AUD CPA Exam: Determining the Appropriate Form and Content of an Accountant’s Report for an Examination or Review for an Attestation Engagement

Introduction

Overview of Attestation Engagements

Definition and Purpose of Attestation Engagements

In this article, we’ll cover determining the appropriate form and content of an accountant’s report for an examination or review for an attestation engagement. Attestation engagements are a category of services provided by certified public accountants (CPAs) wherein the practitioner issues a report on a subject matter, or an assertion about a subject matter, that is the responsibility of another party. The primary objective of these engagements is to enhance the reliability of the information presented by a client, thereby increasing the confidence of intended users in that information.

These engagements are broader than audits, covering a variety of subject matters including, but not limited to, financial information, internal controls, and compliance with regulations. The key characteristic of attestation engagements is the issuance of a formal, written conclusion in the form of an accountant’s report, which provides assurance, limited or otherwise, on the information being attested to.

Types of Attestation Engagements: Examination, Review, Agreed-Upon Procedures

Attestation engagements can be classified into three primary types, each varying in the level of assurance provided and the nature of the procedures performed:

1. Examination Engagements:
   • An examination is the most comprehensive type of attestation engagement. It provides the highest level of assurance, similar to an audit, and involves extensive procedures to obtain sufficient evidence to express an opinion on whether the subject matter conforms with the criteria in all material respects.
2. Review Engagements:
   • A review provides a moderate level of assurance, less than that of an examination. The procedures involved are limited primarily to inquiries and analytical procedures, and the CPA provides a conclusion on the basis of this limited evidence. The conclusion is typically expressed in the form of negative assurance, indicating that nothing has come to the CPA’s attention to suggest that the subject matter does not conform with the criteria.
3. Agreed-Upon Procedures Engagements:
   • In an agreed-upon procedures engagement, the CPA performs specific procedures that have been agreed upon by the client and any relevant third parties. Unlike examinations or reviews, no opinion or assurance is provided by the CPA. Instead, the report simply describes the procedures performed and the findings observed, allowing users to draw their own conclusions based on the report.

Importance of the Accountant’s Report

The Role of the Accountant’s Report in an Attestation Engagement

The accountant’s report is the cornerstone of any attestation engagement. It serves as the formal communication of the CPA’s findings and conclusions based on the procedures performed. The report’s structure and content provide clarity and transparency, allowing users of the report to understand the nature and extent of the engagement, as well as the level of assurance provided.

For examination and review engagements, the accountant’s report concludes on whether the subject matter conforms with the applicable criteria, such as generally accepted accounting principles (GAAP) or other regulatory standards. In agreed-upon procedures engagements, the report details the specific procedures performed and the results, but does not provide an overall conclusion or assurance.

Legal and Regulatory Requirements Guiding the Report’s Content and Form

The content and form of the accountant’s report are not arbitrary; they are governed by a framework of professional standards and regulatory requirements designed to ensure consistency, reliability, and transparency in reporting. The most relevant standards include:

• Statements on Standards for Attestation Engagements (SSAE): Issued by the AICPA, these standards outline the procedures and reporting requirements for all types of attestation engagements.
• Statements on Standards for Accounting and Review Services (SSARS): These standards apply to review engagements and other non-audit services.
• Public Company Accounting Oversight Board (PCAOB) Standards: These standards are applicable to auditors of public companies and outline the specific requirements for reporting on attestation engagements involving public entities.

Adherence to these standards is critical not only for compliance purposes but also for maintaining the integrity and credibility of the CPA profession. Failure to comply with these requirements can result in legal consequences, damage to professional reputation, and loss of client trust.

The accountant’s report plays a vital role in attestation engagements by providing the necessary assurance or findings that stakeholders rely on to make informed decisions. Its form and content are meticulously structured to align with professional and regulatory standards, ensuring that the information presented is both reliable and actionable.

Understanding the Different Types of Attestation Engagements

Examination Engagement

Definition and Objectives

An examination engagement is a type of attestation service where the CPA conducts a comprehensive and in-depth evaluation of a subject matter to express an opinion on its conformity with specified criteria, such as generally accepted accounting principles (GAAP) or regulatory standards. The objective of an examination is to provide a high level of assurance—similar to that of an audit—by obtaining sufficient and appropriate evidence through rigorous testing and analysis.

In an examination, the CPA thoroughly assesses the subject matter, performing detailed procedures that include inspecting documents, confirming information with third parties, and testing internal controls, among others. The outcome of an examination engagement is an opinion that positively asserts whether the subject matter is presented fairly in all material respects, according to the applicable criteria.

Situations Where an Examination Engagement Is Appropriate

Examination engagements are appropriate in scenarios where stakeholders require a high level of assurance and confidence in the information being presented. These engagements are typically used when the subject matter is of significant importance and involves substantial risk or when external parties, such as investors, creditors, or regulators, need reliable, detailed information to make critical decisions.

