Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

What does that risk assessment in a SSARS 19 review look like?

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In a review, the analytical procedures and inquiries should be based on the accountant’s professional judgment.  That judgment is based on the accountant’s understanding of the industry and the client.

According to the SSARS literature, it is also based on the accountant’s awareness of the risk of unknowing failure to modify the review report on financial statements that are materially misstated

That means the accountant should focus analytical procedures and inquiries on those areas where there are increased risks of misstatements.

In a review, it seems this general comment to focus on riskier areas would lead accountants to spend less time in areas where there is a lower likelihood of a mistake or error.  That time savings could be refocused on places where there is a perceived higher risk.

When I’m performing a review, I usually have a general idea where there will be adjustments before even receiving the trial balance from a client.  How can that be? 

The familiarity gained from having performed the review a few years, a working knowledge of the skills of the accounting staff, and awareness of what is going on in the industry combine to give a powerful gut feel for what will be okay and what will need to be adjusted. 

Let’s carry that thought process forward one more step.  The knowledge base mentioned above can be combined with a brief pondering of the opening trial balance and will sometimes identify accounts that have a high probability of containing an error without any further procedures being performed. 

To put it simply, I sometimes can look at an amount for a particular account on the trial balance and know it is probably wrong.  I’m sure you’ve been there – a moments glance at the trial balance and you know what the controller missed.

To rephrase this idea in terms of SSARS 19, I am performing an analytical procedure (specifically a preliminary analytical review of the opening trial balance), identifying a need to increase the assessment of risk in that account (I’m pretty sure that account is wrong) and then adjust the analytical procedures accordingly (based on the nature of the account it’s obvious what additional test or procedure or inquiry will be needed).

When that oddly phrased comment on adjusting analytical procedures and inquiries based on the risk of misstatements is considered this way, it doesn’t seem that new or different.  My guess is most reviews have been performed by most accountants using that type of informal risk assessment for a very long time.   I can just hear one particular colleague of mine saying “so what – that’s the way I’ve done reviews for decades.”

What is necessary now is to more explicitly consider that approach and leave behind some sort of review evidence to demonstrate that thought process exists.

Furthermore, this gives accountants the freedom to let go of some review procedures that address areas that have a low risk of containing a material misstatement.

At the same time, this gives the accountant the ability to add procedures based on a professional judgment, or ‘gut feel’, that there is a risk an account contains a material error.

Written by Jim Ulvog

February 17, 2012, 6:00 am at 6:00 am

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