TRANSLATION Montreal, April 11, 2011 Technical Director International Auditing and Assurance Standards Board 545 Fifth Avenue, 14 th Floor New York, New York 10017 USA Dear Madam/Sir: Please find enclosed the comments of the Exposure Draft Review Committee of the Ordre des comptables agréés du Québec on the Exposure Draft entitled ISRE 2400 (Revised), Engagements to Review Historical Financial Statements. Please note that neither the Ordre des comptables agréés du Québec nor any of the persons involved in preparing the comments shall have any liability in relation to their use and no guarantee whatsoever shall be provided regarding these comments, as specified in the following disclaimer. We will also send you a copy of the English translation of our comments. Yours truly, Annie Smargiassi, CA Secretary to the Exposure Draft Review Committee Encl.: Disclaimer and comments c. c. The Canadian Auditing and Assurance Standards Board (AASB)
DISCLAIMER Subject to the conditions described herein, the documents prepared by the Exposure Draft Review Committee of the Ordre des comptables agréés du Québec (the Ordre), hereinafter referred to as the "comments," provide the opinion of members on statements of principles, documents for comment, associates' drafts and final exposure drafts published by the CICA, Accounting Standards Board, Auditing and Assurance Standards Board, Public Sector Accounting Board, Risk Management and Governance Board and by other organizations. The comments submitted by the Committee should not be relied upon as a substitute for engagements entrusted to professionals with specialized knowledge in their field. It is important to note that the legislation, standards and rules on which the comments are based may change at any time and that, in some cases, the comments may be controversial. Neither the Ordre nor any person involved in preparing the comments shall have any liability in relation to their use and no guarantee whatsoever shall be provided regarding these comments. The comments provided are not binding on the members of the Exposure Draft Review Committee, the Ordre or the Office of the Syndic in particular. Users of the comments shall take full responsibility for, and assume all risks relating to, the use of the comments. They agree to release the Ordre from any claim for damages that could result from a decision they made based on these comments. They also agree not to mention the comments in the opinions they express or the positions they take.
COMMENTS OF THE EXPOSURE DRAFT REVIEW COMMITTEE OF THE ORDRE DES COMPTABLES AGRÉÉS DU QUÉBEC ON THE EXPOSURE DRAFT ENTITLED ISRE 2400 (REVISED), ENGAGEMENTS TO REVIEW HISTORICAL FINANCIAL STATEMENTS TERMS OF REFERENCE OF THE COMMITTEE The terms of reference of the Exposure Draft Review Committee of the Ordre des comptables agréés du Québec are to collect and channel the views of practitioners in public practice and members in business, industry, government and education, as well as those of other persons working in related areas of expertise. For each exposure draft or other document reviewed, the Committee members share the results of their analysis. The comments below reflect the views expressed, and unless otherwise specified, all of the Committee members agree on these comments. The Ordre has not acted upon and is not responsible for the comments expressed by the Committee. GENERAL COMMENTS In the members opinion, the revised ISRE 2400 is well written overall and clearly reflects the expectations of users of financial statements that include a review engagement report. The proposals in the ISRE are consistent with best review engagement practices currently in place in Canada. However, as explained in detail in the responses to the questions below, the terminology used to describe the results of the review work, in both the proposed standard and the review report, is problematic and could blur the distinction between a review and an audit.
