
significant changes in commitments and contractual obligations;
significant changes in contingent assets and contingent liabilities including litigation or claims;
compliance with debt covenants;
matters about which questions have arisen in the course of applying the review procedures;
significant transactions occurring in the last several days of the period or the first several days of the next period;
knowledge of any fraud or suspected fraud affecting the entity involving:
management;
employees who have significant roles in internal control; or
others where the fraud could have a material effect on the financial report; and
knowledge of any allegations of fraud, or suspected fraud, affecting the entity’s financial information communicated by employees, former employees, analysts, regulators or others; and
knowledge of any actual or possible non‑compliance with laws and regulations that could have a material effect on the financial report.
Applying analytical procedures to the financial report designed to identify relationships and individual items that appear to be unusual and that may reflect a material misstatement in the financial report. Analytical procedures may include ratio analysis and statistical techniques such as trend analysis or regression analysis and may be performed manually or with the use of computer‑assisted auditing techniques. Appendix 2 to this Auditing Standard contains examples of analytical procedures the auditor may consider when performing a review of a financial report.
Reading the financial report and considering whether anything has come to the auditor’s attention that causes the auditor to believe that the financial report is not in accordance with the applicable financial reporting framework. (Ref: Para. 16)
The auditor may perform many of the review procedures before or simultaneously with the entity’s preparation of the financial report. For example, it may be practicable to update the understanding of the entity and its environment, including its internal control, and begin reading applicable minutes before the end of the period. Performing some of the review procedures earlier in the period also permits early identification and consideration of significant accounting matters affecting the financial report. (Ref: Para. 16)
The auditor performing a review of the financial report is also the auditor of the annual financial report of the entity. For convenience and efficiency, the auditor may decide to perform certain audit procedures concurrently with the review of the financial report. For example, information gained from reading the minutes of meetings of the board of directors in connection with the review of the financial report may also be used for the annual audit. The auditor may decide also to perform, at the time of the review, auditing procedures that would need to be performed for the purpose of the audit of the annual financial report, for example, performing auditing procedures on:
significant or unusual transactions that occurred during the period, such as business combinations, restructurings, or significant revenue transactions, or
A review of a financial report ordinarily does not require corroborating the enquiries about litigation or claims. It is, therefore, ordinarily not necessary to send an enquiry letter to the entity’s lawyer. Direct communication with the entity’s lawyer with respect to litigation or claims, or alternative procedures, may, however, be appropriate if a matter comes to the auditor’s attention that causes the auditor to question whether the financial report is in accordance with the applicable financial reporting framework. (Ref: Para. 16)
The auditor may obtain evidence that the financial report agrees or reconciles with the underlying accounting records by tracing the financial report to:
the accounting records, such as the general ledger, or a consolidating schedule that agrees or reconciles with the accounting records; and
other supporting data in the entity’s records as necessary. (Ref: Para. 17)
The auditor need not perform procedures to identify events occurring after the date of the review report. (Ref: Para. 18)
Events or conditions which may cast significant doubt on the entity’s ability to continue as a going concern may have existed at the date of the annual financial report, or may be identified as a result of enquiries of management or in the course of performing other review procedures. When such events or conditions come to the auditor’s attention, the auditor needs to enquire of those charged with governance as to their plans for future action, such as their plans to liquidate assets, borrow money or restructure debt, reduce or delay expenditures, or increase capital. The auditor needs to enquire also as to the feasibility of the plans of those charged with governance and whether they believe that the outcome of these plans will improve the situation. Ordinarily, the auditor considers, based on procedures performed, whether it is necessary to corroborate the feasibility of the plans of those charged with governance and whether the outcome of these plans will improve the situation. (Ref: Para. 19)
For example, if the auditor’s review procedures lead the auditor to question whether a significant sales transaction is recorded in accordance with the applicable financial reporting framework, the auditor performs additional procedures sufficient to resolve the auditor’s questions, such as discussing the terms of the transaction with senior marketing and accounting personnel or reading the sales contract. (Ref: Para. 20)
Comparatives – First Financial Report (Ref: Para. 21)
When comparative information is included in the first financial report and the auditor is unable to obtain sufficient appropriate review evidence to achieve the review objective, a limitation on the scope of the review exists and the auditor needs to modify the review report. Ordinarily, a restriction on the scope of the auditor’s work will result in a qualified (“except for”) conclusion. In such cases, ordinarily an auditor encourages clear disclosure in the financial report, that the auditor has been unable to review the comparatives. An example of a modified review report is included in Appendix 4.