Examples of situations where an examination engagement might be appropriate include:

• Audits of financial statements for public or private companies where investors and creditors rely heavily on the accuracy of the financial information.
• Compliance examinations where an organization’s adherence to specific laws, regulations, or contractual obligations needs to be thoroughly verified.
• Internal control examinations where management or external parties require assurance that the controls in place are effective in mitigating risks.

Review Engagement

Definition and Objectives

A review engagement is a type of attestation service that provides a moderate level of assurance, significantly less than that of an examination. The primary objective of a review is to determine whether any material modifications should be made to the subject matter for it to conform to the relevant criteria. Unlike an examination, the CPA performs limited procedures, which mainly involve making inquiries of management and performing analytical procedures rather than extensive testing.

The conclusion reached in a review engagement is expressed in the form of negative assurance, meaning that the CPA states that nothing has come to their attention that causes them to believe that the subject matter does not conform to the applicable criteria. This type of engagement is less rigorous and therefore less costly and time-consuming than an examination.

Situations Where a Review Engagement Is Appropriate

Review engagements are suitable when stakeholders need some level of assurance but do not require the high level of confidence that an examination provides. These engagements are often chosen in situations where the cost and effort of an examination are not justified, but where some assurance is still necessary to support decision-making.

Examples of situations where a review engagement might be appropriate include:

• Interim financial statement reviews for companies that want to provide assurance to investors or lenders without the need for a full audit.
• Smaller entities or non-profits where stakeholders are comfortable with a moderate level of assurance due to lower risk or smaller scale operations.
• Preliminary financial information provided during mergers or acquisitions, where full audits may not yet be necessary, but some assurance is needed to proceed with negotiations.

Comparison Between Examination and Review Engagements

Differences in Scope, Level of Assurance, and Procedures

Examination and review engagements differ significantly in terms of scope, the level of assurance provided, and the procedures performed.

1. Scope:
   • Examination Engagement: The scope of an examination is broad and detailed, involving extensive procedures such as testing, verification, and confirmation. The CPA delves deeply into the subject matter to gather sufficient evidence to support their opinion.
   • Review Engagement: The scope of a review is more limited. The CPA primarily conducts inquiries and analytical procedures, focusing on identifying any material misstatements rather than obtaining exhaustive evidence.
2. Level of Assurance:
   • Examination Engagement: Provides a high level of assurance, with the CPA offering a positive opinion on whether the subject matter conforms to the relevant criteria. This level of assurance is comparable to that provided in an audit.
   • Review Engagement: Offers a moderate level of assurance, with the CPA providing negative assurance—stating that nothing has come to their attention indicating that the subject matter does not conform to the criteria.
3. Procedures:
   • Examination Engagement: Involves a wide range of procedures, including the inspection of records, observation of processes, external confirmations, and detailed testing of controls and transactions.
   • Review Engagement: The procedures are limited to inquiry and analytical review, focusing on identifying anomalies or areas that may require further investigation, but without the depth of testing found in an examination.

While both examination and review engagements serve the purpose of providing assurance, they do so at different levels and with varying degrees of rigor. An examination is appropriate when a high level of assurance is needed, involving thorough testing and analysis. In contrast, a review is suitable when only moderate assurance is required, with more limited procedures and a focus on identifying material misstatements.

General Requirements for an Accountant’s Report

Form and Structure

Standard Format and Structure for Reports

The format and structure of an accountant’s report are governed by professional standards to ensure clarity, consistency, and reliability. These standards provide a framework that guides how the report should be organized, ensuring that it effectively communicates the results of the engagement to the intended users. The standard format includes several key sections that must be presented in a specific order to maintain the report’s integrity and ensure it meets the necessary professional requirements.

A well-structured accountant’s report typically follows this standard format:

1. Title: Clearly indicates the type of engagement and the report’s subject matter.
2. Addressee: Specifies the intended recipient(s) of the report, such as the board of directors, shareholders, or other stakeholders.
3. Introductory Paragraph: Outlines the subject matter of the engagement, the criteria used, and the responsibilities of both the accountant and the client.
4. Scope Paragraph: Describes the nature and extent of the procedures performed during the engagement.
5. Conclusion/Opinion Paragraph: Provides the accountant’s conclusion or opinion based on the evidence obtained.
6. Signature: The accountant’s signature, indicating their responsibility for the report’s content.
7. Date: The date of the report, which typically reflects the date on which the accountant completed their procedures and formed their conclusion.

This standardized format ensures that all essential elements are included in the report and that users can easily navigate the document to find the information they need.

