Understanding Independent Review Engagements in Financial Reporting
Reporting engagements such as audits, reviews, agreed-upon procedures, and compilations serve a crucial role in providing varying levels of assurance on financial information.
These engagements can be mandated by legislation to ensure compliance with regulatory standards or requested by entities, directors, or external parties like lenders to enhance the credibility and reliability of financial statements.
Each type of engagement differs in its scope, procedures, and the level of assurance provided. While audits offer a high level of assurance through extensive verification, reviews provide limited assurance primarily through analytical procedures. Agreed-upon procedures engagements are tailored to specific needs agreed upon by the parties involved, and compilations involve assembling financial information without offering any assurance.
Understanding these distinctions helps stakeholders choose the appropriate engagement to meet their specific needs and regulatory requirements.
Differences Between Reporting Engagements
Understanding how a review engagement differs from other reporting engagements helps practitioner to perform the right level of work, and manage the expectations from stakeholders.
Audits
Purpose: An audit provides a high level of assurance that the financial statements are accurate and complete. It involves a thorough examination, including testing and verification of the financial information. The accountant gives an opinion on whether the statements present a true and fair view..
Procedures: Extensive, including risk assessment, substantive procedures, and possibly tests of controls.
Report: An opinion on whether the financial statements present fairly, in all material respects, in accordance with the applicable financial reporting framework.
Example: A large corporation, required by law to have an audit, undergoes this detailed process to assure investors and regulators that their financial statements are accurate
Reviews
Purpose: In a review, the accountant provides limited assurance that the financial statements are free from major errors. The process involves asking questions and performing basic analyses. The accountant states that nothing came to their attention that would suggest the statements are incorrect..
Procedures: Primarily inquiry and analytical procedures.
Report: A conclusion stating that nothing has come to the practitioner's attention that causes them to believe the financial statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework.
Example: A medium-sized company looking to secure a loan might opt for a review to give the lender some assurance about their financial health, without incurring the higher costs of an audit.
Agreed-Upon Procedures
Purpose: The accountant executes specific procedures previously agreed upon by the client and other stakeholders. Unlike audits or reviews, there is no comprehensive examination of the financial statements or any opinion provided on the overall financial health of the business. The focus is on particular areas or aspects as required by the client.
Procedures: Specific procedures agreed upon by the practitioner and the engaging parties.
Report: A report detailing the procedures performed and the findings, without providing any assurance.
Compilations
Purpose: In a compilation, the accountant helps prepare the financial statements based on the information provided by the business. The accountant does not check the information for accuracy or completeness and does not give any assurance that the statements are correct.
Procedures: Assembling financial statements based on information provided by management.
Report: A notice to reader stating that no assurance is provided.
Example: A new business might use a compilation to prepare their financial statements for internal use or to present to potential investors, knowing that the accountant is simply compiling the information provided without verifying it.
Each engagement type is designed to meet different needs, providing stakeholders with varying levels of confidence in the financial information presented.
What are Independent Reviews?
In South Africa, the term "independent review engagement" is used to describe what is internationally known as a "review engagement."
An Independent Review (aka Review Engagement) is a limited assurance engagement where the practitioner primarily performs inquiry and analytical procedures to obtain sufficient appropriate evidence as the basis for a conclusion on the financial statements as a whole, expressed in accordance with the requirements of ISRE 2400 (Revised). This review must be conducted by a practitioner who was not involved in the preparation of the financial statements.
The International Standard on Related Services (ISRE 2400) outlines what accountants need to do when they perform a review of financial statements. It explains the responsibilities of the accountant and what the final report should look like. The standard is mainly for reviewing complete sets of financial statements, not summaries or interim statements.
An accountant that performs an independent review in terms of the Companies Act, 2008 must do so in terms of ISRS 2400.
The main goal of a review engagement is to give a limited assurance that the financial statements are accurate and free from major mistakes. This is done through a simpler process than an audit, mainly involving asking questions and analysing the financial statements.
According to Companied Regulations 2010, Regulation 29(4), an Independent Review of a company’s annual financial statements must be carried out as follows:
For a company with a public interest score of at least 100 for the financial year, the review must be conducted by a registered auditor or a member in good standing of a professional body accredited under section 33 of the Auditing Professions Act.
For a company with a public interest score of less than 100 for the financial year, the review can be conducted by:
A person meeting the criteria above, or
A person qualified to be an accounting officer of a close corporation in terms of section 60 (1), (2), and (4) of the Close Corporations Act, 1984 (Act No. 69 of 1984).
Independent reviews are not mandatory for owner-managed profit companies but can be performed voluntarily if the public interest score is below 350 and the financial statements are independently compiled, or if the public interest score is below 100. Similarly, an independent review can be performed voluntarily for close corporations (CCs), though the cost versus benefit should be carefully considered.
Qualifying as an Independent Reviewer
In South Africa, performing an independent review requires compliance with the Companies Act, 2008, the Close Corporations Act, 1984, and accreditation from recognized professional bodies. Here's a detailed look at the requirements and processes:
Companies Act, 2008
The Companies Act, 2008, along with its regulations, stipulates that independent reviews can only be conducted by qualified professionals, particularly for companies with a public interest score of less than 100.