When comparative information is included in the first financial report and the auditor believes a material adjustment should be made to the financial report, under paragraph 33, the auditor needs to modify the review report.
When an entity has come into existence only within the first financial reporting period, comparative information will not be provided in the first financial report and no modified review report is required.
Accounting Standard AASB 101 Presentation of Financial Statements provides requirements and explanatory guidance relating to comparative information included in a financial report prepared in accordance with Australian Accounting Standards. Accounting Standard AASB 1 First‑time Adoption of Australian Accounting Standards provides requirements and guidance relating to comparative information when an entity adopts Australian Accounting Standards for the first time.
Evaluation of Misstatements (Ref: Para. 22)
A review of a financial report, in contrast to an audit engagement, is not designed to obtain reasonable assurance that the financial report is free from material misstatement. However, misstatements which come to the auditor’s attention, including inadequate disclosures, need to be evaluated individually and in the aggregate to determine whether a material adjustment is required to be made to the financial report for it to be prepared, in all material respects, in accordance with the applicable financial reporting framework.
The auditor needs to exercise professional judgement in evaluating the materiality of any misstatements that the entity has not corrected. Ordinarily, the auditor considers matters such as the nature, cause and amount of the misstatements, whether the misstatements originated in the preceding year or current year, and the potential effect of the misstatements on future interim or annual periods.
The auditor may designate an amount below which misstatements need not be aggregated, because the auditor expects that the aggregation of such amounts clearly would not have a material effect on the financial report. In so doing, under paragraph 15, the auditor needs to consider the fact that the determination of materiality involves quantitative as well as qualitative considerations and that misstatements of a relatively small amount could nevertheless have a material effect on the financial report.
Written Representations
The auditor needs to endeavour to obtain additional representations as are appropriate to matters specific to the entity’s business or industry. An illustrative representation letter is set out in Appendix 1. (Ref: Para. 23)
Auditor’s Responsibility for Accompanying Information
If the auditor identifies a material inconsistency, the auditor needs to consider whether the financial report or the other information needs to be amended. If an amendment is necessary in the financial report and those charged with governance refuse to make the amendment, under paragraph 29, the auditor needs to consider the implications for the review report. If an amendment is necessary in the other information and those charged with governance refuse to make the amendment, the auditor may, for example, consider including in the review report an Other Matter Paragraph describing the material inconsistency (ASA 720 and ASA 706 include guidance which may be helpful[4]) or taking other actions, such as withholding the issuance of the review report or withdrawing from the engagement . For example, those charged with governance may present alternative measures of earnings that more positively portray financial performance than the financial report, and such alternative measures are given excessive prominence, or are not clearly defined, or not clearly reconciled to the financial report such that they are confusing and potentially misleading. (Ref: Para. 25)
Aus A36.1 For a review of a half‑year financial report under the Corporations Act 2001 (Act), withholding the issuance of the review report and/or withdrawing from the review engagement are not options available under the Act. (Ref: Para. 29)
While reading the other information for the purpose of identifying material inconsistencies, an apparent material misstatement of fact may come to the auditor’s attention (that is, information, not related to matters appearing in the financial report, that is incorrectly stated or presented). When discussing the matter with the entity’s management, ordinarily the auditor considers the validity of the other information and management’s responses to the auditor’s enquiries, whether valid differences of judgement or opinion exist and whether to request management to consult with a qualified third party to resolve the apparent misstatement of fact. If an amendment is necessary to correct a material misstatement of fact and management refuses to make the amendment, ordinarily the auditor considers taking further action as appropriate, such as notifying those charged with governance and, if necessary, obtaining legal advice. (Ref: Para. 26)
Communication