Components of an Accountant’s Report

An accountant’s report is composed of several key components, each serving a specific purpose in communicating the results of the engagement. These components include:

1. Title: The title should be specific and reflect the nature of the engagement, such as “Independent Accountant’s Report on Examination of Financial Statements” or “Accountant’s Review Report.” The title helps set the expectation for the level of assurance provided in the report.
2. Addressee: The addressee identifies who the report is intended for. This could be an individual, a group of stakeholders, or the public, depending on the nature of the engagement. Properly addressing the report ensures it reaches the appropriate audience.
3. Introductory Paragraph: This paragraph introduces the subject matter of the report and specifies the criteria against which the subject matter was evaluated. It also clarifies the responsibilities of the accountant and the client, establishing the context for the engagement.
4. Scope Paragraph: The scope paragraph outlines the procedures performed during the engagement. It describes the nature, timing, and extent of the work conducted and highlights any limitations or restrictions that were encountered. This section is critical as it provides the reader with an understanding of how the conclusion was reached.
5. Conclusion/Opinion Paragraph: This is the most critical part of the report, where the accountant expresses their conclusion or opinion based on the evidence gathered. In an examination engagement, this paragraph will contain a positive assurance, stating that the subject matter is presented fairly in all material respects. In a review engagement, it will provide negative assurance, indicating that nothing has come to the accountant’s attention that suggests a material misstatement.
6. Signature: The accountant’s signature is a formal acknowledgment of their responsibility for the report. It signifies that the accountant has conducted the engagement in accordance with professional standards and stands by the findings presented in the report.
7. Date: The date on the report is crucial as it indicates when the accountant completed their procedures. This is important because it provides context regarding the timeliness of the information presented and may impact its relevance to the users of the report.

Content Requirements

Elements Required in Every Report

To ensure that an accountant’s report meets professional and regulatory standards, certain elements must be included in every report. These elements provide the necessary structure and content to effectively communicate the results of the engagement.

1. Title: The title of the report must clearly indicate the nature of the engagement. It should be specific enough to distinguish between different types of services (e.g., “Independent Accountant’s Report on Financial Statements” vs. “Review Report on Interim Financial Information”).
2. Addressee: The report must specify who it is directed to, whether it is a specific individual, a governing body, or a broader audience. Properly addressing the report ensures it reaches the intended users and helps to define the scope of the engagement.
3. Introductory Paragraph: This paragraph must include:
   • A statement identifying the subject matter of the engagement.
   • A description of the criteria against which the subject matter was evaluated (e.g., GAAP, IFRS, regulatory requirements).
   • A clarification of the responsibilities of the accountant and the client, establishing who is responsible for the subject matter and who is responsible for the evaluation.
4. Scope Paragraph: The scope paragraph should describe:
   • The nature of the procedures performed, including any testing, inquiries, or analytical procedures.
   • The extent of the engagement, including any limitations or restrictions that may have impacted the procedures performed.
   • A statement confirming that the engagement was conducted in accordance with relevant professional standards (e.g., SSAE, SSARS).
5. Conclusion/Opinion Paragraph: This paragraph must clearly state the accountant’s conclusion or opinion based on the evidence obtained. In an examination engagement, this will be a positive assurance statement, while in a review engagement, it will be a negative assurance statement. The language used in this paragraph must be precise and unambiguous to avoid any misinterpretation by the report’s users.
6. Signature: The accountant’s signature must be included to authenticate the report. This signifies that the accountant takes responsibility for the content of the report and has adhered to all relevant professional standards in conducting the engagement.
7. Date: The report must include the date on which the accountant completed their procedures. This date is important as it indicates the currency of the information provided and may affect the report’s relevance to its users.

Incorporating these elements into every accountant’s report ensures that it meets the necessary professional and regulatory standards while effectively communicating the results of the engagement to the intended users.

Compliance with Professional Standards

Relevant Professional Standards (AICPA, PCAOB, GAO)

Accountants must adhere to specific professional standards when preparing reports for attestation engagements. These standards are established by authoritative bodies to ensure the consistency, reliability, and quality of the reports issued. Three primary organizations set the standards that guide accountants in their work:

1. American Institute of Certified Public Accountants (AICPA):
   • The AICPA is a leading professional organization for CPAs in the United States. It sets the ethical and auditing standards that CPAs must follow, including those for attestation engagements. The AICPA issues the Statements on Standards for Attestation Engagements (SSAE), which provide detailed guidance on how to conduct attestation services, including the form and content of the accountant’s report.
2. Public Company Accounting Oversight Board (PCAOB):
   • The PCAOB is a regulatory body established by the Sarbanes-Oxley Act of 2002 to oversee the audits of public companies. For accountants involved in the audit or attestation of public companies, adherence to PCAOB standards is mandatory. The PCAOB standards focus on ensuring that the reports issued by accountants are accurate, transparent, and useful to investors and other stakeholders in the public markets.
3. Government Accountability Office (GAO):
   • The GAO issues the Government Auditing Standards (GAS), commonly known as the “Yellow Book,” which apply to audits and attestation engagements involving government entities, programs, activities, and functions. Accountants working on engagements related to government entities must follow these standards to ensure that their reports meet the rigorous requirements of public sector accountability.

Importance of Following SSARS and SSAE

Two critical sets of standards issued by the AICPA—Statements on Standards for Accounting and Review Services (SSARS) and Statements on Standards for Attestation Engagements (SSAE)—play a vital role in guiding accountants through the process of preparing reports for different types of engagements.

