A review report ends with a conclusion that the accountant is not aware of any material modifications the statements need. That sentence is unmodified only when two conditions hold: the statements are not materially misstated, and the accountant obtained sufficient appropriate review evidence. When either fails, AR-C 90 as amended by SSARS 25 sends the accountant down one of three roads: a qualified conclusion, an adverse conclusion or withdrawal. This post sets out which road applies and what the report says.
The surrounding engagement is in the AR-C 90 step-by-step guide, and the design of procedures that produce the evidence is in review inquiries and analytical procedures. SSARS 25 took effect for periods ending on or after December 15, 2021; see SSARS in force for 2026.
What changed in 2020
Before SSARS 25, the accountant was barred from modifying the standard report to say the statements were not in accordance with the framework. A known departure went into a separate paragraph under a heading such as "Known Departures From Accounting Principles Generally Accepted in the United States of America," and the conclusion stayed unmodified. If that paragraph was not enough, the accountant withdrew.
The Accounting and Review Services Committee reversed the prohibition. Its stated reasoning: withdrawing from an engagement can leave users unaware that the statements are materially and pervasively misstated, so prohibiting an adverse conclusion is not in the public interest. The review report now carries a modified conclusion, with the same convergence logic as ISRE 2400 (Revised) and the auditing standards.
The decision matrix
| Situation | Result |
|---|---|
| Statements are materially misstated, effects not pervasive | Qualified conclusion |
| Statements are materially misstated, effects material and pervasive | Adverse conclusion |
| Sufficient appropriate review evidence cannot be obtained | Withdraw from the engagement |
| Management will not revise statements after a subsequently discovered fact the accountant believes needs revision | Modify the report or withdraw, as appropriate |
| Management does not provide required representations | Withdraw |
Material misstatement: qualified or adverse
The accountant expresses a modified conclusion when, based on procedures performed and review evidence obtained, the statements are materially misstated. The choice between the two forms turns on one word.
Pervasive describes effects that, in the accountant's judgment, are not confined to specific elements, accounts or items; or that, if confined, represent or are capable of representing a substantial portion of the statements; or that, in disclosures, are fundamental to users' understanding of the statements.
- A misstated inventory valuation that touches cost of sales and one balance sheet line is confined to specific items. If material, it points to a qualified conclusion.
- Missing lease accounting for an entity that operates from leased premises touches assets, liabilities, expenses and disclosures. If material, the effects are not confined, which points to an adverse conclusion.
- Disclosures fundamental to users' understanding meet the definition on the disclosure side alone.
Inadequate disclosure is a misstatement for this purpose: AR-C 90 defines an error to include mistakes in the application of accounting principles, including inadequate disclosures.
Required report wording
When the conclusion is modified, the report:
- uses the heading "Qualified Conclusion" or "Adverse Conclusion" for the conclusion paragraph; and
- puts a description of the matter in a separate paragraph, under a heading such as "Basis for Qualified Conclusion" or "Basis for Adverse Conclusion," immediately before the conclusion paragraph.
The standard prescribes the conclusion language. For a qualified conclusion:
Based on my (our) review, except for the effects of the matter(s) described in the Basis for Qualified Conclusion paragraph, I am (we are) not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with [the applicable financial reporting framework].
For an adverse conclusion:
Based on my (our) review, due to the significance of the matter(s) described in the Basis for Adverse Conclusion paragraph, the financial statements are not in accordance with [the applicable financial reporting framework].
What the basis paragraph contains
The content follows the type of misstatement:
- Specific amounts, including quantitative disclosures: describe and quantify the financial effects when management has determined them or the accountant knows them from the procedures. If the effects are not determined, the accountant is not required to compute them, and the report states that management has not made the determination.
- Narrative disclosures: explain how the disclosures are misstated.
- Omitted information: describe the nature of what was omitted and include the omitted disclosures when practicable.
Going concern disclosure is the common trigger
When the framework requires management to evaluate going concern and the financial statements do not adequately disclose substantial doubt, the accountant expresses a qualified or adverse conclusion and states in the basis paragraph that substantial doubt exists and the statements do not adequately disclose it. The same applies where management's plans alleviated the doubt but the statements do not disclose the matter. If management refuses to perform or extend the evaluation to the period the framework requires, the accountant considers the implications for the report.
Inability to complete the review
A review is built on inquiry and analytics. When those procedures do not produce the evidence the accountant expected, the first response is more work: extend the procedures or perform others judged necessary to reach a conclusion. The standard recognises that the evidence the accountant expected from inquiry and analytics may simply not materialise.
If the accountant still cannot obtain sufficient appropriate review evidence to form a conclusion, AR-C 90 requires withdrawal from the engagement. The standard's response to insufficient evidence is withdrawal, not a scope-limited conclusion.
Withdrawal also follows two related events:
- Management does not provide the requested written representations, or the accountant doubts management's integrity such that the representations provided are not reliable, after the accountant discusses the matter with management and those charged with governance.
- Fraud or noncompliance with laws is suspected, and management or those charged with governance do not supply information showing the statements are free of material misstatement from fraud or that the entity complies. The accountant then considers obtaining legal advice and taking appropriate action, including withdrawal.
Withdrawal is optional where the statements are misstated
Where the statements are materially misstated, withdrawal is available but not required. SSARS 25 says that, unless prohibited by law or regulation, the accountant can determine it appropriate to withdraw when the review evidence shows material misstatement. The Committee's reasoning for the modified conclusion forms is that withdrawal leaves users uninformed, so the accountant weighs a report that informs users against leaving.
Revised statements and later facts
If a fact becomes known before the report release date and management revises the statements, the accountant performs the review procedures needed on the revision and either dates the report later or dual-dates it for the revision. If management refuses to revise statements the accountant believes need revision, the accountant modifies the report or withdraws.
After release, when management does not revise, the accountant notifies management and those charged with governance not to make the statements available to third parties. If they have already been released, the accountant assesses whether management is taking timely and appropriate steps to inform recipients that the statements are not to be used.
A practical routine for the file
- Accumulate uncorrected misstatements and quantify each, including disclosure deficiencies.
- Aggregate and test against the materiality memo.
- Document the pervasiveness assessment against the three characteristics in the definition.
- Draft the basis paragraph with effects quantified or the statement that they were not determined.
- Date the report no earlier than the date sufficient appropriate evidence was obtained.
- Record the reasoning if withdrawal is chosen over a modified conclusion, and the communication of reasons to management.
Sources
- AICPA, SSARS No. 25, Materiality in a Review of Financial Statements and Adverse Conclusions (February 2020): https://assets.ctfassets.net/rb9cdnjh59cm/5BMOcgkNedJtTs90b7cnrs/b6d98fb77d96db625e9154050be92e2e/92317096_ssars-25.pdf
- AICPA, SSARS No. 25 At a Glance: https://assets.ctfassets.net/rb9cdnjh59cm/37wTF1wRjO6Gg0XZmCAfg5/3eb4c95d450c4c45a693b25690e10ab5/ssars-25-at-a-glance.pdf
- PacificCPE, SSARS Nos. 21-23 course text (pre-SSARS 25 known-departures treatment, representation and withdrawal provisions): https://pacificcpe.s3.amazonaws.com/2001A_-_SSAR_21-23.pdf?1559607826
- Western CPE, SSARS 25: 10 useful pro tips: https://www.westerncpe.com/western-alert/ssars-25-10-useful-pro-tips/
- Journal of Accountancy, ARSC further converges with international standards (February 2020): https://www.journalofaccountancy.com/news/2020/feb/arsc-further-converges-aicpa-international-accounting-standards-22939/
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