Communications with management and/or those charged with governance are made as soon as practicable, either orally or in writing. The auditor’s decision whether to communicate orally or in writing ordinarily is affected by factors such as the nature, sensitivity and significance of the matter to be communicated and the timing of the communications. If the information is communicated orally, under paragraph 44, the auditor needs to document the communication. (Ref: Para. 28)
The determination of which level of management may also be informed is affected by the likelihood of collusion or the involvement of a member of management. (Ref: Para. 30)
As a result of performing a review of a financial report, the auditor may become aware of matters that in the opinion of the auditor are both important and relevant to those charged with governance in overseeing the financial reporting and disclosure process. (Ref: Para. 31)
Reporting the Nature, Extent and Results of the Review of a Financial Report (Ref: Para. 32)
In some cases, law or regulation governing the review of a financial report may prescribe wording for the auditor’s conclusion that is different from the wording described in paragraph 32(i). Although the auditor may be obliged to use the prescribed wording, the auditor’s responsibilities as described in this Auditing Standard for coming to the conclusion remain the same. ASA 700 includes guidance which may be helpful.[5] Illustrative review reports are set out in Appendices 3 and 4.
Departure from the Applicable Financial Reporting Framework (Ref: Para. 33–34)
If matters have come to the auditor’s attention that cause the auditor to believe that the financial report is or may be materially affected by a departure from the applicable financial reporting framework, and those charged with governance do not correct the financial report, the auditor needs to modify the review report. If the information that the auditor believes is necessary for adequate disclosure is not included in the financial report, the auditor needs to modify the review report and, if practicable, include the necessary information in the review report. Illustrative review reports with a qualified conclusion are set out in Appendix 4.
Departures from the applicable financial reporting framework, may result in an adverse conclusion. An illustrative review report with an adverse conclusion is set out in Appendix 4.
Limitation on Scope (Ref: Para. 35)
Ordinarily, a limitation on scope prevents the auditor from completing the review.
Limitation on Scope Imposed by Management
The auditor needs to refuse to accept an engagement to review a financial report if the auditor’s preliminary knowledge of the engagement circumstances indicates that the auditor would be unable to complete the review because there will be a limitation on the scope of the auditor’s review imposed by management of the entity. (Ref: Para. 36)
If, after accepting the engagement, management imposes a limitation on the scope of the review, the auditor needs to request the removal of that limitation. If management refuses to do so, the auditor is unable to complete the review and express a conclusion. In such cases, the auditor needs to communicate, in writing, to the appropriate level of management and those charged with governance, the reason(s) why the review cannot be completed. Nevertheless, if a matter comes to the auditor’s attention that causes the auditor to believe that a material adjustment to the financial report is necessary for it to be prepared, in all material respects, in accordance with the applicable financial reporting framework, under paragraphs 27, 28 and 30, the auditor needs to communicate such matters to the appropriate level of management and, where appropriate, those charged with governance. (Ref: Para. 37)
The auditor needs to consider the legal and regulatory requirements, including whether there is a legal requirement for the auditor to issue a report. If there is such a requirement, the auditor needs to disclaim a conclusion and provide in the review report the reason why the review cannot be completed. However, if a matter comes to the auditor’s attention that causes the auditor to believe that a material adjustment to the financial report is necessary for it to be prepared, in all material respects, in accordance with the applicable financial reporting framework the auditor needs to communicate such a matter in the report. (Ref: Para. 38)
Other Limitations on Scope Not Imposed by Management (Ref: Para. 39)
A limitation on scope may occur due to circumstances other than a limitation on scope imposed by management or those charged with governance. In such circumstances, the auditor is ordinarily unable to complete the review and express a conclusion, and is guided by paragraphs 38 and 39. There may be, however, some rare circumstances where the limitation on the scope of the auditor’s work is clearly confined to one or more specific matters that, while material, are not in the auditor’s judgement pervasive to the financial report. In such circumstances, the auditor needs to modify the review report by indicating that, except for the matter which is described in an explanatory paragraph to the review report, the review was conducted in accordance with this Auditing Standard, and by qualifying the conclusion. Illustrative review reports with a qualified conclusion are set out in Appendix 4.