1. Statements on Standards for Accounting and Review Services (SSARS):
   • SSARS applies specifically to accountants engaged in preparing and reporting on financial statements that are not subject to an audit, such as reviews and compilations. SSARS provides the framework for ensuring that these reports are prepared consistently and meet the necessary quality standards. Compliance with SSARS is crucial because it ensures that the accountant’s report accurately reflects the procedures performed and the level of assurance provided. For example, in a review engagement, SSARS dictates the format and content of the report, including the type of assurance (negative assurance) that can be provided.
2. Statements on Standards for Attestation Engagements (SSAE):
   • SSAE applies to a broader range of attestation engagements beyond financial statements, including compliance, performance, and other subject matter-specific attestations. These standards provide comprehensive guidance on conducting attestation engagements and the preparation of related reports. SSAE ensures that the reports are structured and worded in a way that accurately conveys the findings and conclusions of the engagement. Whether the engagement is an examination, review, or agreed-upon procedures, following SSAE ensures that the accountant’s report is both legally compliant and professionally sound.

The Importance of Compliance

Compliance with these professional standards is not optional; it is a fundamental requirement for ensuring that the accountant’s report is credible, reliable, and legally defensible. Adhering to AICPA, PCAOB, GAO, SSARS, and SSAE standards protects the integrity of the accounting profession and provides assurance to stakeholders that the information presented is trustworthy.

Failure to comply with these standards can have significant consequences, including:

• Legal and Regulatory Risks: Non-compliance can lead to legal penalties, sanctions, and damage to the accountant’s professional reputation.
• Credibility Issues: Stakeholders may lose confidence in the accountant’s work, leading to reputational damage and potential loss of business.
• Professional Discipline: Accountants who fail to comply with these standards may face disciplinary action from professional bodies, including suspension or revocation of their license to practice.

Following the relevant professional standards is essential for producing high-quality, reliable, and compliant accountant’s reports. These standards ensure that the report is properly structured, that the content accurately reflects the engagement’s findings, and that the users of the report can trust the information provided.

Specific Considerations for an Examination Engagement Report

Form and Content

Detailed Requirements for the Introductory, Scope, and Opinion Paragraphs

In an examination engagement report, the form and content are carefully structured to convey the results of the engagement clearly and comprehensively. Each paragraph within the report has a specific purpose and must adhere to detailed requirements to ensure that the report is both informative and compliant with professional standards.

1. Introductory Paragraph:
   • The introductory paragraph of an examination engagement report sets the stage for the entire document. It must include:
     • Identification of the Subject Matter: Clearly describe what is being examined, whether it is financial statements, compliance with regulations, or another subject matter.
     • Reference to the Criteria: Specify the criteria against which the subject matter is evaluated, such as generally accepted accounting principles (GAAP), regulatory requirements, or contractual agreements.
     • Responsibilities: Outline the responsibilities of both the entity being examined and the accountant. The entity is responsible for preparing the subject matter, while the accountant’s responsibility is to express an opinion based on the examination.
2. Scope Paragraph:
   • The scope paragraph describes the nature and extent of the work performed by the accountant. Key elements include:
     • Description of Procedures: Provide a detailed description of the procedures conducted during the examination, such as testing of evidence, evaluation of controls, and inspection of documents. This paragraph should convey that sufficient and appropriate evidence was obtained to provide a basis for the opinion.
     • Compliance with Standards: State that the engagement was conducted in accordance with relevant professional standards, such as the Statements on Standards for Attestation Engagements (SSAE). This assures the reader that the procedures performed meet the required quality and rigor.
3. Opinion Paragraph:
   • The opinion paragraph is the most critical part of the report, as it conveys the accountant’s conclusion based on the examination. Requirements for this paragraph include:
     • Expression of Opinion: Clearly state the accountant’s opinion on whether the subject matter is presented fairly, in all material respects, in accordance with the applicable criteria.
     • Unqualified Opinion: In cases where the accountant finds no material misstatements or issues, an unqualified (clean) opinion is issued, affirming that the subject matter conforms to the criteria.
     • Language Clarity: The opinion must be expressed in clear, unambiguous language to avoid any misunderstanding by the users of the report.

Requirements for Disclosures and Explanatory Language

In addition to the standard paragraphs, an examination engagement report may require additional disclosures and explanatory language to provide context or clarify certain aspects of the engagement. These include:

1. Disclosures:
   • Significant Accounting Policies: When applicable, disclose any significant accounting policies that impact the subject matter of the report. This helps users understand how specific items were treated in the examination.
   • Key Judgments and Estimates: If the examination involved significant judgments or estimates, these should be disclosed to provide transparency about areas of potential uncertainty or complexity.
2. Explanatory Language:
   • Emphasis-of-Matter Paragraphs: Used to draw attention to specific issues that are fundamental to understanding the subject matter, such as uncertainties or significant subsequent events. This paragraph does not modify the opinion but highlights important information for the reader.
   • Other-Matter Paragraphs: Included when the accountant needs to communicate matters that are not presented or disclosed in the subject matter but are relevant to the user’s understanding, such as related-party transactions or contingencies.

Including appropriate disclosures and explanatory language ensures that the report provides a complete and accurate representation of the subject matter, enhancing the user’s ability to make informed decisions based on the report.

