New Review Engagement standards

Review engagements are a lesser level assurance alternative to audits as a form of independent assurance over financial statements.  New review standards were issued in New Zealand and took from 2014.  

Way back in the last century (1998 to be precise) I first burst into print extolling the virtues of review engagements.  My message was that reviews could often be a cost effective alternative when an entity did not need the full rigour and full cost of an audit level of assurance.  This is a view I have largely stuck to over the intervening 18 years.

My fundamental issue was that we saw far too many small entities forced into the often high cost of compliance of an audit by a funder who just used the audit requirement as a de facto quality control check.  However, in imposing this audit requirement they often didn’t take into account the actual level of assurance they required, whether an audit actually gave them what they wanted, or the cost they imposed on the entity seeking the funding and required to be audited. 

Some progress has been made over the past 18 years in that some funders have understood the implications of their actions and accepted either a review engagement or other bespoke assurance.  However, reviews remain in the minority with the number of audits still exceeding reviews by a very considerable margin.

The Status Quo & the problem

The previous Statement of Review Engagement Standards No.1 (RS-1) along with an accompanying guidance statement (RG-1) was originally issued back in August 1989 by the then New Zealand Society of Accountants.  This reminds me of the cynical observation regarding the subsequent change in organisation name shortly after that time that accountants in New Zealand have since been “removed from Society and put into an Institution”.   I’m sure many non-accountants may see that as progress!  J 

The review standard and guidance statements had remained in place essentially unchanged in the intervening 24 years.  While appropriate when drafted, the world had moved on considerably since 1989.  Expectations of detail and clarity of standards are now much greater.   Having acted as an expert witness assisting to defend an international accounting firm in a legal action for their performance in a review engagement, I can attest that RS-1 provided limited clarity of expectations when compared to the comprehensive body of international auditing standards now in force in New Zealand.

In recent years the recognition of the need for alternatives to audits has also been slowly increasing.  However, an off-setting recognition had been growing awareness regarding the need for RS-1 to be updated.  

So it became clear that an update of the review standard was needed.  In the past decade New Zealand has been progressively moving to adopting international standards in terms of accounting and auditing.  This has been essential for the credibility of NZ Inc. especially in global trade.  Accordingly a decision was taken that we should as a country be seeking to positively influence good quality international standards rather than “reinventing the wheel” ourselves in isolation.  Hence NZ was very proactive in lobbying the international assurance standards setting board as well as leading a research project to set the groundwork for an overhaul of review standards internationally. The result of this, while taking some time, was that a new international standard on review engagements was eventually created an issued.

Roll on 2017…

As a result of the above and a lot of effort both internationally and in New Zealand we now have new review engagement standards.  These are now issued by the New Zealand Auditing and Assurance and Standards Board (the NZAuASB – a sub-board of the Government’s standard setting External Reporting Board). 

There are two standards:

1.  International Standard on Review Engagements (New Zealand) (ISRE (NZ)) 2400 Review of Historical Financial Statements Performed by an Assurance Practitioner Who is Not the Auditor of the Entity

2.  New Zealand Standards on Review Engagements (NZ SRE) 2410 Review of Financial Statements Performed by the Independent Auditor of the Entity

These are effective for financial statements of periods beginning on or after 1 January 2014.  Hence if you see someone still using the old RS-1 then sadly they have it wrong.

What’s Changed?

At an overall approach level; not much.  A review engagement still seeks to provide a moderate level of independent assurance regarding the financial statements prepared by another party.  It is primarily conducted by enquiry and analytical procedures and requires the exercise of professional judgement by a reviewer of appropriate skill.  It results in a negative expression of opinion along the lines that “nothing has come to the reviewer’s attention that anything is wrong”, as opposed to the positive opinion expressed as a result of the greater level of detailed work, and especially the substantive tests of detail, of an audit engagement.

However, the new standards are much more explicit as regards what is required of the assurance practitioner in carrying out a review engagement.   It is clearer what has to be done in every review and the documentation of this will result in more time for many.  This difference in style can be seen in ISRE 2400 being 90 pages long in comparison to a combined 31 pages for RS-1 and RG-1. 


More work for assurance practitioners to demonstrate that they have complied with the new review standards.  However this is largely in line with the current expectations from a variety of stakeholders of assurance professionals and especially regulators.

It is my opinion that the new review standards should result in more comprehensive and consistent review engagements which I believe will enhance assurance quality.  

But this comes at a cost.  More explicit requirements require more time which is the cost driver of a review engagement.  This in turn may result in reviews being less attractive to some parties who are really only interested in them due to them being much cheaper than audits.  Sadly for the not-for-profit sector the cost impost of greater requirements is always felt the most by the smallest entities.

Education is still needed as a review is different to an audit.  It involves a different approach, different work effort, and results in a different and lesser level of independent assurance. 

Some charities and assurance practitioners need to better understand the new review engagement standard requirements due to new financial reporting legislation being passed.  These new statutory assurance requirements require from 2016 that registered charities with an annual operating expenditure of between $500,000 and $1m obtain a review engagement or an audit.  Hence there is be a choice to be made between which level of assurance is appropriate, and it is important that this choice is a well-informed one.

Disclosure note:  The author is a member of the New Zealand Auditing and Assurance Standards Board, as well as former chair of the former NZ standard setting board that lobbied for international progress on the review standards update and provided research input.  The views in this article represent his alone. 

Download this article as a pdf here: rsm_article_-_new_review_engagement_standards.pdf

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Craig Fisher