QUESTIONS 1. Do respondents who are users or preparers of financial statements believe the proposed ISRE will result in a review engagement that is meaningful? Yes, members believe that the proposed ISRE will result in a meaningful review engagement. 2. Do respondents who are practitioners believe that proposed ISRE 2400 will result in engagements that can be understood and performed by practitioners in a cost-effective manner in a way that clearly distinguishes the engagement from an audit? Yes, members believe that proposed ISRE 2400 will result in engagements that can be understood and performed by practitioners in a cost-effective manner in a way that clearly distinguishes a review from an audit. 3. Do respondents believe that the objectives stated in the proposed ISRE appropriately describe the expected outcome of the practitioner s work in a review engagement, and the means by which the objectives are to be achieved? Is there any wording in the objectives that might have unintended consequences, or that may blur understanding of the difference between a review and an audit? No, members do not believe that the objectives stated appropriately describe the expected outcome of the practitioner s review work. They believe that the terminology used is confusing and may blur the distinction between a review and an audit. Paragraph 14(a) of the revised standard refers to éléments probants obtenus (evidence obtained). The expression éléments probants (audit evidence) is also used in paragraph 5 of CAS 500, Audit Evidence, which defines it as follows, information used by the auditor in arriving at the conclusions on which the auditor's opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial statements and other information. The Dictionnaire de la comptabilité et de la gestion financière, published jointly by the Canadian Institute of Chartered Accountants, the Ordre des experts-comptables de France, the Compagnie Nationale des Commissaires aux Comptes France and the Institut des Reviseurs d Entreprises Belgique defines élément probant (evidence) as follows: Any element used to prove a fact or an assertion. [Translation] This dictionary provides the word preuve (proof) as a synonym. In English, the word proof is defined as follows: fact, testimony, argument which helps to establish that a thing is true. Members are not comfortable with the terminology used in the revised standard, because they note that in a review engagement, practitioners are not required to obtain evidence, except under specific circumstances described in paragraphs 57 and 58. According to paragraphs 14 and 44, in a review engagement, the practitioner designs and performs inquiry and analytical procedures, but is not normallyrequired to obtain evidence, unless under the specific circumstances described in paragraphs 57 and 58. Obtaining evidence is necessary in an audit engagement; however this is what distinguishes an audit from a review. They also believe that in a legal context, this terminology may be problematic. Members suggest replacing the terms éléments probants (evidence), éléments probants suffisants et appropriés (sufficient appropriate evidence) with different terms to ensure a clearer distinction between the results of audit and review work. This terminology is found in the following paragraphs of the revised standard: 7, 14(a), 30(b) (iii)c., 48, 56, 69, 70, 71, 72(b), 73(b), 75(b), 76(b), 79, 80, 81, 82(f)(iii), 83(a), 84 and 89. Terms such as résultats obtenus (results obtained) or éléments obtenus information obtained could be acceptable terms.
4. Do respondents believe that the factors affecting engagement acceptance and continuance, and the preconditions for performing a review under the proposed ISRE, are appropriate and clearly communicated in the proposed ISRE? Yes, members believe that the proposals are appropriate and clearly communicated in the proposed ISRE. 5. The approach to performing a review set out in the proposed ISRE (paragraphs 43 and 44) requires the practitioner to identify areas in the financial statements where material misstatements are likely to arise, based on the practitioner s understanding of the entity and its environment, and the applicable financial reporting framework, and then to focus the design and performance of inquiry and analytical procedures in those areas. (a) Do respondents believe this approach is appropriate for a review? Yes, members believe that this approach is appropriate for a review. (b) Do respondents believe that the requirement and guidance in the proposed ISRE adequately convey this intended approach? Yes, members believe that the requirements and guidance in the proposed ISRE adequately convey this intended approach. (c) Do respondents believe that the requirements and guidance relating to the practitioner s understanding (explained in paragraph 43), and designing and performing inquiry and analytical procedures (explained in paragraph 44), are sufficient to promote performance of reviews on a reasonably consistent basis with the application of the practitioner s professional judgment and understanding, taking account of the circumstances in individual review engagements? Yes, members believe that the requirements and guidance are sufficient. However, they would like additional inquiries they believe are necessary in a review to be added to paragraph 45 of the proposed standard. They suggest adding inquiries concerning contingencies and non-monetary transactions, since underlying transactions (contract signatures, for example) are not usually documented (or recorded) in an entity s accounting records. Accordingly, for practitioners to conclude that nothing has caused them to believe that these items are not appropriately reflected in the financial statements, they will have to request specific information from the entity s management (or from those charged with governance). Furthermore, such inquiries should be included in management s written representation in paragraph 60 of the proposed standard. 6. Do respondents agree with the requirements and guidance in the proposed ISRE (paragraphs 57 and 58) describing the trigger point at which additional procedures are required? Do respondents agree with the related requirements concerning the practitioner s response when there are matters that cause the practitioner to believe the financial statements may be materially misstated? Yes, members agree with the additional requirements related to additional procedures. However, they believe that the wording used in paragraph 57 should be in line with the negative form of expression in the review report. They suggest rewording subparagraph (a) of paragraph 57 as follows: conclude, after performing additional procedures, that nothing has come to the practitioner s attention that would cause the practitioner to believe the financial statements as a whole are materially misstated. 7. With respect to the practitioner s review report (as illustrated in Appendix 2 of the proposed ISRE): (a) Do respondents believe the report adequately communicates to users the work undertaken by the practitioner for the review? No, members do not believe that the wording of the report adequately communicates the work undertaken by the practitioner for the review. As already explained, including in their response to question 3, they believe that