Expressing an Opinion

Nature of the Opinion Expressed in an Examination Engagement

In an examination engagement, the opinion expressed by the accountant is intended to provide a high level of assurance regarding the subject matter. The nature of the opinion is typically one of the following:

1. Unqualified (Clean) Opinion:
   • Issued when the accountant concludes that the subject matter is presented fairly, in all material respects, in accordance with the applicable criteria. This is the most favorable opinion and indicates that no material misstatements were found during the examination.
2. Qualified Opinion:
   • Issued when the accountant finds that the subject matter is generally in conformity with the criteria, except for certain issues that are material but not pervasive. The qualified opinion identifies the specific areas of concern and explains the nature of the qualifications.
3. Adverse Opinion:
   • Issued when the accountant concludes that the subject matter is not presented fairly and that the misstatements identified are both material and pervasive. An adverse opinion indicates significant issues that undermine the reliability of the subject matter.
4. Disclaimer of Opinion:
   • Issued when the accountant is unable to obtain sufficient and appropriate evidence to form an opinion on the subject matter. A disclaimer of opinion may be necessary if there are significant limitations on the scope of the engagement or if the accountant encounters significant uncertainties.

Situations Requiring a Modified Opinion (Qualified, Adverse, or Disclaimer of Opinion)

There are specific situations where the accountant may need to issue a modified opinion, including:

1. Material Misstatements:
   • If the accountant discovers material misstatements that impact the fairness of the subject matter but are not pervasive, a qualified opinion is appropriate. If the misstatements are both material and pervasive, an adverse opinion is required.
2. Scope Limitations:
   • When the accountant is unable to perform all the necessary procedures due to restrictions imposed by the client or other circumstances, a qualified opinion or a disclaimer of opinion may be issued, depending on the significance of the limitation.
3. Uncertainties:
   • Significant uncertainties, such as pending litigation or unresolved contingencies, may lead to a qualified opinion or a disclaimer of opinion if they significantly impact the accountant’s ability to form a conclusive opinion.
4. Inconsistencies or Lack of Conformity:
   • If the subject matter does not conform to the relevant criteria or there are inconsistencies in the information provided, the accountant may issue a qualified or adverse opinion, depending on the severity of the issue.

In all cases, when issuing a modified opinion, the accountant must clearly explain the reasons for the modification, the nature of the issues encountered, and their impact on the subject matter. This ensures that the users of the report are fully informed about any limitations or concerns that affect the reliability of the information presented.

Specific Considerations for a Review Engagement Report

Form and Content

Detailed Requirements for the Introductory, Scope, and Conclusion Paragraphs

In a review engagement report, the form and content are structured to reflect the nature of the review, which provides limited assurance. Unlike an examination, a review involves fewer procedures and offers a lower level of assurance, which must be clearly communicated in the report. The key paragraphs in a review engagement report are the introductory, scope, and conclusion paragraphs, each with specific requirements.

1. Introductory Paragraph:
   • The introductory paragraph sets the context for the review engagement. It should include:
     • Identification of the Subject Matter: Clearly state what is being reviewed, such as interim financial statements or specific financial data.
     • Reference to the Criteria: Specify the criteria against which the subject matter is being reviewed, such as generally accepted accounting principles (GAAP).
     • Responsibilities: Outline the responsibilities of both the entity and the accountant. The entity is responsible for the preparation and presentation of the subject matter, while the accountant’s responsibility is to conduct the review and provide a conclusion based on the procedures performed.
2. Scope Paragraph:
   • The scope paragraph describes the nature and extent of the procedures performed during the review. Key elements include:
     • Description of Procedures: Outline the limited procedures conducted, such as inquiries of management and analytical procedures. Unlike an examination, a review does not involve detailed testing or confirmation of information.
     • Compliance with Standards: State that the review was conducted in accordance with relevant professional standards, such as the Statements on Standards for Accounting and Review Services (SSARS). This assures the reader that the procedures performed are consistent with accepted practices for a review engagement.
3. Conclusion Paragraph:
   • The conclusion paragraph provides the accountant’s conclusion based on the limited procedures performed. Requirements for this paragraph include:
     • Expression of Limited Assurance: The accountant should provide a conclusion that offers negative assurance, stating that nothing has come to their attention that causes them to believe that the subject matter is not presented fairly, in all material respects, in accordance with the applicable criteria.
     • Language Clarity: The language used in the conclusion must be precise and reflect the limited nature of the assurance provided. This distinction is crucial to avoid any misinterpretation by the users of the report.

Language to Be Used in a Review Report

The language used in a review report must clearly differentiate the review from an audit or examination, emphasizing the limited scope and assurance. Key phrases typically include:

• Introductory Paragraph: “We have reviewed the accompanying [subject matter], which comprises [specific details of the subject matter].”
• Scope Paragraph: “A review includes primarily applying analytical procedures to management’s financial data and making inquiries of company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the [subject matter]. Accordingly, we do not express such an opinion.”
• Conclusion Paragraph: “Based on our review, we are not aware of any material modifications that should be made to the [subject matter] in order for it to be in conformity with [applicable criteria].”