According to the Act:
A person qualified to be an accounting officer of a close corporation as defined in Section 60 (1), (2), and (4) of the Close Corporations Act, 1984 (Act No. 69 of 1984).
Close Corporations Act, 1984
The Close Corporations Amendment Act, 25 of 2005 redefined the appointment of accounting officers. Section 60(4) states that a Close Corporation (CC) may appoint as its accounting officer:
A person who is a member of a recognised profession listed in a notice referred to in subsection (2).
A firm as defined in the Public Accountants’ and Auditors’ Act, 1991.
Another firm, if each partner is qualified to be so appointed.
Another corporation, if each member is qualified to be so appointed.
Recognised professional bodies include:
The Chartered Institute for Business Accountants (CIBA), previously SAIBA.
Qualifying as an Independent Reviewer with CIBA
To perform an independent review, accountants must be licensed by the Chartered Institute for Business Accountants (CIBA), which is a recognised profession by the Companies and Intellectual Property Commission (CIPC). CIBA is responsible for setting standards and monitoring the work of independent reviewers.
To qualify as an independent reviewer with CIBA:
Become a Business Accountant in Practice (SA): Obtain this designation from CIBA to qualify to perform the work of an accounting officer.
Pass the Independent Reviewer Exam: After achieving the designation, apply for and pass the exam to be licensed as an independent reviewer.
An accountant looking to expand their services to include independent reviews would first become a Business Accountant in Practice (SA) through CIBA, then study for and pass the independent reviewer exam to become licensed to perform these engagements.
Summary
To conduct an independent review in South Africa, accountants must:
Be part of a recognized professional body as specified in the Companies Act and Close Corporations Act.
Obtain a specific license from CIBA, which includes achieving a relevant designation and passing an exam.
This integrated approach ensures that only qualified professionals perform independent reviews, maintaining the integrity and reliability of financial reporting.
Type of Work Involved in a Review Engagement
In the process of conducting a review engagement, an accountant must carefully follow a series of structured steps to ensure the accuracy and reliability of the financial statements under examination.
These steps include accepting the engagement, planning the review, performing the agreed-upon procedures, forming a conclusion, and ultimately, reporting the findings.
Each stage plays a crucial role, from initially ensuring the firm's capability to take on the review, to understanding the business environment, executing the necessary procedures, and providing a clear and concise report on the results. This methodical approach helps accountants provide stakeholders with a limited but meaningful level of assurance about the financial statements:
1.Accepting the Engagement
The accountant needs to ensure they can take on the review by checking their firm’s policies, ensuring they have the right staff, and confirming their independence from the client. They also prepare an engagement letter to outline the terms of the review.
Example: An accounting firm might evaluate whether they can accept a review engagement for a non-profit organization by checking if they have the right team available and ensuring compliance with their internal policies.
2. Planning
The accountant gets to know the business and its environment, determines what is significant (materiality), and identifies areas where mistakes are likely. This helps in designing the questions and analyses.
Example: While planning a review for a retail store, the accountant will look at factors like inventory management and sales trends to identify potential areas for errors.
3. Performing Procedures
The accountant carries out the planned procedures and any additional ones needed to gather enough evidence. This includes asking questions of management and performing basic analyses.
Example: During the review of a tech company, the accountant might analyze revenue trends and ask management about unusual fluctuations.
4. Forming a Conclusion
The accountant evaluates the findings and discusses them with management, ensuring all relevant issues are resolved before forming a conclusion.
Example: After reviewing a construction company's financial statements, the accountant might discuss any discrepancies in project costs with management before forming a conclusion.
5. Reporting
The final step is to prepare and issue the review report, which summarizes the scope of the review, the procedures performed, and the accountant's conclusion.
Example: The accountant prepares a report for a healthcare provider, summarizing the review procedures and concluding that nothing has come to their attention to suggest the financial statements are incorrect.
Key Steps Involved in Performing a Review Engagement
Determine the acceptability of the engagement and client relationship: Decide if the review can be accepted.
Obtain an understanding of the entity and its environment and the applicable financial reporting framework: Learn about the business and identify areas prone to mistakes.
Make inquiries of management and others within the entity involved in financial and accounting matters: Ask meaningful questions based on the understanding of the business.
Perform inquiry and analytical procedures: Carry out the planned procedures to gather evidence.
Design and perform any additional procedures required to confirm or dispel any potential material misstatements: Address any issues that arise during the review.
Evaluate the sufficiency and appropriateness of the evidence obtained: Ensure that the evidence supports the conclusion.
Form a conclusion: Draw a conclusion based on the evidence.
Report on the financial statements: Prepare and issue the review report.
Independent Review Report
The report is the key document that wraps up the review process. It tells stakeholders, like company owners and investors, what the accountant did and what they found. The key elements of the Report are:
Introduction
This part tells everyone what financial statements were reviewed (like balance sheets or income statements), including the specific time period they cover. It also mentions under which accounting rules these statements were prepared.