the use of the term éléments probants (evidence) is problematic in the second and third paragraphs under Practitioner s Responsibility. In addition, they do not feel it necessary to include the sentence related to additional procedures that will only be required under certain circumstances. These procedures are described in the requirements set out in paragraphs 57 and 58; however, the reader of the review report would likely not be aware of the circumstances that would require the practitioner to perform such procedures. The sentence members specifically wish to remove is the following: A review also requires performance of additional procedures when the practitioner becomes aware of matters that cause the practitioner to believe the financial statements as a whole may be materially misstated. Members also suggest not specifying involved in financial and accounting matters in the second paragraph under Practitioner s Responsibility, so as not to put limitations on the practitioners judgment when making inquiries. In some circumstances, inquiries could be made of staff involved in areas other than accounting and finance, for example those in charge of sales or marketing. Members believe that the wording used may cause confusion and blur the distinction between a review and an audit, or limit the practitioner s judgment. They suggest replacing the second paragraph under Practitioner s Responsibility with the following: A review of financial statements in accordance with ISRE 2400 consists primarily of making inquiries of management and of others within the entity, applying analytical procedures and evaluating their sufficiency and appropriateness. They also suggest replacing the third paragraph under Practitioner s Responsibility with the following: We believe that the information we have obtained is sufficient and appropriate to provide a basis for our conclusion. Or they propose that this sentence simply be removed since it is also used in audit reports, in order to avoid misleading the reader of the review report and to clearly differentiate review and audit reports. In the members opinion, the word evidence in English is as problematic as the French élément probant, even if the English word makes no specific reference to audit evidence. Finally, members believe that to be consistent with audit reporting standards, practitioners should be required to report going concern issues in an Emphasis of Matter paragraph after the conclusion. Readers should be informed about going concern issues given their significance. For this reason, members suggest adding the following paragraphs: When the financial reporting framework provides for a going concern assumption and the practitioner has doubts about the entity s ability to continue as a going concern, the practitioner shall consider adding an Emphasis of Matter paragraph to the review report. The potential effects of inherent limitations on the practitioner s ability to conclude that material misstatements may arise are greater for future events or conditions that may cause an entity to cease to continue as a going concern. The practitioner cannot predict such future events or conditions. Accordingly, the absence of any reference to going concern uncertainty in a review report cannot be viewed as a guarantee as to the entity s ability to continue as a going concern. (b) Do respondents believe that the form of the practitioner s conclusion (that is, nothing has come to the practitioner s attention that causes the practitioner to believe ) communicates adequately the assurance obtained by the practitioner? Is this form of wording of the practitioner s conclusion preferable to other forms that have been explored by the IAASB as discussed above, including those that use wording perceived as being more positive? If not, please explain and provide alternative wording that could be used to express the practitioner s conclusion. Yes, members believe that the negative form of expression adequately communicates the level of assurance obtained in a review engagement. (c) Is the practitioner s conclusion expressed in this form likely to be understandable and meaningful to users of the financial statements? Does this form of conclusion achieve the intended purpose of
properly differentiating the conclusion reported in a review from the opinion expressed in an audit of financial statements? Yes, members believe that this form of conclusion is appropriate, meaningful and understandable to financial statement users. Canadian users of financial statements that include a review engagement report are accustomed to this negative form of expression. Other comments: Users of Financial Statements of SMEs, including Regulators Recognizing that financial statements reviewed by professional accountants under proposed ISRE 2400 will likely be of particular interest and relevance to users in the SME environment (for example, creditors, lending institutions, suppliers) and, in some cases, regulators, the IAASB invites respondents from these constituencies to comment on the proposed ISRE, in particular on the form and content of the illustrative practitioners reports. Members suggest including, after paragraph A80, explanatory paragraphs similar to paragraphs A49, A76 and A93 in ISA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment. In their opinion, the addition of these explanations is necessary for SME reviews. Developing Nations Recognizing that many developing nations have adopted or are in the process of adopting the International Standards, the IAASB invites respondents from these nations to comment, in particular, on any foreseeable difficulties in applying the proposed ISRE in a developing nation environment. Members have no comments on this matter. Translations Recognizing that many respondents may intend to translate the final ISRE for adoption in their own environments, the IAASB welcomes comment on potential translation issues respondents may note in reviewing the proposed ISRE. Members noticed that some terms used in the proposed English and French versions are inconsistent. They mentioned, for example, the word evidence which was translated as éléments probants in ISRE 2400, while in CAS 500, audit evidence was also translated as éléments probants. Since this term is expressly used in and associated with audit engagements, members do not believe that it is appropriate in the context of review engagements. Effective Date Recognizing that proposed ISRE 2400 is a substantive revision of extant ISRE 2400, and given the public interest need to harmonize practice internationally as soon as practicable, the IAASB believes that an appropriate effective date for the standard would be 18 months after approval of the final standard. Assuming the IAASB finalizes the revised standard in the first half of 2012, it would then likely be effective for reviews of financial statements for periods ending on or after December 31, 2013. The IAASB welcomes comment on whether this would likely provide a sufficient period to support effective implementation of the ISRE. Members agree with the IAASB s proposals.