This language clearly communicates the nature of the engagement and the level of assurance provided, ensuring that users understand the limitations of a review.

Providing Limited Assurance

Nature of the Assurance Provided in a Review Engagement

A review engagement provides limited assurance, which is significantly less than the high level of assurance provided by an audit or examination. In a review, the accountant’s conclusion is based primarily on inquiries and analytical procedures, without the extensive verification and testing required in an audit.

The limited assurance in a review engagement is expressed as negative assurance. This means that the accountant states that nothing has come to their attention that would indicate that the subject matter is materially misstated. The language used in the report reflects this level of assurance, indicating that the review was less comprehensive than an audit and that no opinion is being expressed on the overall fairness of the subject matter.

Situations Requiring Additional Paragraphs (Emphasis-of-Matter, Other-Matter)

In certain situations, a review report may need to include additional paragraphs to provide clarity or highlight specific issues that are important for the users of the report to understand. These additional paragraphs include:

1. Emphasis-of-Matter Paragraphs:
   • An emphasis-of-matter paragraph is used to draw attention to a specific issue that is fundamental to the understanding of the subject matter, such as significant accounting policies, uncertainties, or subsequent events. This paragraph does not modify the conclusion but provides additional context that is critical for users to consider.
   • Example: “We draw attention to Note X in the [subject matter], which describes [specific issue]. Our conclusion is not modified in respect of this matter.”
2. Other-Matter Paragraphs:
   • An other-matter paragraph is included when the accountant needs to communicate matters that are not presented or disclosed in the subject matter but are relevant to the users’ understanding of the review. This could include information about related-party transactions, contingencies, or significant changes in accounting principles.
   • Example: “Our review was conducted for the purpose of expressing a conclusion on the [subject matter]. The supplementary information contained in [specific section] is presented for purposes of additional analysis and is not a required part of the [subject matter].”

These additional paragraphs ensure that the report provides a complete and transparent representation of the subject matter, addressing any significant issues that may affect the users’ understanding or decision-making.

A review engagement report is carefully structured to reflect the limited assurance provided, with specific language that communicates the nature of the review and the accountant’s conclusion. Additional paragraphs may be included to highlight important issues or provide further context, ensuring that the report is both informative and compliant with professional standards.

Special Reports and Modifications

Modifications to the Standard Report

Circumstances That Lead to Modifications

In certain situations, the standard accountant’s report must be modified to address specific issues encountered during the engagement. These modifications are necessary when the accountant identifies matters that affect the overall reliability or presentation of the financial statements. The primary circumstances that lead to modifications in the report include:

1. Scope Limitations:
   • A scope limitation occurs when the accountant is unable to obtain sufficient appropriate evidence to form a conclusion or opinion on the subject matter. This could be due to restrictions imposed by the client, limitations in the availability of data, or other circumstances beyond the accountant’s control. When a scope limitation is significant, it may require the accountant to issue a qualified opinion or, in extreme cases, disclaim an opinion entirely.
2. Departures from GAAP:
   • If the financial statements or subject matter do not conform to generally accepted accounting principles (GAAP) or other relevant criteria, and the departure is material and pervasive, the accountant may need to issue an adverse opinion. If the departure is material but not pervasive, a qualified opinion may be appropriate.
3. Uncertainties:
   • Significant uncertainties, such as pending litigation or events that may impact the entity’s financial position, may require the accountant to modify the report. The modification could involve adding an emphasis-of-matter paragraph to highlight the uncertainty, or issuing a qualified opinion if the uncertainty is not adequately disclosed.

How to Modify the Report and Examples of Modified Language

When a modification to the standard report is necessary, the accountant must clearly articulate the nature of the issue and its impact on the financial statements. The report should include specific language that reflects the modification, ensuring that the users of the report are fully informed of the situation.

1. Qualified Opinion:
   • Example: “In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements present fairly, in all material respects, the financial position of [Entity Name] as of [Date], in accordance with [applicable criteria].”
2. Adverse Opinion:
   • Example: “In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion paragraph, the financial statements do not present fairly the financial position of [Entity Name] as of [Date], in accordance with [applicable criteria].”
3. Disclaimer of Opinion:
   • Example: “Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the financial statements.”

Each modification requires a “Basis for [Type of Opinion]” paragraph that provides a detailed explanation of the issue leading to the modification. This ensures transparency and provides the report’s users with the context necessary to understand the modification.

Emphasis-of-Matter and Other-Matter Paragraphs

When and How to Include These Paragraphs

Emphasis-of-matter and other-matter paragraphs are used to draw attention to specific issues that are important for understanding the financial statements but do not affect the accountant’s overall conclusion or opinion. These paragraphs are included in the report when additional context or disclosure is necessary to ensure that the users of the report fully understand significant matters related to the financial statements.

