ISRE 2410: Review of Interim Financial Information

International Standard on Review Engagements (ISRE) 2410, “Review of Interim Financial Information Performed by the Independent Auditor of the Entity,” provides a framework for these engagements. This standard outlines the professional responsibilities for an independent auditor already familiar with an entity through a full audit when they are asked to review interim financial statements. Such information can be a complete or condensed set of financial statements for a period shorter than a full financial year. This engagement is a review, not a full audit, and therefore involves different procedures and levels of assurance.

Objective and General Principles of a Review

The objective of a review under ISRE 2410 is to allow the auditor to state whether anything has come to their attention that would lead them to believe the interim financial information is not prepared, in all material respects, according to the applicable financial reporting framework. This conclusion is expressed as a form of “negative assurance.” It informs the reader that nothing wrong was found, which is different from the “positive assurance” provided in a full audit, where the auditor explicitly states that the financial statements are fairly presented.

A review engagement does not involve the extensive testing required for an audit and is not designed to provide the same level of confidence. The risk of an inappropriate conclusion is reduced to a moderate level, whereas in an audit, it is reduced to a low level. The procedures are less rigorous, focusing mainly on inquiries and analytical work rather than detailed verification of transactions and balances.

Throughout the engagement, the auditor must adhere to ethical principles, particularly independence from the entity. This ensures the auditor’s conclusion is unbiased and credible. The auditor is also required to apply professional judgment in planning and performing the review, deciding on the nature, timing, and extent of procedures. Professional skepticism is maintained to remain alert for conditions that may indicate a material misstatement.

Agreeing the Terms of the Engagement

Before accepting a review engagement, the auditor must ensure certain preconditions are met. Management must formally acknowledge its responsibility for designing and maintaining internal controls relevant to the preparation of the interim financial information. They must also accept their duty to prepare the financial information in accordance with the applicable financial reporting framework and to provide the auditor with unrestricted access to all necessary information and personnel.

These agreements are formalized in an engagement letter. ISRE 2410 specifies that this letter should clearly outline the objective and scope of the review. The letter details the responsibilities of both the auditor and management, clarifying the roles each party will play during the engagement.

The engagement letter also describes the anticipated form and content of the final report that will be issued. This includes stating that the engagement is not an audit and that an audit opinion will not be expressed.

Performing the Review Procedures

The auditor relies heavily on making inquiries and performing analytical procedures to identify potential material misstatements. Inquiries are directed primarily toward individuals responsible for financial and accounting matters within the entity. The auditor will ask about the consistency of accounting policies applied, any significant transactions or events, and management’s knowledge of any actual or suspected fraud. Questions may also cover the status of uncorrected misstatements from prior periods and any significant changes in commitments or contingent liabilities.

A review includes evaluating management’s assessment of the entity’s ability to continue as a going concern, which is the assumption it will remain in operation for the foreseeable future. The auditor’s inquiries specifically address this area, seeking to identify any events or conditions that might cast significant doubt on this assumption.

Analytical procedures are used to identify unusual fluctuations or relationships in the financial data that may indicate a problem. This involves comparing the interim financial information to data from comparable prior periods, anticipated results from budgets or forecasts, and relevant non-financial information. The auditor also obtains a sufficient understanding of the entity and its environment, including its internal control, to identify areas where material misstatements are likely to arise.

Evaluating Misstatements and Communication

After performing inquiries and analytical procedures, the auditor accumulates any identified misstatements, other than those that are clearly trivial. The auditor then evaluates these misstatements, both individually and in aggregate, to determine if they necessitate a material modification to the interim financial information. This judgment is made in the context of the applicable financial reporting framework and the overall presentation of the financial data.

The auditor must communicate any identified misstatements to the appropriate level of management on a timely basis. If management does not respond appropriately, the auditor considers the implications for the review report.

Significant matters arising during the review must also be communicated to those charged with governance, such as the board of directors or audit committee. This includes any material weaknesses in internal control related to the preparation of interim financial information that the auditor may have identified.

The Auditor’s Review Report

The auditor’s review report has a prescribed structure under ISRE 2410. The report begins with a title that clearly indicates it is a “Report of Review of Interim Financial Information.” It is addressed to the appropriate party, typically the shareholders or the board of directors, and an introductory paragraph identifies the specific interim financial information that was reviewed.

The report contains separate paragraphs outlining the responsibilities of management and the auditor. The management’s responsibility paragraph affirms their role in preparing the interim financial information. The auditor’s responsibility paragraph states that the review was conducted in accordance with ISRE 2410, describing the nature of a review and noting its scope is less than an audit.

The conclusion paragraph provides the negative assurance. For an unmodified report, the wording states that, based on the review, nothing has come to the auditor’s attention that causes them to believe the interim financial information is not prepared, in all material respects, in accordance with the applicable financial reporting framework. If the auditor identifies a material departure from the framework or faces a scope limitation, the conclusion must be modified to a qualified or adverse conclusion, or in some cases, a disclaimer of conclusion.