The auditor may have expressed a qualified opinion on the audit of the latest annual financial report because of a limitation on the scope of that audit. The auditor needs to consider whether that limitation on scope still exists and, if so, the implications for the review report.
Going Concern and Significant Uncertainties (Ref: Para. 40‑43)
In certain circumstances, an emphasis of matter paragraph may be added to a review report, without affecting the auditor’s conclusion, to highlight a matter that is included in a note to the financial report that more extensively discusses the matter. The paragraph would preferably be included after the conclusion paragraph and ordinarily refers to the fact that the conclusion is not qualified in this respect.
The auditor may have modified a prior audit or review report by adding an emphasis of matter paragraph to highlight a material uncertainty relating to an event or condition that casts significant doubt on the entity’s ability to continue as a going concern. If the material uncertainty still exists and adequate disclosure is made in the financial report, the auditor needs to modify the review report on the current financial report by adding a paragraph to highlight the continued material uncertainty.
If, as a result of enquiries or other review procedures, a material uncertainty relating to an event or condition comes to the auditor’s attention that casts significant doubt on the entity’s ability to continue as a going concern, and adequate disclosure is made in the financial report, the auditor needs to modify the review report by adding an emphasis of matter paragraph.
ASA 570 Going Concern provides information that the auditor may find helpful in considering going concern in the context of the review engagement.
Ordinarily, a significant uncertainty in relation to any other matter, the resolution of which may materially affect the financial report, would warrant an emphasis of matter paragraph in the auditor’s review report.
Other Considerations
The terms of the engagement include agreement by those charged with governance that, where any document containing a financial report indicates that the report has been reviewed by the entity’s auditor, the review report will be also included in the document. If those charged with governance have not included the review report in the document, ordinarily the auditor considers seeking legal advice to assist in determining the appropriate course of action in the circumstances. (Ref: Para. 12)
If the auditor has issued a modified review report and those charged with governance issue the financial report without including the modified review report in the document containing the financial report, ordinarily the auditor considers seeking legal advice to assist in determining the appropriate course of action in the circumstances, and the possibility of resigning from the appointment to audit the annual financial report.
Considerations Specific to Public Sector Entities
The auditor needs to agree with the client the terms of engagement. When agreeing the terms of engagement, an engagement letter helps to avoid misunderstandings regarding the nature of the engagement and, in particular, the objective and scope of the review, management’s responsibilities, the extent of the auditor’s responsibilities, the assurance obtained, and the nature and form of the report. Law or regulation governing review engagements in the public sector ordinarily mandates the appointment of the auditor. Nevertheless, an engagement letter setting out the matters referred to in paragraph A8 may be useful to both the public sector auditor and the client. Public sector auditors, therefore, consider agreeing with the client the terms of a review engagement by way of an engagement letter. (Ref: Para. 12)
In the public sector, the auditor’s statutory audit obligation may extend to other work, such as a review of interim financial information. Where this is the case, the public sector auditor cannot avoid such an obligation and, consequently, may not be in a position not to accept, or to withdraw from a review engagement. The public sector auditor also may not be in the position to resign from the appointment to audit the annual financial report. (Ref: Para. 29(b)‑29(c) and 36)
The auditor needs to communicate to those charged with governance and consider the implications for the review when a matter comes to the auditor’s attention that causes the auditor to believe in the existence of fraud or non‑compliance by the entity with laws and regulations. In the public sector, the auditor may be subject to statutory or other regulatory requirements to report such a matter to regulatory or other public authorities. (Ref: Para. 31)
Documentation (Ref: Para. 44)
The auditor needs to prepare documentation that enables an experienced auditor having no previous connection with the engagement to understand the nature, timing and extent of the enquiries made and analytical and other review procedures applied, information obtained, and any significant matters considered during the performance of the review, including the disposition of such matters.