1. Emphasis-of-Matter Paragraph:
   • An emphasis-of-matter paragraph is included when there is a need to highlight information that is already disclosed in the financial statements, such as significant accounting policies, going concern issues, or subsequent events. This paragraph does not modify the opinion but draws attention to matters that are fundamental to understanding the financial statements.
   • Example: “We draw attention to Note X in the financial statements, which describes [specific issue]. Our opinion is not modified in respect of this matter.”
2. Other-Matter Paragraph:
   • An other-matter paragraph is used to communicate issues that are not disclosed in the financial statements but are relevant to the user’s understanding of the engagement, such as the reporting framework used or the intended purpose of the report. This paragraph can also be used to address matters related to the scope of the engagement or the accountant’s responsibilities.
   • Example: “Our report is intended solely for the information and use of [specific users] and is not intended to be and should not be used by anyone other than these specified parties.”

Impact on the User’s Understanding of the Financial Statements

Including emphasis-of-matter and other-matter paragraphs enhances the transparency of the report by providing additional context that may impact the user’s interpretation of the financial statements. These paragraphs help users identify and understand significant issues or limitations that could affect their decision-making. By clearly communicating these matters, the accountant ensures that the report is both informative and useful, providing the necessary insights for stakeholders to make informed judgments.

Other Special Considerations

Reporting on Internal Control Deficiencies

When the engagement involves an examination of internal controls, the accountant may need to report on any deficiencies identified during the process. Internal control deficiencies can range from minor issues to significant weaknesses that could impact the reliability of the financial statements.

1. Significant Deficiencies and Material Weaknesses:
   • If significant deficiencies or material weaknesses in internal controls are identified, they must be disclosed in the report. The accountant should describe the nature of the deficiencies, their potential impact, and any recommendations for remediation.
2. Reporting Format:
   • The report may include a separate section or an additional paragraph addressing internal control deficiencies. The language used should be clear and precise, explaining the implications of the deficiencies for the entity’s financial reporting.

Reports on Compliance with Laws and Regulations

In some engagements, the accountant is required to assess the entity’s compliance with specific laws and regulations. When non-compliance is identified, it must be reported in the engagement report.

1. Nature of Non-Compliance:
   • The report should describe the nature and extent of the non-compliance, including the specific laws or regulations that have been breached and the potential consequences for the entity.
2. Implications for the Financial Statements:
   • The accountant should discuss how the non-compliance affects the financial statements or the overall conclusion of the engagement. If the non-compliance is material, it may necessitate a modification to the report or the inclusion of an emphasis-of-matter or other-matter paragraph.

By addressing internal control deficiencies and compliance with laws and regulations, the accountant’s report provides a comprehensive overview of the entity’s financial health and operational integrity, ensuring that all relevant issues are transparently communicated to stakeholders.

Practical Examples and Scenarios

Example of an Examination Report

Walkthrough of a Sample Examination Report

An examination report provides the highest level of assurance and is similar in format to an audit report. Let’s walk through a sample examination report, highlighting the key components and the required language.

Title:

• “Independent Accountant’s Report on Examination of Financial Statements”

Addressee:

• “To the Board of Directors and Shareholders of XYZ Corporation”

Introductory Paragraph:

• “We have examined the accompanying financial statements of XYZ Corporation, which comprise the balance sheet as of December 31, 20XX, and the related statements of income, changes in equity, and cash flows for the year then ended, and the related notes to the financial statements.”

Scope Paragraph:

• “Our examination was conducted in accordance with the Standards for Attestation Engagements established by the American Institute of Certified Public Accountants (AICPA). Those standards require that we plan and perform the examination to obtain reasonable assurance about whether the financial statements are free from material misstatement. An examination involves performing procedures to obtain evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. We believe that the evidence we have obtained is sufficient and appropriate to provide a reasonable basis for our opinion.”

Opinion Paragraph:

• “In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Corporation as of December 31, 20XX, and the results of its operations and its cash flows for the year then ended, in accordance with generally accepted accounting principles.”

Signature:

• “John Doe, CPA”

Date:

• “March 15, 20XX”

Explanation:
This report follows the standard format, providing an unqualified opinion that the financial statements are presented fairly in all material respects. It includes all the necessary components, with clear and precise language that aligns with professional standards.

Example of a Review Report

Walkthrough of a Sample Review Report

A review report provides limited assurance and involves less extensive procedures than an examination. Let’s walk through a sample review report, focusing on the differences in structure and language.

Title:

• “Independent Accountant’s Review Report on Financial Statements”

Addressee:

• “To the Management of ABC Company”

Introductory Paragraph:

• “We have reviewed the accompanying financial statements of ABC Company, which comprise the balance sheet as of June 30, 20XX, and the related statements of income, changes in equity, and cash flows for the six months then ended, and the related notes to the financial statements. A review includes primarily applying analytical procedures to management’s financial data and making inquiries of company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, we do not express such an opinion.”

Scope Paragraph:

• “We conducted our review in accordance with the Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. These standards require that we perform procedures to obtain limited assurance that there are no material modifications that should be made to the financial statements. We believe that our review provides a reasonable basis for our conclusion.”

Conclusion Paragraph:

• “Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles.”

Signature:

• “Jane Smith, CPA”

Date:

• “August 5, 20XX”

Explanation:
This review report provides limited assurance, as indicated by the language used in the introductory and conclusion paragraphs. The scope of the engagement is clearly less extensive than an examination, and this is reflected in the language that conveys negative assurance, rather than a positive opinion.