Management’s Responsibility
Here, the report points out that the company's management is responsible for making sure the financial statements are correct and fair. This includes taking care of the systems and controls that help ensure the financial statements are free from major mistakes or misstatements.
Practitioner’s Responsibility
This section explains that the accountant's job is to look at the financial statements and provide a conclusion based on their review. It clarifies that the review is less detailed than a full audit and only aims to give a limited level of confidence that the financial statements don't have big errors.
The accountant says they followed specific standards meant for reviews, which involve asking questions and looking at financial data to form their conclusion.
Scope of the Review
This part describes what the accountant looked at during the review. It explains that they did things like talking to management and looking at financial numbers to get a sense of whether anything seemed off. The idea is to give enough of a check to support the accountant’s final view, but it’s not as deep as an audit.
Conclusion
This is where the accountant sums up what they think after doing their review. Typically, they'll say something like, "Based on our review, nothing has come to our attention that makes us think the financial statements are wrong in any big way."
If there were any unusual or significant issues that affected the review, those would be described here. If the accountant had to change their usual conclusion because of these issues, they would explain why here.
Other Reporting Responsibilities
If the accountant also had to report on other things because of specific laws or rules, they would mention that here.
Signature, Date, and Place:
The report ends with the accountant’s signature, the date they finished the review, and where it was done.
Conclusion
In summary, review engagements provide a practical level of assurance about a company's financial statements without the depth and expense of a full audit. Through these reviews, accountants use discussions and basic analysis to check for major issues, offering stakeholders a simpler, yet effective way to ensure financial statements are reliable.
For businesses in South Africa, understanding when and how to conduct these reviews is key, especially with specific rules about who can perform them based on the company's size and public interest score. Accountants need proper credentials, like those from the Chartered Institute for Business Accountants (CIBA), to carry out these reviews correctly.
Overall, review engagements strike a balance between thoroughness and efficiency, helping businesses meet regulatory needs and maintain trust with stakeholders. This approach ensures that financial statements are fair and free from significant errors, supporting transparency and confidence in financial reporting.
Why This License Is Essential for Your Career
The Independent Review Specialist License isn't just a credential — it's your gateway to becoming a recognized expert in the field of independent reviews. If you're a Business Accountant in Practice (BAP(SA)) looking to expand your professional horizons, this license is crucial. It enables you to gain official recognition from the Companies and Intellectual Property Commission (CIPC) as an independent reviewer, allowing you to offer your services with confidence and authority.
What the License Offers
Obtaining this license isn’t just about fulfilling a requirement; it’s about proving your expertise in a specialized area. You'll need to pass a rigorous exam set by industry experts and accredited by the Chartered Institute for Business Accountants (CIBA). This process ensures that you’re not just knowledgeable, but truly ready to tackle the complexities of independent reviews.
Benefits of Becoming a Licensed Independent Review Specialist
By earning this license, you'll:
Enhance Your Professional Standing: Equip yourself with the necessary skills to perform your statutory duties under section 30(7)(b) and regulation 29 of the Companies Act. This is more than compliance — it’s about professional excellence.
Master Industry Standards: Learn to apply critical standards of conduct, maintain quality control, and use the International Standard on Review Engagements (ISRE) 2400 effectively in your reviews.
Boost Your Earnings: Specialize in a field that not only increases your value as a professional but also offers the potential for higher fees and better profit margins due to the specialized nature of the work.
What You Need to Know About the License
Under the Companies Act, 71 of 2008, some businesses need their financial statements audited, while others require an independent review. This license empowers you to provide an authoritative opinion on financial statements through reviews conducted according to the International Standard on Review Engagements 2400.
Pricing and Refunds
License Fee: R2,500.00
Annual Renewal: Starting from R550.00
Important: Make sure you meet the product requirements before purchasing, as no refunds are issued for incorrect purchases. For any uncertainties, please reach out to academy@saiba.org.za. Note that this license is not part of any subscription package.
Comprehensive Study Material and Assessments
The license package includes extensive study materials to prepare you for the assessment, covering essential topics like:
Introductions and Definitions - Get to grips with the key terms and concepts.
Ethics and Quality - Understand the ethical considerations and quality standards.
Accepting the Client - Learn how to evaluate potential engagements.
Performing the Engagement - Dive into the practical aspects of conducting reviews.
Completing the Review - Finalize your review process effectively.
Issuing a Report - Master the art of writing meaningful and clear reports.
Assessment Includes
Multiple-choice questions to test your knowledge.
Essay assessments to evaluate your understanding and application of the material.
Entry Requirements
To enroll, you need:
A BAP(SA) designation from CIBA or an equivalent qualification at NQF level 7, plus SAIBA Associate membership.
At least three years of general accountancy experience.
If you don’t have the BAP(SA) designation, explore how you can qualify through CIBA’s competency recognition routes. Learn more.
CPD Credits
Completing this license contributes 25 hours towards your Continuing Professional Development (CPD). According to CIBA's CPD policy, 6.25 hours (25%) can be allocated towards your accounting CPD hours, ensuring you keep up with the diverse skills needed in your profession.