Conformity with International Standards on Review Engagements
This Auditing Standard on Review Engagements conforms with International Standard on Review Engagements ISRE 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity, issued by the International Auditing and Assurance Standards Board (IAASB), an independent standard‑setting board of the International Federation of Accountants (IFAC).
The underlying standard is extant ASRE 2410 Review of Interim and Other Financial Reports Performed by the Independent Auditor of the Entity. The underlying standard to extant ASRE 2410 is ISRE 2410 which has not been drafted in “clarity” format by the IAASB.
Following consultation with constituents in Australia in accordance with normal exposure draft processes, the AUASB has decided that:
due to the nature of reviews of other historical financial information, a separate Standard is more appropriate than ASRE 2410 being adapted by the auditor for this purpose; and
ASRE 2405 Review of Historical Financial Information Other than a Financial Report, developed by the AUASB, deals with reviews of other historical financial information.
Accordingly, ASRE 2410 is intended to conform, with the exceptions listed below, to ISRE 2410 to the extent that ISRE 2410 deals with the review of financial statements by the auditor of the entity.
Except as noted below, this Auditing Standard conforms, to the extent described above, with International Standard ISRE 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the IAASB. The main differences between this Auditing Standard and ISRE 2410 are:
This Auditing Standard contains the following requirements that are not contained in ISRE 2410:
This Auditing Standard applies to:
a review, by the independent auditor of the entity, of a financial report for a half‑year in accordance with the Corporations Act 2001; and
a review, by the independent auditor of the entity, of a financial report, or a complete set of financial statements, comprising historical financial information, for any other purpose (Ref: Para. 1(a) and (b)).
Where in rare and exceptional circumstances, factors outside the auditor’s control prevent the auditor from complying with an essential procedure contained within a relevant requirement, the auditor shall:
if possible, perform appropriate alternative procedures; and
document in the working papers:
o the circumstances surrounding the inability to comply;
o the reasons for the inability to comply; and
o justification of how alternative procedures achieve the objectives of the requirement.
When the auditor is unable to perform appropriate alternative procedures, the auditor shall consider the implications for the auditor’s review report (Ref: Para. 7).
The auditor shall, prior to agreeing the terms of the engagement, determine whether the financial reporting framework is acceptable and obtain agreement from management and, where appropriate, those charged with governance, that it acknowledges and understands its responsibility:
for the preparation and fair presentation of the financial report;
for such internal controls as management and, where appropriate, those charged with governance, deems necessary to enable the preparation of the financial report that is free from material misstatement; and
to provide the auditor with:
o access to information relevant to the preparation of the financial report;
o additional information that the auditor may request for the purposes of the review engagement; and
o unrestricted access to persons from whom the auditor determines it necessary to obtain evidence (Ref: Para. 11).
The auditor shall agree the terms of the engagement with the entity, which shall be recorded in writing by the auditor and forwarded to the entity. When the review engagement is undertaken pursuant to legislation, the minimum applicable terms are those contained in the legislation (Ref: Para. 12).
The auditor shall consider materiality, using professional judgement, when:
determining the nature, timing and extent of review procedures; and
evaluating the effect of misstatements (Ref: Para. 15).
When comparative information is included for the first time in a financial report, an auditor shall perform similar procedures on the comparative information as applied to the current period financial report (Ref: Para. 21).
If management and, where appropriate, those charged with governance refuse to provide a written representation that the auditor considers necessary, this constitutes a limitation of the scope of the auditor’s work and the auditor shall express a qualified conclusion or a disclaimer of conclusion, as appropriate (Ref: Para. 24).