Discussion of Common Issues

Common Pitfalls and How to Avoid Them

When preparing examination and review reports, accountants must be aware of common pitfalls that can undermine the clarity, accuracy, and compliance of the report. Some of these pitfalls include:

1. Ambiguous Language:
   • Using unclear or ambiguous language can lead to misunderstandings about the level of assurance provided. To avoid this, ensure that the wording in the report accurately reflects the nature of the engagement, whether it is an examination, review, or another type of attestation.
2. Inadequate Disclosure:
   • Failing to adequately disclose significant matters, such as uncertainties or scope limitations, can mislead users of the report. Always include the necessary disclosures, such as emphasis-of-matter or other-matter paragraphs, to provide complete and transparent information.
3. Improper Use of Modifications:
   • Modifying a report without a clear basis or failing to appropriately modify a report when necessary can result in non-compliance with professional standards. Ensure that any modifications to the report are well-justified and clearly explained in the appropriate sections.

Best Practices for Ensuring Clarity and Compliance

To ensure that reports are clear, compliant, and useful to their intended users, accountants should follow these best practices:

1. Adhere to Professional Standards:
   • Always follow the relevant professional standards, such as those issued by the AICPA, PCAOB, or GAO. These standards provide the framework for conducting engagements and preparing reports.
2. Use Clear and Concise Language:
   • The language used in the report should be precise, unambiguous, and easily understood by the intended audience. Avoid jargon or technical terms that may not be familiar to all users.
3. Include All Required Components:
   • Ensure that all required components of the report, such as the title, addressee, scope paragraph, and conclusion, are included and properly formatted. This helps maintain consistency and ensures that the report meets the necessary standards.
4. Review and Cross-Check:
   • Before finalizing the report, review it carefully to ensure that all information is accurate and consistent with the findings of the engagement. Cross-check the report against the work performed to verify that all relevant issues have been addressed.

By following these best practices, accountants can produce reports that are not only compliant with professional standards but also clear, informative, and useful to the users who rely on them for decision-making.

Conclusion

Summary of Key Points

Recap of the Key Differences Between Examination and Review Reports

Examination and review reports serve distinct purposes and provide different levels of assurance to stakeholders. An examination report offers the highest level of assurance, comparable to an audit, with the accountant expressing a positive opinion on the subject matter’s conformity to specified criteria. This report involves extensive procedures, including testing and verification, to gather sufficient evidence for the opinion.

In contrast, a review report provides limited assurance, expressed as negative assurance, where the accountant states that nothing has come to their attention that would indicate a material misstatement. The procedures in a review are more limited, focusing on inquiries and analytical review rather than extensive testing.

Understanding these differences is crucial for accountants to ensure that they select the appropriate type of engagement and report, depending on the needs of the client and the expectations of the report’s users.

Importance of Adhering to Standards and Guidelines

Adhering to professional standards and guidelines, such as those issued by the AICPA, PCAOB, and GAO, is essential for producing high-quality reports that meet the legal and regulatory requirements. These standards provide a structured framework for conducting engagements and ensure consistency, transparency, and reliability in the reporting process.

Compliance with standards such as the Statements on Standards for Attestation Engagements (SSAE) and Statements on Standards for Accounting and Review Services (SSARS) is not just a matter of professional integrity—it is also a legal obligation that helps protect the accountant’s reputation and the credibility of the financial reporting process.

Final Thoughts

The Accountant’s Responsibility in Ensuring Accurate and Compliant Reporting

Accountants have a significant responsibility in ensuring that the reports they prepare are accurate, clear, and compliant with all relevant standards. This responsibility involves not only conducting thorough and diligent engagements but also carefully crafting reports that effectively communicate the results of those engagements to stakeholders.

Accurate and compliant reporting is fundamental to maintaining the trust and confidence of clients, investors, regulators, and other stakeholders who rely on these reports to make informed decisions. Any errors, omissions, or non-compliance can have serious consequences, including legal penalties, loss of professional standing, and damage to the reputation of both the accountant and the client.

The Impact of a Well-Prepared Report on Stakeholders

A well-prepared report serves as a critical tool for stakeholders, providing the necessary information to assess the financial health and performance of an entity. Whether it is an examination report offering a high level of assurance or a review report providing limited assurance, the clarity, accuracy, and transparency of the report directly impact stakeholders’ ability to make sound decisions.

Moreover, a report that is meticulously prepared in accordance with professional standards enhances the credibility of the financial information presented, fostering trust between the entity and its stakeholders. This trust is essential for maintaining strong relationships with investors, creditors, and regulators, and for ensuring the long-term success and sustainability of the entity.

In conclusion, the preparation of examination and review reports is a critical aspect of the accounting profession. By adhering to established standards and guidelines, and by focusing on accuracy, clarity, and transparency, accountants can produce reports that not only meet the required legal and regulatory criteria but also provide invaluable insights to stakeholders, supporting their decision-making processes and contributing to the overall stability and integrity of the financial markets.