When, as a result of performing the review of a financial report, a matter comes to the auditor’s attention that causes the auditor to believe in the existence of fraud or
non‑compliance by the entity with laws and regulations, the auditor shall communicate the matter as soon as practicable to those charged with governance and shall consider the implications for the review (Ref: Para. 30).
The auditor shall express a qualified or adverse conclusion when a matter has come to the auditor’s attention that causes the auditor to believe a material adjustment should be made to the financial report for it to be prepared, in all material respects, in accordance with the applicable financial reporting framework. The auditor shall include a basis for modification paragraph in the report, that describes the nature of the departure and, if practicable, states the effects on the financial report. If the effects or possible effects are incapable of being measured reliably, a statement to that effect and the reasons therefor shall be included in the basis for modification paragraph. The conclusion paragraph shall be headed “Qualified Conclusion” or “Adverse Conclusion”, whichever is relevant (Ref: Para. 33).
When the effect of the departure is so material and pervasive to the financial report that the auditor concludes a qualified conclusion is not adequate to disclose the misleading or incomplete nature of the financial report, the auditor shall express an adverse conclusion (Ref: Para. 34).
Unless required by law or regulation, an auditor shall not accept an engagement to review a financial report when management has imposed a limitation on the scope of the auditor’s review (Ref: Para. 36).
If, after accepting the engagement, management imposes a limitation on the scope of the review, the auditor shall request management to remove the limitation. If management refuses the auditor’s request to remove the limitation, the auditor shall communicate, in writing, to the appropriate level of management and those charged with governance, the reasons why the review cannot be completed (Ref: Para. 37).
If management and, where appropriate, those charged with governance, refuses the auditor’s request to remove a limitation that has been imposed on the scope of the review, but there is a legal or regulatory requirement for the auditor to issue a report, the auditor shall issue a disclaimer of conclusion or qualified conclusion report, as appropriate, containing the reason(s) why the review cannot be completed
(Ref: Para. 38).
The auditor shall express a qualified conclusion when, in rare circumstances, there is a limitation on the scope of the auditor’s work that is confined to one or more specific matters, which while material, is not in the auditor’s judgement pervasive to the financial report, and when the auditor concludes that an unqualified opinion cannot be expressed. A qualified conclusion shall be expressed as being “except for” the effects of the matter to which the qualification relates. The conclusion paragraph shall be headed “Qualified Conclusion” (Ref: Para. 39).
The following requirements in ISRE 2410, paragraph 43(e) and paragraph 43(j), are not contained in this Auditing Standard:
Paragraph 43(e)
“In other circumstances, a statement that management is responsible for the preparation and presentation of the interim financial information in accordance with the applicable financial reporting framework”.
Paragraph 43(j)
“In other circumstances, a conclusion as to whether anything has come to the auditor’s attention that causes the auditor to believe that the interim financial information is not prepared, in all material respects, in accordance with the applicable financial reporting framework (including a reference to the jurisdiction or country of origin of the financial reporting framework when the financial reporting framework used is not International Financial Reporting Standards).”
Requirements and guidance on the review of financial statements that are prepared in accordance with a financial reporting framework that is not designed to achieve fair presentation are included in ASRE 2405 Review of Historical Financial Information Other than a Financial Report.
This Auditing Standard includes explanatory guidance not contained within ISRE 2410 on:
Materiality (Ref: Para. A14 to A18); and
Comparatives (Ref: Para. A28 to A31).
This Auditing Standard provides illustrative examples that differ in form and content from those contained in ISRE 2410, namely:
An engagement letter (Appendix 1).
A written representation letter (Appendix 1).
The auditor’s unmodified review reports
(Appendices 3 and 4).
The auditor’s modified review reports (Appendix 4).
This Auditing Standard provides illustrative detailed procedures that may be performed in an engagement to review a financial report that are not contained in ISRE 2410 (Appendix 2).
Compliance with this Auditing Standard on Review Engagements enables compliance with ISRE 2410 to the extent described above.